On 24 February, the EBA issued its final Guidelines (Guidelines) on the limited network exclusion (LNE) under the revised Payment Services Directive (2015/2366/EU) (PSD2). The LNE enables service providers to issue payment instruments or electronic money under certain conditions without requiring a license under PSD2. Aiming to address inconsistencies in how the LNE has previously been applied across the EU, the Guidelines clarify how national competent authorities should assess whether a network of service providers or a range of goods and services qualify as ‘limited’ and are, therefore, not subject to PSD2’s licence requirements. The clarification provided by these Guidelines will be particularly beneficial to issuers of store cards, fuel cards, membership cards and other similar card- or account-based payment instruments. Here we look at the Guidelines and assess how the clarified LNE may operate in practice.
Overview of the Guidelines
Set out in Art.3(k) of PSD2, the LNE precludes specific payment instruments from the PSD2 licencing requirements, so long as the exclusion is ‘used only in a limited way’ and meets one of the following conditions:
(i) the instrument allows the holder to acquire goods or services only in the premises of the issuer or within a limited network of service providers, under direct commercial agreement with a professional issuer;
(ii) the instrument can only be used to acquire a very limited range of goods or services;
(iii) the instrument is valid only in a single member state, provided at the request of an undertaking or a public sector entity and regulated by a national or regional public authority for specific social or tax purposes to acquire specific goods or services from suppliers having a commercial agreement with the issuer.
As the EBA emphasised, providers of excluded services cannot benefit from passporting rights under PSD2. Accordingly, the scope and substance of the LNE and the notification regime is largely defined by and administered at the member state level. Consequently, the application and interpretation of the LNE requirements diverged significantly across the member states, creating the risk of regulatory arbitrage and significant burden for issuers of payment instruments that are available in more than one member state. The EBA is hopeful that publication of the Guidelines will bring convergence and harmonisation.
The Guidelines provide national competent authorities with provisions, criteria and indicators aimed at ensuring that payment instruments that can benefit from the exclusion are used in a limited way, thus reducing potential risks that may arise for the users of such instruments.
- Guideline 1 aims to clarify what is meant by ‘specific payment instrument’ within the meaning of Art.3(k) PSD2, noting that the LNE applies not only to card-based payment instruments but also to other means of payment.
- Guideline 2 describes the criteria for a network to be considered ‘limited’ under Art.3(k)(i) PSD2 by setting out certain mandatory indicators that must be taken into account by competent authorities (eg the existence of a contractual agreement between issuer and the provider of goods/services; envisaged number of providers) and certain complementary indicators that should be considered (eg specific geographical area; annual volume and value of payment transactions carried out with the payment instrument).
- Guideline 3 clarifies that ‘premises’ in the meaning of Art.3(k)(i) PSD2 is limited to the physical premises of the issuer and not to online stores.
- Guideline 4 provides guidance on the meaning of ‘limited range of goods’ under Art.3(k)(ii) PSD2, emphasising that there must be a ‘functional connection’ between the goods and/or services and that competent authority must take into account a range of mandatory and complementary indicators when making the assessment.
- Guideline 5 notes that regulated payment service providers or e-money institutions can also make use of the LNE if they distinguish the regulated payment services/electronic money from the services excluded under Art.3(k) PSD2 in a clear and easily recognisable way and inform the user of the specific payment instrument in a simple and clear way that the provided services are not regulated and supervised.
- Guideline 6 describes the notification procedure under Art.37(2) PSD2, including details on timing and content of the notifications as well as the assessment criteria of the competent authorities, the calculation of the thresholds and required updates to the notification.
- Guideline 7 clarifies that payment instruments falling under Art.3(k)(iii) PSD2 do not need to fulfil the exclusion requirements under Art.3(k)(i) and (ii) PSD2.
