The EU Payment Services Directive (PSD) adopted on 13 November 2007 (Directive 2007 / 64 / EC) broke new ground by creating a regulatory framework for the provision of payment services. These European rules were implemented in Germany by way of the Payment Services Act (ZAG). On 24 July 2013, the European Commission published its proposal for a revised directive on payment services in the internal market (Payment Services Directive 2 = PSD 2), which makes extensive changes to the first Payment Services Directive with the aim of promoting competition, efficiency and innovation in electronic payments and ensuring legal clarity and equal competition. The new Payment Services Directive is currently going through the EU legislative process, and is expected to come into force in the course of this year. Alongside expanding the scope of the directive, PSD 2 seeks to restrict the existing exemptions.
Existing exemption for “limited networks”
German lawmakers implemented the exemption provided in the PSD for limited networks – aimed at
protecting deposits and curbing money laundering – via section 1 sub-section 10 no. 10 of the ZAG. Under this provision, payment services do not include services which are based on instruments that can only be used to acquire goods or services at the issuer’s place of business (alternative 1) or within the scope of a business agreement with the issuer either for the acquisition of goods or services within a limited network of service providers (alternative 2) or for the acquisition of a limited selection of goods or services (alternative 3).
The existing limited network exemption contains some undefined legal terms which are subject to interpretation, resulting in the distinction between activities requiring official authorisation and those not requiring authorisation being unclear at times; application of the exemption thus needs to be decided on a case-by-case basis. As such, it has proved difficult to apply the exemption in practice in Germany. What is certain, however, is that the German financial regulator (BaFin) has interpreted the limited network exemption more restrictively than other EU Member States. BaFin has in particular attempted to narrow down the exemption in geographical terms, as well as with regard to the scope of the products acquired using the card.
Changes under the proposed PSD 2
The European Commission felt that revision of the limited network exemption was required because it was increasingly being applied to large networks with high payment volumes and a wide range of products and services. The Commission does not consider this usage to be within the purpose of the exemption, and believes that it results in high payment volumes remaining outside the scope of the legal framework established, which leads to a competitive disadvantage for players in regulated markets. Amending the exemption is intended to reduce these risks. The new limited network exemption provides that services based on “specific instruments” should be excluded. These must also be designed to “address precise 2 needs” and “used only in a limited way”. In all other respects, the three alternatives described in the previous paragraph still apply, despite changes to the wording of the exemption provision.
By using the new limiting elements of “specific instruments”, which “address precise needs” and are “used only in a limited way”, the European Commission’s intention is to restrict the limited network exemption. However, it remains unclear how these legal terms will be interpreted and implemented in practice. No general exemption with a threshold for smaller systems has been included by the European Commission, as called for by some during the legislative process. The Commission makes clear in recital 12 to the PSD 2 that the limited network exemption is intended to cover payment instruments which can only be used for the purchase of goods and services in a specific store or chain of stores, or for a limited range of goods or services, regardless of the geographical location of the point of sale. The examples provided include: store cards, petrol cards, membership cards, public transport cards, meal vouchers or vouchers for specific services, provided that any such specific-purpose instrument does not develop into a general purpose instrument. A general purpose instrument is one which can be used for purchases in stores of various listed merchants.
The revised definition of limited networks has been subject to much criticism, on the one hand because it is still not possible to determine the area of application with absolute certainty, and on the other because it fails to achieve the intended purpose of combating money laundering and protecting customer funds. Application of the exemption to systems which typically feature high volumes – such as fuel card systems – would still be permitted. Paper-based vouchers will also continue to be expressly excluded from the requirement to obtain authorisation. Critics also feel there are good reasons to doubt whether electronic vouchers for use within a corporate group or across multiple companies actually play any role in money
Notification requirement for activities within limited networks
Unlike the existing legal situation, the draft PSD 2 provides for mandatory notification by payment service providers if they intend to offer activities within a limited network. As such, payment service providers cannot commence operations and then themselves decide whether the preconditions for a limited network exemption have been met. Rather, they must submit to a mandatory review by the authorities before commencing their activity if they exceed a threshold of EUR 1 million in payment transactions per month. An application for recognition as a limited network is required in this case. Within one month from the date of application, the competent authority will take a decision and add the company to a public register of recognised companies if the application is successful.
In the case of companies that are new to the market this change means that a mandatory application must be made, and this must be factored into the process for launching the business activity both in terms of time and content. The same applies to companies making use of the exemption without the consent of BaFin.
With PSD 2, card systems such as electronic vouchers which can be redeemed at multiple merchants and non-cash loyalty programmes will generally come under scrutiny if they cannot be used solely in a limited geographical area or for purchasing a limited range of goods. Despite the fact that BaFin has already applied a restrictive interpretation of the limited network exemption, companies which make use of the exemption or intend to do so will in future be forced to apply for recognition as a limited network. Companies considering an application for authorisation in accordance with the ZAG should also take into account the time required for the authorisation process of between six to twelve months, along with the obligation to identify customers arising from money laundering regulations. The relevant companies should therefore undertake a timely review of the legal situation as regards PSD 2 and establish whether action is needed.