The development of direct-to-phone-bill purchases by mobile network operators (MNOs) has to a certain extent been hampered by the wording of an exemption in the Payment Services Directive (2007/64/EC) (PSD). Uncertainty around the scope of the exemption has made some MNOs reluctant to expand their businesses into the area of direct-to-phone-bill purchases because of the risk that they may have to become an authorised payment institution in order to offer the service.
Industry lobbying has led to proposals for a change to the exemption wording in the context of the PSD review, but some feel the new proposed exemption would not go far enough and would still raise a number of issues for MNOs. Expect further lobbying in the coming months as MNOs try to ensure the revised PSD delivers the best outcome for their industry.
In this article, Andrew Barber and Alex Haffner look at the current and the proposed new PSD exemption.
The Payment Services Directive
The European Union adopted the PSD in November 2007. One aim of the legislation was to enable new types of payment institutions to compete with the banks in providing payment services. The Payment Services Regulations 2009 (PSR) implemented the PSD in the United Kingdom.
The PSD includes several exemptions taking many entities outside its scope and Article 3 set these out. For MNOs that want to provide certain services to their customers, Article 3(l) excludes from the scope of the PSD:
"payment transactions executed by means of any telecommunication, digital or IT device, where the goods or services purchased are delivered to and are to be used through a telecommunication, digital or IT device provided that the telecommunication, digital or IT operator does not act only as an intermediary between the payment service user and the supplier of the goods and services."
To use the Article 3(l) exemption (implemented in the UK in paragraph (l) of Part 2 of Schedule 1 to the PSR) an MNO must both be an intermediary and must add value to the goods and services delivered to the device.
Where an MNO can take advantage of this exemption it will not fall within the scope of the PSR and would not need to become an authorised payment institution or a small payment institution to provide payment services within the scope of the exemption. Importantly this means:
(a) the arrangements between the MNO and its customers would not have to comply with the detailed information requirements and rights and obligations under Parts 5 and 6 respectively of the PSR; and
(b) the MNO will not have to satisfy the capital and safeguarding requirements in the PSR.
What the exemption covers ̶ drafters' intentions
The PSD's drafters originally intended that the Article 3(l) exemption would allow for operator billing/direct-to-phone-bill purchases for things such as ring tones and premium SMS services. The European Parliament and the European Council have recently commented that this payment method has been popular and consumers trust it for low value payments. However, given the ambiguous drafting of the wording, MNOs in various European jurisdictions have also used the exemption to promote operator billing for quasi-physical goods. European legislators have expressed the view that this ambiguity is stretching the scope of the exemption beyond its intended limits.
Quasi-physical goods and the exemption ̶ an example
An example of the use of the article 3(l) exemption for quasi-physical goods is WyWallet. MNOs introduced WyWallet in Sweden and it allowed for the purchase of transport tickets through a user's mobile. There were several issues to consider before the exemption could be used. One of those considerations was how the MNO was acting as more than an intermediary for the transaction. MNOs contended that being able to purchase tickets before arriving at the bus stop/station provided the necessary value added part of the transaction for the exemption to apply.
The EU PSD Review
The European Parliament and the European Council are now keen to remove what they view as a legal uncertainty for MNOs and consumers. They also want to amend the exemption as other payment service intermediaries have used it to take themselves out of scope of the PSD.
Revised text for the Article 3(l) exemption
As part of the EU proposals to replace the PSD, the proposed new text for Article 3(l) is narrower than the current exemption and would exempt:
"payment transactions carried out by a provider of electronic communications networks or services where the transaction is provided for a subscriber to the network or service and for purchase of digital content as ancillary services to electronic communications services, regardless of the device used for the purchase or consumption of the content, provided that the value of any single payment transaction does not exceed EUR 50 and the combined value of payment transactions does not exceed EUR 200 in any billing month."
Issues for MNOs
This exemption poses several issues for MNOs. A significant issue is that an MNO could use the exemption only if digital content is provided to the user. Unless MNOs can structure arrangements so that:
(a) digital content is delivered to the device; and
(b) a customer uses the digital content to buy a quasi-physical good,
this proposed exemption significantly reduces the ability of MNOs to expand into this area.
Additionally, the cap on monthly transactions is likely to cause problems for MNOs, which will have to develop their systems to be able to oversee and impose this cap. It seems the new exemption would make it harder for MNOs to offer direct-to-phone-bill services except for a limited product range only.
In the UK, industry has already started to lobby HM Treasury, asking it to make further representations to European legislators about the scope of this exemption. The PSD review is at its earliest stages, with the text of the proposals published only in late July. We will need to await the outcome of that lobbying as further changes may be made to the exemption. Meanwhile, MNOs will need to consider their current plans for operator billing for quasi-physical goods. They may even choose to suspend current plans until the uncertainty about the Article 3(l) exemption is resolved.