Brace yourselves Marketplaces — PSD2 is coming!
Why the new European legislation entering into force in 2018 is a serious threat for Marketplaces.
You must have already heard a lot about the potential impact of the new Payment Service Directive (PSD2) on the banking industry. Truth is that the real impact will not upset banks —they are prepared for that and have actually been involved very soon in the project. By contrast, a majority of marketplaces, are not aware of this imminent shift. No doubt, the impact will be significant.
PSD2, what is it again?
What we call PSD2 is the new piece of European legislation on payment (Payment Service Directive) that will enter into force beginning of 2018. The idea of this Directive is to enhance security on payments while also supporting more innovative banking methods. You can find many articles describing this topic here.
“European consumers want to know that their payments are safe when they shop or make a payment online. The new Payment Service Directive will ensure that electronic payments in Europe become more secure and more convenient for European shoppers. this legislation is a step towards a digital single market; it will benefit consumers and businesses, and help the economy grow.” said Jonathan Hill, European Commissioner for Financial Stability, Financial Services and Capital Markets Union.
Sounds like a positive development for everybody concerned with ecommerce, doesn’t it? Actually there is one major issue that is blightening all marketplaces, from the smallest niche platform to the industry leading giants. That issue is payments.
Why PSD2 is a step change for marketplaces?
Under the original Payment Services Directive (PSD1), there were exemptions that allowed certain companies to operate payments without full regulatory authorization :
- One such exemption related to “commercial agents”, meaning companies negotiating the sale of goods or services for other parties. Under PSD1, such platforms were not considered to be providing a payment service.
- Then there was the “small payment institution exemption”, which allowed any company with an average monthly processing volume of EUR 3 million or below to operate without a payment institution license even if it was acting as an intermediary for payments between two other parties.
The updated legislation, however, narrows those exemptions:
- To maintain agent status, the company will have to put a formal agreement in place to negotiate the sale or the purchase of goods or services on behalf of both parties in the transaction. So, an ecommerce marketplace that wishes to operate under this exemption would need to very carefully review and very possibly alter their business model to ensure they comply with the legislation
- The threshold of EUR 3 million applying to the exempted “small payment institution” will be lowered to an average monthly processing volume of EUR1 million or less. And even if a marketplace falls into the bracket, it is not guaranteed that their regulator will grant the exemption. In fact, the exemption will not be incorporated in some of the EU’s biggest ecommerce markets, such as Germany and France.
Therefore, under PSD2, many marketplaces will be legally considered as an intermediary of payments because they handle funds from a seller and a buyer. “Handling funds”, in this case, refers to executing payment transactions, money remittance or acquiring. They will be then regulated under PSD2.
To satisfy with this new legislation, you can decide:
- to upgrade your company structure into a payment institution and deal with the legislation. This path will be a very lengthy and a costly decision. In fact, the entire application process could cost at least EUR 125,000 and take one and a half years to complete.
- to assign the handling of your payments to a licensed payment institution. Delegating your payment stack to the appropriate player is the true and easy answer to PSD2.
By adopting a payment solution from a payment services provider who is already approved and regulated, the handling of money becomes a non-issue. This route simply erases PSD2 from the marketplace’s list of concerns and allows you to snatch up a greater share of the expanding profits.
Leave your bank and build-up your payment infrastructure with the right partner
Conclusion for marketplaces that are currently handling their third-party payments with their bank: beginning of next year, you will be required to follow the new legislation and you won’t be able to manage third-party funds on your own banking account. It means a total shift of your payment infrastructure and I sincerely don’t believe that banks will be able to launch such infrastructure model within the following months.
The logical next step would be then to outsource your payments stack to a Payment Service Provider (PSP) that will be able to provide you with the right and compliant infrastructure without lowering your service level for your clients.
For those interested in digging this topic, I wrote an article on how to choose the right banking infrastructure as a Marketplace here.