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.

Extension of FCA Principles And Marketing Rules To Payment Service Providers

From 1 August, the Financial Conduct Authority will begin to enforce its Principles of Business and certain rules on marketing and communications against the payment service providers that it regulates.

The FCA explained its approach in a policy statement earlier this year, but it was likely put off as a summer project, and Brexit will have been a distraction for many. At any rate, chapters 2, 3 and the rules in Annexes A-C are the key parts to read.

Some Key Points

Because many PSPs also provide unregulated services that are allied to their regulated activity (e.g. gateway services and other "technical services" as well as unregulated foreign exchange and e-commerce services), it's important to note that the FCA's high level Principles will also apply to unregulated activities that are "connected" to regulated e-money or payment services. The FCA is refusing to clarify exactly what that means, since the list is long, and this may lead to 'regulatory creep' to the extent PSPs err on the side of caution. 

Equally, a PSP's compliance with the Principles (and even the marketing rules) can be affected by the activities of other group companies - e.g. faulty centralised fraud or risk management systems or other outsourced support services; or misleading ads for an unregulated service that is deemed to be "connected" with the PSP's regulated service.

The FCA is particularly anxious about the misleading promotion of currency transfer services (and 'connected' foreign exchange services, even if unregulated).

The FCA does not care that there is overlap with other advertising and communications requirements - as there is for banks (the 'new' rules on marketing and communications are created by applying the FCA's existing Banking Conduct of Business (BCOB) rules to PSPs). But the FCA does confirm that these rules cannot cut across EU-derived regulations (wither Brexit?).

Next Steps

The extension of the Princples and the marketing rules to PSPs means they will likely need to update various in internal policies and procedures, e.g. those dealing with: 

• Governance (reporting lines and responsibilities to control operational risks);

• Marketing and communications (the policy and procedures for sign off on your ads and communications to ensure they are clear, fair and not misleading) particularly for payment services involving currency transfer services - and any "connected" unregulated activities; and

• Treating Customers Fairly (with appropriate cross references to other policies). 

That summer project starts now!

The Cost Of My Professional #Brexit Preparations - £9,000 in Year 1

Few politicians will talk about the plight of the UK's trade in services after Brexit, presumably because they don't understand how it works, much less care. Yet services represent 80% of the UK economy, while UK firms and individuals exported £245 billion in services in 2016. But the UK had an overall trade deficit of -£67 billion with the EU in 2017, because a surplus of £28 billion on trade in services (exporting more than we imported) was outweighed by a deficit of £95 billion on trade in goods. The affected service providers will be hoping for this insane project to stop, but in the meantime we must prepare for the worst, whatever that might be...

Services affected by Brexit include, say, a British architect designing a building for a German client; the Manchester hotel catering for Italian tourists; or the Edinburgh accountants advising a French exporter.

Financial services and other business services (legal, accounting, advertising, research and development, architectural, engineering and other professional and technical services) made up 52% of UK service exports to the EU. And, of course, many businesses in those categories supply services to each other. 

So, the fact that financial licences won't work across the EU after Brexit, for example, means UK finance firms are moving their EU-facing operations into a remaining EU27 country and serving the rest of Europe from those offices.

Similarly, the fact that my UK legal qualifications won't be recognised in the EU means that I'll need to set up an additional presence somewhere in the EU27 (Ireland, in my case) just to keep advising my financial services clients on their EU-facing operations.

So, for me personally, the cost of doing business as usual after Brexit is at least £9,000 in fees the first year, and £6,000 each year after that, excluding any travel and accommodation. That's a big investment to make on the assumption that local lawyers elsewhere in the EU27 don't simply take my EU-related work away from me. But it's also money that will be spent in Euros in Ireland and not in the UK. Ireland is the winner here.

But this is not just a sob story about financial institutions and their professional advisers. The British woman, based in France, who drives skiers from Geneva airport to Morzine in her UK minibus on her UK bus licence won't be able to do that anymore, either.  Courier firms are also horrified, not just about vehicle or driver licensing issues and the higher costs and complexity involved in the movement of goods, but also because they employ EU staff with language skills and other key knowledge who may simply want to leave. 

What hoteliers make of all this is anyone's guess, it seems, but PWC suggests the biggest problem will be the ability to recruit and retain staff with the right language skills and experience. Based on the impact on financial and other business services, perhaps the movement of EU-facing operations into the EU may also mean less need for UK management and staff to travel to EU offices.

Of course, a market should develop around the need for advice on how to prepare for the worst. But for that to happen, we need to be much clearer on the impact of Brexit on services in the first place.