Why does payments regulation matter to sharing economy platforms?

At first glance, payments regulation might seem to be something which only affects banks or credit card companies. However, many sharing economy platform providers’ business models are impacted by payments regulation in the EU and elsewhere. Find out more below.

Why does this affect platform providers?

Payments legislation (and legislation to support sanctions or prevent money laundering) can come into play wherever money is being moved from a payer to a recipient via an intermediary or chain of intermediaries.

For commercial reasons, many platform providers have positioned themselves as an intermediary between the customer and the merchant. This simplifies the collection of the platform provider’s fees and can also help to instil customer confidence – a customer is more likely to trust their platform provider than a small, overseas merchant. However, a platform provider which sits in the payments chain is likely to be subject to payments regulation.

Within the EU, the Payments Services Directive 2007 (PSD) and the Second Electronic Money Directive 2009 (2EMD) (which is relevant to pre-payments) are key. Outside the EU, many countries have, or are developing, similar regimes.

How does this impact on platform providers?

By acting as a ‘payment intermediary’ between the customer and the merchant and by being in receipt of funds, a platform provider is likely to be providing the payment service of “money remittance” within the scope of the PSD. Where there is any element of pre-payment, the payment structure operated by the platform provider might be classed as an e-money scheme and so also be subject to 2EMD.

If a platform provider is providing a payment service or issuing electronic money (e-money) in the EU:

1. it may need to be authorised by the financial regulator in the EU state in which it has its registered office or fall within an exemption under PSD or 2EMD in order to operate; and
2.  there can be ongoing obligations, such as to include particular provisions in terms and conditions, to maintain minimum levels of regulatory capital at all times, to ensure it has competent staff in place, to segregate and safeguard customer money and to abide with rules regarding the movement of that money.

The consequences of non-compliance with payments legislation can be severe: in EU states it can be a criminal offence with fines for platform providers and possible jail sentences and/or fines for the officers of those platform providers. Agreements may also be unenforceable by the platform provider.

The international nature of a platform provider’s business makes the position particularly challenging. It is often necessary to assess the picture in each country in which a platform provider is intending to operate. Examples of some of the issues that arise include:

1. Inconsistent regulatory approach

The PSD contains an exemption for ‘commercial agents’ who are acting in the payment chain, but this is inconsistently applied within the EU. The UK regulator believes that the exemption can cover platform providers in the payments chain, which therefore would not be providing a payment service in the UK. However, regulators in Germany, France and Luxembourg hold a contrary view and an intermediary platform provider active there must be authorised (or exempt on other grounds). The practical quandary is that if it is not authorised in its home jurisdiction, the platform provider cannot use the EU “passport” to offer its services in other countries legitimately, yet it cannot usually become authorised in other countries without a physical establishment there.

Impending legislation, the Second Payment Services Directive (PSD2), will harmonise the position: the stricter interpretation of the commercial agent exemption will prevail throughout the EU. PSD2 is expected to reach the European statute book in December 2015 and EU Member States will have another two years to implement the legislation. By then, most platform providers will need to have:

• become authorised in order to legitimately offer their services;
• identified other exemptions that might be available as an alternative, restructured their offering accordingly and given notice to their home regulator that they are relying on an exemption;
• ceased to be an intermediary in the payments chain; or
• partnered with a regulated institution in order for it to carry on providing the regulated payments service or e-money involved in the platform’s operation.

2. Local requirements before operating

In any event, platform providers usually need local advice before they can start trading with customers or merchants/suppliers in a country.

Areas of difference can include: the need for a local presence, licences or approvals; requirements to route payments through local bank accounts; currency controls, international sanctions, or import/export restrictions which might limit the platform provider’s ability to move funds into or out of the country; the required form for terms and conditions; and the extent of restrictions on marketing the platform provider’s services in that country.

The way forward

As a result, we regularly undertake international surveys for our platform provider clients, working with payments experts in Osborne Clarke’s international offices and other trusted law firms.

By identifying the payments and e-money regulatory issues that exist in those countries in which our platform provider clients wish to operate, we are able to give practical advice and make commercial suggestions to overcome potential regulatory hurdles for our clients in the Sharing Economy.

This article is the second in a series of six weekly articles on the legal issues affecting the sharing economy.  Click here to read the last update on the employment and tax challenges facing sharing economy platforms. 

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