Impact of PSD2 law on marketplaces and digital platforms
Helping to navigate the European regulatory changes
PSD2 (second Payment Services Directive) , a new European law, has introduced major changes that significantly impact marketplaces operating in Europe. These businesses can no longer rely on the licensing exemptions that were in place before PSD2.
Essentially, any platform acting as an intermediary for both buyers and sellers, without itself selling that product or service, can no longer receive payments that are owed by buyers to sellers (these payments cannot land in the marketplace/ intermediaries bank account). Ryft offers such a solution - marketplaces using Ryft do not receive payments owed by buyers to sellers. Instead of the marketplace having to become a licensed provider of regulated payment services Ryft provides a compliant solution, taking the marketplace business completely out of the flow of funds.
For more information on PSD2, continue reading below.
INTRO.
Marketplace businesses are some of the most exciting of our age. They have revolutionised how we go about buying and selling products or services. Europe has been the birthplace for many of these pioneering businesses, which is why more legislation has been introduced to keep pace with technological innovations, protect customers and ultimately stop money laundering.
Most platforms receiving payments on behalf of their sellers in Europe have relied on a “commercial agent” exemption when it comes to licencing. The key change around PSD2 is that if platforms act on behalf of both the buyers and sellers as a facilitator, the platform can only avoid becoming a licensed and regulated business if they do not possess or control funds and instead rely on a licensed payment provider. Ryft solves this regulatory compliance for platform businesses, ensuring that the flow of funds is kept compliant end to end.
PSD1 CONTEXT
Marketplaces are facilitators. They do not construct the sale but merely facilitate, passing on economic risk to the seller (the financial, legal and tax obligations associated with selling a product). This is how marketplace businesses thrive, by providing a wealth of options from multiple sellers to attract buyers and influence conversion. Buyers do not contract with the platform, instead, the seller contracts with the platform and the buyer.
Any platform or business providing a form of regulated payment service requires authorisation as an Electronic Money Institution. If a platform enters into possession or control of funds owed contractually to a seller, it’s considered to be providing regulated payment services (e.g executing payment transactions, money remittance, operating a payments account).
Before PSD2 most platforms received the buyer's payment and subsequently paid to the seller (minus any platform commissions or fee) as the diagram below illustrates.
In this way, the buyer's debt to the seller is not settled immediately. Despite the buyer not contractually owing a payment to the platform, the platform takes the payment and is directly involved with the flow of funds. This money is beneficially owned by the seller. Under European payment law, this is considered to be regulated activity and would require the platform to have a payments license (unless the platform has an exemption).
Exemptions
Under PSD1, most platforms were allowed to operate in this way without a license as they could rely upon the “commercial agent’ exemption.
A commercial agent is authorised to negotiate or conclude a sale on behalf of the seller. Under this arrangement, the buyer’s debt is considered to be settled if received by the agent.
Most regulators (not all) throughout Europe generally considered platforms as acting on behalf of both the buyer and seller (via technology the buyer and seller are brought together to match supply and demand). Before PSD2, some regulators permitted a commercial agent to act on behalf of both seller and buyer (processing the order for the buyer, sending orders and payments to seller). Stricter regulators only permitted a commercial agent to act on the behalf of either the buyer or the seller, but not both. The strictest regulators deemed that the platform did not act on behalf of either party because there was no negotiation in the actual sale (platform simply facilitates), therefore the platform is not a commercial agent at all.
As you can see, there were a lot of inconsistencies on how the compliance was applied across different territories in regards to the commercial agent exemption.
PSD2
PSD2 was brought about to clear up any inconsistencies in how the compliance was applied. In order for the “commercial agent” exemption to apply, the commercial agent must very clearly act on behalf of either the seller or the buyer, but not both. If acting for both, the platform can only avoid a licensing requirement if it does not possess or control funds.
You can see the explanation on the change here in the introduction to PSD2 "…[PSD1 was] applied very differently across the Member States. Certain Member States allow the use of the exclusion by e-commerce platforms that act as an intermediary on behalf of both individual buyers and sellers without a real margin to negotiate or conclude the sale or purchase of goods or services. Such application of the exclusion goes beyond the intended scope set out in that Directive and has the potential to increase risks for consumers, as those providers remain outside the protection of the legal framework. Differing application practices also distort competition in the payment market. To address those concerns, the exclusion should therefore apply when agents act only on behalf of the payer or only on behalf of the payee, regardless of whether or not they are in possession of client funds. Where agents act on behalf of both the payer and the payee (such as certain e-commerce platforms or marketplaces), they should be excluded [from licencing requirements] only if they do not, at any time enter into possession or control of client funds."
The FCA also explains the change in compliance:
"An example of where a platform will be acting for both the payer and the payee would be where the platform allows a payer to transfer funds into an account that it [the platform] controls or manages, but this does not constitute settlement of the payer’s debt to the payee, and then the platform transfers corresponding amounts to the payee, pursuant to an agreement with the payee."
The change of the “commercial agent’ exemption protects payments made by consumers to sellers. When a platform receives the seller's payment, the seller inadvertently takes on extra risk of the platform defaulting or not being able to settle the buyer's debt in some capacity. From a competition standpoint, PSD2 levels the playing field across Europe.
BUSINESS ACTIVITY TEST
The question platforms should ask themselves is whether payment services are a regular occupation or business activity in their day to day runnings. The FCA are clear on this “the services must be provided as a regular occupation or business activity….the fact that the service is provided as part of a package does not make it ancillary”. In other words, if processing funds from buyers to sellers is fundamental to your business operations, you require licences as it is not an ancillary part of the business. As a marketplace representing both buyer and seller, without relevant licenses the platform must remove itself from the flow of funds.
RYFT PAY SOLUTION
Ryft was born from the frustration of a distinct lack of choice for compliant payment solutions for platform businesses. It’s vital platform businesses understand new requirements to avoid non compliance. Ryft Pay eliminates this risk by completely removing platform businesses from the flow of funds, without incurring unnecessarily high costs. The regulated payment service is provided by Ryft, making the platform exempt from PSD2.
Not only does Ryft take on the compliance and regulatory burden, we also:
Automate all payouts to your partners, minus any commission or fees you charge.
Onboarding and KYC/AML identity checks (Know your business/Anti Money Laundering), in accordance with anti money laundering obligations.
Protection of all sensitive card information data to a PCI Level 1 standard, taking away any burden to the platform in regards to PCI compliance.
Anti-fraud and monitoring checks for every single transaction end to end.
Written by Sam Biggins, Commercial Director at Ryft Pay. For any questions on this article please contact hello@ryftpay.com