Key take-aways from the Guidelines
Scope of ‘limited network of service providers’. In Germany, for example, there is already a very granular administrative practice as to what falls within the remit of a ‘limited network of service providers’, and the Guidelines incorporate certain central requirements from the BaFin practice, such as the ‘common brand that characterises the limited network’ (einheitlicher Markenauftritt). The Guidelines permit, based on the size and specificity of the member state market, to take into account the ‘maximum amount to be credited to the payment instruments, as envisaged by the issuer.’ Similarly, BaFin, imposes a €250 limit for prepaid cards.
BaFin also aligns with the EBA’s Guidelines in that a limited network can consist of physical stores only, online stores only or a combination of physical and online stores. However, the EBA takes the view that competent authorities should not make a distinction between the type of stores and should not require the type of goods and services offered in online stores to be dependent on the type of goods and services. This differs from the current BaFin approach which emphasises that the types of goods/services offered in the online shop must equal those offered in the physical stores for the issuer to fall under the LNE.
E-commerce platforms. Under BaFin’s published guidance, providers of ‘online marketplaces’ cannot rely on the ‘limited network of service providers’ limb of the LNE. However, the EBA clarifies, however, that ‘online marketplaces could potentially benefit from the LNE, provided that they meet the requirements of Art.3(k) PSD2 and the provisions of these Guidelines.’ Due to online marketplaces tending to ‘grow their acceptance network and the goods and services provided over time’, the EBA also asks competent authorities to ‘treat these business models with caution due to the possibility for some of the specific instruments to develop into general-purpose instruments.’
Scope of ‘very limited range of goods and services’. The Guidelines note that in order to determine whether the goods or services that can be acquired are actually ‘very limited’, the competent authority must identify a ‘functional connection’ between the goods and services. This is in line with BaFin’s current administrative practice, which approaches the criterion by providing illustrative examples. The EBA provides an abstract definition, ie whether ‘a specific category of goods and/or services with a common purpose has been identified by the issuer.’ It remains to be seen how this affects individual business models.
Payment instrument. The Guidelines clarify that ‘payment instruments’ for the purposes of the LNE are payment instruments as defined by Art.4(14) PSD2. Therefore, issuers can make use of the LNE if they offer card-based payment instruments, as well as other means of payment. The EBA emphasises that a single payment instrument excluded under Art.3(k) PSD2 cannot benefit from more than one exclusion from the scope of application of PSD2, including other exclusions under Art.3(k) PSD2.
Third parties involved in the funding process. Should an issuer involve third parties in the funding process of the payment instrument, the EBA makes clear that the transfer of funds should be considered as a separate payment service that does not fall within the scope of the LNE. This may be relevant for business models offering money remittance and acquisition business.
Notification threshold and frequency. Providers of excluded services for which the total value of payment transactions executed over the preceding 12 months exceeds €1m must send a notification to competent authorities. The EBA clarifies that notifications should be made where the users of the payment instrument are located and where the threshold is exceeded. This addresses some member states’ administrative current practice to require notifications based on the location of the issuer or in case that the €1m threshold is only crossed on a multi-jurisdictional level.
Some member states require an annual resubmission of the notifications. However, the Guidelines determine that notifications shall be submitted by the issuer only once (unless substantial changes occur). Furthermore, this makes clear that an issuer must also submit a notification if the €1m threshold is crossed in a period shorter than 12 months. Accordingly, issuers would have to calculate their payment transactions on a rolling and not a calendar year basis.
The Guidelines will enter into force on 1 July 2022 with an additional 3-month transitional period for issuers that already benefit from the exclusion to submit a new notification to their national competent authority.
Competent authorities in the member states will need to notify the EBA by a still-to-be-disclosed date as to whether they will apply the Guidelines or provide a reason for non-compliance.
Issuers that have already submitted notifications in one or more member state(s) should focus in particular on the requirement to resubmit notifications in accordance with the Guidelines by 1 September 2022. Competent authorities shall assess the resubmitted notifications ‘in an expedited manner.’ As of early February 2022, the BaFin has registered more than 1,000 issuers so this could easily become a major task for competent authorities. The impact on registered issuers is therefore far from clear and will require careful observation.