What Is A "Payment Service"?

I'm often approached by senior managers in businesses who've been asked this question - usually by their credit card acquirer, a financial regulator or a potential customer doing its due diligence. There's often no simple answer, but I've explained the main issues below. Please get in touch if you would like to discuss any of them.

Which types of businesses need to think about this?

This question tends to arises where your business:

• receives cash from one set of customers and makes payments to other customers. Examples range from e-commerce marketplaces, to law firms, to fully regulated payment service providers (including banks, e-money institutions and payment institutions);

• issues vouchers or other forms of value that can be exchanged for goods or services, either from the same business or some other participating retailers or suppliers;

• enables customers to send transaction data to their card acquirer, initiate a payment from their bank account or share bank statements or other financial information with third parties.

Depending on the circumstances any of these activities could mean that you are either:

• offering an "e-money" service and/or a "payment service", in which case you would and need some form of regulatory authorisation or registration; or

• your activities might be outside the scope of regulation, or in scope but specifically excluded from some or all of the authorisation or registration requirements.

How are payment services regulated?

Activities involving e-money and payments are mainly regulated throughout the EEA under national regulations that implement the second Electronic Money Directive (EMD) and the second EU Payment Services Directive (PSD).

These two directives are 'maximum harmonisation' directives, which means each EEA member state is supposed to apply them the same way (subject to a few permitted options). However, the interpretation by one country’s regulator that a service is either out of scope of the EMD and PSD, or in scope but expressly excluded, cannot be ‘passported’ to other EEA countries. So it is prudent to check the interpretation with local counsel in each significant EEA market in which you intend to operate.

If your activities are in scope, and not excluded, then you would need to be authorised as an E-money Institution (EMI) or payment institution (PI), or registered as small EMI or PI or as the agent of an EMI or PI. If you offer 'account information services' then you only need a registration; and some types of exclusion also require you to register with the local regulator.

A fully authorised firm may “passport” its services into other EEA countries (or rely on its principal’s passports if it is a registered agent).  Because of Brexit, however, UK-based institutions would need to set up an entity based in one of the remaining EU27 countries, or an EEA member state, from which to passport services around the EEA; and EEA-based firms can either register for a temporary permission (by 30 January 2020) or set up a UK subsidiary and apply for the relevant authorisation or registration locally.

What is a payment service?

Unless you enable the collection and withdrawal of physical cash, the “payment services” you are most likely to be concerned with involve:

• the 'execution' (processing etc) of payment transactions involving card-based payments, bank/credit transfers, direct debits, either with or without credit;

• money remittance: where funds are received from a payer, without any payment accounts being created in the name of the payer or the payee, for the sole purpose of transferring a corresponding amount to a payee or to another payment service provider acting on behalf of the payee, and/or where such funds are received on behalf of and made available to the payee;

• issuing payment instruments: contracting to provide a payer with a payment instrument to initiate and process the payer’s payment transactions (a payment instrument is any personalised device(s) and/or set of procedures agreed between the user and the service provider that is used to initiate a payment order);

• aquiring payment transactions: contracting with a payee to accept and process payment transactions, which results in a transfer of funds to the payee (e.g. debit/credit card acquiring or 'merchant acquiring');

• payment initiation services: a service to initiate a payment order at the request of the user with respect to a payment account held at another payment service provider; or

• account information services: an online service to provide consolidated information on one or more payment accounts held by the user with on or more other payment service provider(s).

There are many related definitions, but the central one to understand is that a "payment transaction" means "an act initiated by the payer or payee, or on behalf of the payer, of placing, transferring or withdrawing funds [i.e. money, including "e-money"], irrespective of any underlying obligations between the payer and payee." This definition can involve some degree of legal fiction, such as when applied to card acquiring, which actually involves multiple payment transactions.

What is e-money?

The term “electronic money” or "e-money" means monetary value that is:

• electronically stored; 
• represented by a claim on the electronic money issuer, 
• issued on receipt of funds, 
• for the purpose of making “payment transactions”; 
• accepted by a person other than the electronic money issuer; and 
• not a “limited network” service.

"Limited networks" are services based on specific payment instruments that can be used only in a limited way and meet any one or more of the following conditions:

• allow the holder to acquire goods or services only in the issuer's premises;

• are issued by a professional issuer and allow the holder to acquire goods or services only within a limited network of service providers which have direct commercial agreements with the issuer;

• may be used only to acquire a very limited range of goods or services; or

• are valid only in a single EEA State, are provided at the request of an undertaking or a public sector entity, and are regulated by a national or regional public authority for specific social or tax purposes to acquire specific goods or services from suppliers which have a commercial agreement with the issuer.

