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The Austrian Financial Market Authority (FMA) recently published a circular to provide more clarity regarding the application of the "limited network" exemption for payment services under the Payment Service Directive 2 (PSD2). Download here: https://www.fma.gv.at/download.php?d=4225
The FMA also clarifies that service providers whose total payment volume exceeded EUR 1m in the past 12 months are to notify the FMA by 31 March 2020 at the latest, otherwise administrative penalties may be imposed.
Companies that rely on the limited network exemption (e.g. issuers of fuel cards, shopping centre cards, payment instruments for online games or films, etc.) and regularly process larger payment volumes should therefore submit a corresponding notification to the FMA in due course.
PSD2 and its exemptions
The PSD2 is changing the European payment market. Many amendments were introduced in the context of a highly modernised payment infrastructure and changing payment behaviour of payment service users, the scope of which was not efficiently regulated by the previous Directive (PSD1) anymore. In Austria, PSD2 was implemented by the Payment Services Act 2018 (Zahlungsdienstegesetz 2018 – ZaDiG 2018) and entered into force on 1 June 2018.
In addition to regulating the new services that evolved as a result of continuous technical developments (such as payment initiation services and account information services) or introducing new security standards for payments (strong customer authentication), the PSD2 also amended (and narrowed) the exemptions to regulated payment services that lawmakers believed had previously been applied too extensively.
The exemptions are essential to many service providers, as much of their business is often based on the processing of payments that are exempted from the regulation.
In Austria, the exemptions are set out in Section 3 (3) nos. 1 to 15 ZaDiG 2018 and limit the scope of PSD2/ZaDiG 2018 to the extent that a licence for providing payment services is not required as long as service providers comply with the requirements of the exemptions.
Limited network exemption
An important exemption to the payment services requiring a licence is the so-called limited networks exemption (Section 3 (3) no. 11 ZaDiG 2018).
Payments conducted with payment instruments that are only used within a limited scope should not be subject to the strict regulation (and licence requirement) of the PSD2.
The exact scope of the limited networks exemption was somewhat ambiguous, because no regulatory guidance by the FMA or the European Banking Authority (EBA) has been published so far.
Where previously only the PSD2 (especially recitals 13 and 14) could be used as guidance, the new FMA Circular (dated 21 January 2020) now provides for more clarity, both as regards the scope of the relevant exemptions as well as the deadlines for notifications to the FMA.
As regards limited networks exemptions, four alternatives are relevant:
1. Shop card (no. 11 lit a first alternative)
A shop card is an instrument which allows its holder to purchase goods or services only within the business premises (or webshop) of a single issuer.
The instrument may only be used vis-à-vis the specific issuer, i.e. the issuer and the acceptor are the same entities. However, this can extend to several shops of the same issuer. The exemption does not require the shop card to be geographically limited (cross-border use is possible) or accepted only for a limited product range, provided the card is valid only for shops of the single acceptor.
Independent companies within one and the same department store (or shop) are also considered business premises of the issuer. The exemption thus also covers shop-in-shop solutions for which a department store operator provides a shop card ("everything under one roof"). In contrast, structurally separated areas within a building complex or separate sales shops within an overall shopping area are no longer covered (e.g. a shopping centre or an outlet village; however, these are usually covered by the second alternative of the exemption – see below).
The exemption is not met if the business card is equipped with a credit card function.
2. Limited network (no. 11 lit a second alternative)
An instrument which allows for goods and services to be purchased with a limited range of service providers under a commercial agreement with a professional issuer operates within a limited network. An instrument may be used in only one such limited network; otherwise it would not be covered by the exemption.
An issuer is considered professional if it creates all the entrepreneurial and technical prerequisites for the proper processing of payments and, where applicable, properly manages any prepaid amounts. The circular clarifies that the issuer may also accept the payment instrument itself, i.e. act as an acceptor. The person of the issuer does not necessarily have to be different from the acceptor.
An example is a fuel card issued by a network of shops or petrol stations, an individual shopping centre or a franchise association. The FMA clarifies that the mode of operation is irrelevant, e.g. both own shops and shops within the same corporate group or franchise fall within the scope of the exemption. The decisive factor is whether the various acceptors have a common market presence based on a single payment brand.
Other examples are instruments for the purchase of goods and services in/by:
- holiday resorts;
- stadiums and festivals;
- a single outlet village (but not across multiple outlets);
- a single shopping centre (but not across multiple centres); or
- a university.
As is the case with shop cards, no product or geographical limitation is required for the application of the limited network exemption. The exemption can be applied both in Austria and cross-border.
The circular makes it clear that webshops that operate according to the principles outlined above are also covered by the exemption.
