Evolution of retail platforms and marketplaces risks additional regulatory consequences for businesses

Retailers play a significant role in the payments ecosystem – much of the point of payments and e-money regulation is to ensure that participants can make and receive payments safely, confidently and seamlessly, and for that reason, this is a heavily regulated area. However, as business models evolve and gig economy-style platforms become more common, retail platforms and marketplaces can easily find themselves nudging up against the regulatory perimeter. 

We explore how financial services regulations, including the availability of exclusions, impact on retailers' business propositions. 

How regulation impacts platforms and marketplaces in practice

Sometimes a relatively logical development in the retailer's business model can have significant regulatory consequences and it is important that retailers consider this before launching new products or changing their online offerings. 

For example, what if, instead of only selling the products it manufactures, a company's website also offers and takes payment for products or services made by another manufacturer or service provider? While this can make commercial sense, platforms and marketplaces can easily find that they are providing the regulated payment service of "money remittance" or even "acquiring", for which they either need to be authorised by the Financial Conduct Authority (FCA) or fall within an exclusion. 

Regulatory speed read

"Money remittance" is defined in the Payment Services Regulations 2017 (which implemented the EU's Second Payment Services Directive) and has four main elements (all of which need to be present):

• the transmission of money (or any representation of monetary value);
• no payment accounts being created in the name of the payer or payee;
• the receipt of funds from the payer; 
• for the sole purpose of transferring a corresponding amount to a payee or to the payee's payment services provider.

"Acquiring" is more broadly defined and is not limited to those providing "traditional" merchant acquiring services. It involves:

• a contract with a payee to accept and process payment transactions;
• which results in a transfer of funds to the payee.

If either of these activities are being offered as a regular occupation or business activity (which will generally turn on the regularity of the activity and whether it is provided in its own right as part of the marketplace's business), it is worth exploring the available exclusions – which may offer the extra layer of defence required.

The most commonly relied upon exclusions for platforms and marketplaces tend to be those known as the "commercial agent" exclusion or the "limited network" exclusion. However, neither are straightforward and, as each EU member state has its own implementing legislation, the picture is particularly complex when the platform or marketplace has an international reach. 

Commercial agent exclusion

The commercial agent exclusion requires marketplaces to be negotiating or concluding the contract (which really means they must actively be doing something to facilitate the relationship between the payer and the payee) but also to be doing so on behalf of only one of the parties. This can be tricky: 

• providing the technical means through which payer and payees connect is unlikely to be enough to meet the high bar required by this exclusion; and 
• platforms and marketplaces are often positioned to be working for both parties simultaneously. 

In addition, while the FCA has always taken a pro-business view of the exclusion, other European regulators (particularly BaFin in Germany) are more hostile to its use by marketplaces. 

Limited network exclusion

The limited network exclusion (LNE) might seem like more familiar territory – this is the exclusion that products such as shopping centre cards (which can only be used in a particular centre), fuel cards (which can only be used at a particular chain of petrol stations) and some gift cards have traditionally used. 

There are four separate and distinct limbs to the LNE and providers have to fit firmly within one to be able to rely on the exclusion. Marketplaces might occasionally fit within the second or third limb of the LNE if they only work with suppliers that can be said to amount to a "limited network" which is not "continuously growing" and which each have an agreement with the marketplace or if they only work with the suppliers of a "very limited range of goods or services".

These requirements can be fairly subjective: at what point can we be sure that a network of service providers is limited? What constitutes a "very limited range" of goods or services? This will depend on each individual business model and is complicated by the fact that that the interpretation of the exclusion often differs across European countries. There are also notification requirements for the LNE if transactions in a 12 month period exceed €1 million. 

The European Banking Authority has recently (February 2022) published guidelines on the LNE under the Payment Services Directive (PSD2) which it hopes will make the interpretation of the LNE more consistent. These guidelines are due to apply from 1 June 2022. However, they will also have other consequences: firms will need to provide more granular information with their notification including providing certain parameters for their LNE products, such as the maximum number of payment instruments to be issued and the maximum value and volume of payment transactions to be executed on an annual basis. This will require more forward planning and forecasting for LNE products than has been required historically.  

Osborne Clarke comment

The situation for retail platforms and marketplaces often is not black and white. Providing regulated payment services without the requisite authorisation or an exclusion is a criminal offence and businesses may need help to analyse their models as there may be changes they can make to structures, payment flows and/or documentation which can tip the balance and mitigate the risk of regulatory non-compliance. Increasingly, other stakeholders (for example, a retailer's bank and acquiring payment service provider) are asking retailers and marketplaces for legal opinions confirming that they fall outside of the regulatory regime and this is often when problems are picked up.

If you would like to find out more, or discuss what this will mean for your business, please contact one of the experts listed below or your usual Osborne Clarke contact.