Limited network exemption under PSD2 – EBA consults on draft guidelines
In the summer of 2021, the European Banking Authority (EBA) published draft guidelines on limited network exemption (LNE) under the Payment Services Directive 2 (PSD2) for consultation (available here). The draft guidelines aim to promote prudential convergence among the competent national regulators (NCAs) of the EU.
The consultation is open for comments until October 15, 2021. The EBA anticipates that the draft guidelines apply from October 1, 2022.
The provision of payment and electronic money services is subject to prior authorization from the NCA of the relevant EU Member State (in Austria, the Financial Markets Authority (FMA)), unless the entities can avail themselves of an available exemption. Many companies rely or intend to rely on the limited network exemption (LNE) under the Payment Services Directive 2 (PSD2). For those, it is very advised To review the Draft EBA Guidelines in detail, as they propose important changes (including more restrictive views) to the current interpretation of the scope of LNE.
In addition, the Draft Guidelines may impact the scope of the LNE available for electronic money services (because the regulations on electronic money refer to the PSD2 exemptions). Companies should be aware that the issuance of electronic voucher cards (including personalized or anonymous gift cards) with a payment function may qualify as licensed electronic money issuance.
Background to the EBA draft guidelines
The so-called “limited network exemption” actually consists of three different sub-exemptions from the license requirements and scope of PSD2, namely:
- instruments allowing the holder to acquire goods or services (i) on the premises of the issuer or (ii) within a limited network of service providers under a direct commercial agreement with a professional issuer (network exemption limited in the narrow sense);
- instruments that can only be used to acquire a very limited range of goods or services (very limited product line exemption);
- instruments for the acquisition of specific goods or services for specific social or fiscal purposes (social and tax exemption).
The EBA concluded that the implementation and application of the scope of these (sub) exemptions diverges considerably between EU Member States, which creates opportunities for regulatory arbitrage and thus hinders the single market for payment services. The draft guidelines should help create a more uniform approach of the NCAs regarding the interpretation of the limited network exemption of PSD2.
It’s the first time that the ABE has published specific criteria that NCAs should take into account when assessing the scope of the limited network exemption (however, many NCAs, including the Austrian FMA, have already issued national guidance).
Summary of EBA’s main proposals
Although the draft EBA guidelines contain many aspects, the following will probably have the most significant impact on the current and future scope of LNE:
- Common brand: The EBA specifies that in the case of a group made up of several distribution chains where each chain uses a separate brand, the use of a payment instrument from one of the distribution chains in the other distribution chains not fall within the scope of LNE. The use of a common payment brand (as opposed to a common general retail brand) would be on its own not be enough in the opinion of the EBA. The groups of distribution chains offering combined payment voucher cards in their different brands should therefore (re) assess whether it would be necessary to make changes to the current structure.
- Also available for authorized entities: The EBA specifies that not only legal persons can use the LNE, but also already approved market players (such as banks, payment institutions, etc.). This means that regulated entities do not necessarily need to offer only payment instruments within the scope of PSD2 but – if all requirements are met – are also allowed to offer unregulated payment instruments within the scope. LNE framework.
- Place of establishment of the issuer / cross-border service: The EBA specifies that the issuer of the payment instrument may be established in an EU Member State other than the Member State where the excluded payment instrument is to be used. The EBA further notes that there is no general geographical limitation of LNE and that the cross-border service LNE services should be authorized. It remains to be seen whether some NCAs will reconsider their rather restrictive approach to certain LNE sub-exemptions (for example, the German BaFin currently considers the sub-exemption under Article 3 (k) (i) PSD2 (limited network service providers in direct commercial agreement with a professional issuer) does not apply on a cross-border basis). However, because the services are exempt from PSD2, service providers relying on the LNE cannot benefit from passport rights and subsequently are depends on an evaluation by the NCA of each EU Member State in which they wish to use the LNE.
- Notification requirements / thresholds: If the combined transaction values ââmade under a certain payment instrument of an issuer exceed 1 million euros within 12 months, the issuer must submit a detailed LNE notification (including an explanation of why the LNE is applicable) to the NCA of the EU Member State where the services are provided. However, the EBA specifies that the threshold must be calculated (i) at the level of each provider (i.e. all payment transactions within the framework of all offers from the same issuer must be added) but (ii) with regard to each EU member state separately. It follows that an issuer could offer payment instruments under the LNE exceeding an overall transaction value of 1 million euros without submit an LNE notification, if the transaction value in each relevant EU Member State is less than the 1 million euros
- On-site exemption not available for online business: The EBA is of the opinion that the reference to “local“in Article 3 (k) (i) PSD2 clearly defines a geographical area restriction to physical location (s). This means that according to the EBA, payment instruments benefiting from this particular exclusion can only be used for purchases in physical locations and not for shopping in online stores. Of course, payment instruments designed for use in online stores may resort to other sub-exemptions if all conditions are met, for example as part of a contractual agreement with a professional issuer.
- The restriction only in the T & Cs is not sufficient: The EBA specifies that the two technical and contractual restrictions on the use of the payment instrument must apply in order to be able to rely on the LNE. This means that the use of the payment instrument must be technically restricted to the scope of suppliers / stores or to the very limited range of products, for example by technically restricting the possibility of using a payment instrument for certain excluded products as opposed to a simple legal exclusion in the T & Cs.
It remains to be seen whether the consultation process will result in relevant changes to the now proposed draft guidelines. It is strongly recommended that entities that currently rely on the LNE or plan to rely on it in the future to review if their scope of services will probably (continue to) fall within the scope of the PSD2 LNE in the future.
The final guidelines on the limited network exemption under PSD2 should be published in 2022.