The exclusion for limited networks also applies to payment services generally. This can include loyalty schemes, fuel card schemes and so on. Some regulators may consider gift cards as falling within this exclusion, while others may not see them as within scope of the PSD at all.

Is the service offered by way of business?

This is where a lot of uncertainty can arise because, in some countries (like the UK), the regulator is only concerned about payments activity that is operated or offered as a business separately or distinctly from any other activity. In other countries, however, this may not be a factor that the regulator considers to be very important, if at all.

So it's worth considering that if you are receiving money and paying it out or holding it on a customer's behalf only as a small part of a much wider service - like, say, a law firm - then it is possible that the local regulator might not consider your payments-related activity to be a "payment service" in its own right (but of course other laws and/or professional rules may apply to those scenarios anyway).

It is also worth exploring any opportunities to re-position or integrate the payments activity so that it is not offered by way of business in its own right.

Even if your activity is in scope, could an exclusion apply?

Some activities that initially meet the test of being a "payment service" might actually benefit from a specific exclusion under the EMD or PSD.  There is quite a long list of possible exclusions. Some reflect day-to-day activies, like paying another person directly, paying by paper cheque etc., or physically transporting cash. Others are quite specialised and/or involve a lot of explanation and the possibility for regulators to interpret them differently, as with the scope of the EMD or PSD.  Exclusions that are likely to involve considerable legal analysis are:

• the commercial agent's exclusion: covers payment transactions from the payer to the payee through a commercial agent authorised via an agreement to negotiate or conclude the sale or purchase of goods or services on behalf of only the payer or only the payee;

• the technical service providers exclusion: covers services which support the provision of payment services, without the service provider entering into possession of the funds to be transferred - like 'payment gateway' services or anti-fraud services, for example. These services include processing and storage of data, trust and privacy protection services, data and entity authentication, information technology (IT) and communication network provision, provision and maintenance of terminals and devices used for payment services, but exclude payment initiation services and account information services;

• the limited network exclusion, which I've already mentioned above in relation to e-money.

Conclusion:
Again, there is often no simple answer as to whether your activities constitute a regulated e-money or payment service, but I've explained the main issues above. Please get in touch if you would like to discuss any of them.

E-commerce Marketplaces, Commercial Agents and PSD2

E-commerce marketplaces are now common in most sectors, enabling suppliers and consumers of all types of goods and services to find each other, contract directly, pay or be paid, arrange delivery and download their transaction data. But action being taken by some payment service providers (PSPs) suggests that many marketplace operators who offer this service in the European Economic Area may not have realised that the payment step needs to be structured in a way that avoids the need for the operator to be authorised by an EEA financial regulator as a payment institution or e-money institution under the Payment Services Directive or E-money Directive (depending on whether the supplier or customer is able to hold a balance in their 'account').

Some financial regulators, like the UK's Financial Conduct Authority, take the view that offering a payment service or e-money service has to be the operator's regular occupation or business in itself to fall within the scope of the PSD or EMD in the first place (the "business test"), although the payment step would need to be a small, ancillary part of the service offered and this is open to interpretation. But less pragmatic or experienced regulators around the EEA might apply the Directives simply because the operator is running a business of any kind. 

This means operators should err on the side of structuring their activities to avoid holding balances and to take advantage of an exclusion under the Payment Services Directive (e.g. for commercial agents authorised to negotiate or conclude contracts on behalf of either the payer or payee); or involve a PSP to handle the receipt and distribution of funds (or become the registered agent of a PSP). 

Other exclusions under the PSD or EMD may also be helpful. But even relying on an exclusion can be somewhat tricky because the interpretation of exclusions can vary from regulator to regulator across the EEA; and there is no 'passport' for one regulator's interpretation as there is for regulated PSPs who can offer their service across the EEA from under authorisation in their home member state. 

That means an operator should seek legal advice on how to structure its activities appropriately under the law of its home EEA member state; and if that involves relying on the local regulator's interpretation of the business test or an exclusion, the operator should check that analysis works under the law of each member state where the operator has a presence or significant numbers of participants (whether suppliers or their customers).  Acting on formal legal advice should also make it less likely that a regulator will take action for acts or omissions consistent with that advice, although it will not necessarily stop a regulator requiring a different structure going forward.