Open networks or continuously growing networks whose underlying terms do not provide for its size to be limited are not covered by the exemption.
3. Limited range (no. 11 lit b)
This exemption covers instruments that only entitle its holder to purchase a very limited range of goods and services.
The exemption is much narrower than under PSD1, which has led to ambiguity in its application.
The amended exemption is only available if a close functional connection between a defined number of goods and services exists, whereas a geographical limitation is not required (the same rationale applies to webshops). In its circular, the FMA focuses on the purpose of the payment instrument. For the exemption to be applicable, it is therefore not required to limit the (total) number/quantity of goods and services, but to establish a very limited typological range of closely related goods and services.
The principle can be easily understood using the example of fuel cards. The exemption would cover "anything used for the moving and using of a motor vehicle", such as fuels and lubricants, additional products (Add Blue, windscreen wiper fluid, etc.), accessories (ice scrapers, windscreen wipers, etc.), vehicle washing or cleaning, repairs, tolls and parking fees. Food or drinks for the driver, however, would not be covered by the exemption (as this does not concern the vehicle but the driver).
If the application is restricted to a very limited range of goods and services, the payment instrument can be used, for example, across several chains of service stations (e.g. fuel cards that can be used not only with one petrol station brand but with different petrol stations operated by different operators). By restricting the range of goods and services, it is therefore possible – in contrast to no. 11 lit a second alternative – to extend the range of acceptance even across several chains/trademarks.
Pursuant to the FMA, other examples encompassed by this exemption are:
- Transport cards in public transportation ("Everything concerning travelling");
- Instruments for the purchase of goods or services relating to or serving a person's fitness (fitness centre cards with payment function for additional products such as drinks and sports food, sportswear, training accessories, massages, individual training, etc.);
- Instruments for the acquisition or streaming of films, sporting events, music and computer games;
- Instruments for the purchase of cinema tickets, including food and drinks offered on the premises; or
- Instruments for the purchase of parking services and other related services (e.g. charging electric vehicles).
4. Social or tax purposes (no. 11 lit. c):
This alternative of the exemption aims at covering payment instruments whose use is closely linked to specific social or fiscal objectives and which are subject to a specific set of specific (labour or fiscal) legal provisions. Examples are cards for the payment of food and drink in social institutions or occupational health care measures.
Obligation to notify the FMA from the amount of EUR 1m – first notification by 31 March 2020 at the latest
A service provider that would like to apply the exemption set out in Section 3 para. 3 no. 11 lit a or b ZaDiG 2018 (i.e. shop card, limited network, limited range) must notify the FMA as soon as the total value of payment transactions of the preceding 12 months exceeds the EUR 1m threshold. Payment transactions to be included within this limit encompass inter alia provision of funds, transfers or withdrawals.
The service provider needs to inform the regulator about the specific alternative of the exemption it wishes to make use of (no. 11 lit a or b) and describe the services it offers. The service provider may only rely on one specific alternative of the exemption.
In its circular, the FMA specifies the treatment of payment instruments that enable cross-border use. The domicile of the issuing entity is the relevant connection factor in relation to the notification requirement and calculation of the threshold amount:
- All payments that were processed using payment instruments issued by this entity must be added together (and not be split up by country).
- If the threshold of EUR 1m is exceeded, the notification must be submitted to the FMA (if the entity is domiciled in Austria), and not to all regulators of every country where the instruments is used.
This means (at least from an Austrian perspective) that only one notification is required upon making use of the limited network exemption, i.e. in the country of domicile of the entity issuing the payment instrument.
In the draft circular, the FMA also clarifies for the first time that the notification must be made within three months after the date on which the threshold value of EUR 1m was exceeded for the first time.
Entities that can reasonably expect the threshold value to be exceeded are obliged to monitor the current total value of the processed payments at the end of each month. This should be implemented as part of their internal control system. The FMA assumes that the first day on which the conditions for a notification could have been met was 1 January 2020 and grants a period until 31 March 2020 for entities to submit the required notification and information.
A violation of the obligation to notify the regulator constitutes an administrative offence punishable by the FMA with a fine of up to EUR 30,000. If a notification is duly filed but the FMA determines that the requirements for relying on the exemption are not met, i.e. the service provider has in fact provided payment services requiring a licence, a fine of up to EUR 50,000 may be imposed.
Preparation of a notification to the FMA
The proper notification and documentation that the payment services provided are covered by an available exemption requires careful and diligent preparation. Entities subject to the obligation of notifying the FMA may retain external legal advisors.
We would be happy to assist you in assessing whether the PSD2 exemptions (still) apply to you and in any necessary notification to the authorities in case your transaction volume exceeds EUR 1m. You may also consult us about any other open questions on this matter.