In this series, every Friday, I will be posting facts on PSD2 (yes there is more to it than just XS2A!) to get you up-to-speed with the upcoming changes. TGIF gets a whole new meaning: “Thank God It’s Fact-day”

PSD2 Fact 1: No more home country shopping?

When choosing a EU home country to establish presence and obtain a financial services license (either due to Brexit or EU market expansion), companies may take many factors into consideration. Speed of license application, tax benefits, talent pool, attitude of the supervisor, AML requirements (see my white paper here:http://www.emergingpayments.org/resources/payments-compliance-in-europe-gaining-competitive-advantage-through-amlkyc-regulations/) etc…Now it is time to add a new factor to the mix: where will the payment services business be provided?

Article 11 paragraph 3 of PSD2 stipulates: “A payment institution which, under the national law of its home Member State is required to have a registered office, shall have its head office in the same Member State as its registered office and shall carry out at least part of its payment service business there.” The underlined part is a new addition to this article compared to PSD1 (currently article 10 par 3).

Currently, local authorities under PSD1 are setting local establishment requirements of a more organizational nature (head office must be established locally, running central administration locally, have a local footprint, not just sales office, at least 2 day-to-day decision makers locally, etc). This new requirement of providing local payment service business adds now a turnover element to it. The European Commission clarifies that this is intended to avoid abuses of the right of establishment (consideration 36).

Will Luxembourg still make the cut?

Over the years, home country shopping became a trend, for instance to obtain a license quickly. It will be interesting to see if this newly added requirement will result in targeted home countries now being scratched of the list? For example, Luxembourg has become a top pick for many (mostly E-Money) institutions due to their openness to technology and the speed of the license application (in 2014 an impressive 73.44% of the total EU e-money transactions related to E-Money issued by E-Money Institutions based in Luxembourg – source ECB payment statisticshttp://sdw.ecb.europa.eu/reports.do?node=1000004051). However, the question is whether all these companies are actually carrying out a part of its payment services in Luxembourg? The above percentage represents total transactions in Europe by PSPs resident in Luxembourg only (and not for instance whether the E-Money holders are originating from Luxembourg). Looking at other payment transactions, Luxembourg scores low compared to the rest of Europe.

In 2014, Luxembourg only had a 1.66% share in the total number of EU payment and terminal transactions. Compared to the UK, who had a 20.61%, that is very insignificant. Even if we leave UK for what it is (Brexit), 11 other EU countries had a higher share than Luxembourg. Luxembourg had a 0.07% country share in the total number of Direct Debit transactions in Europe in that year, and a 0.21% share in total number of EU card transactions. In this list Luxembourg is part of the top bottom; even 19 countries (on DD) and 23 EU countries (on CC) score a higher country share than Luxembourg. With this middle and low range position, would this share be sufficient for Luxembourg to maintain its attractive position?

This makes you wonder whether all those Luxembourg PSPs are even processing payments originating from Luxembourg? Other attractive home countries seem to have more presence in the processing volume cut. Using a payment volume threshold to establish whether in fact payment services business are carried out in a home country will clearly not be beneficial to Luxembourg. What criteria will be used by member states be using in establishing whether at least a part of the payment services business is being conducted in their country?

Local Interpretations – Hard Criteria or Soft Criteria?

Unfortunately “at least part of…” is not further defined by the European legislator, leaving it up to the local supervisors to set the criteria. This leaves room for local authorities to pursue their own political agendas. If they desire to welcome much more financial institutions into their country, the barrier will be set much lower than in the countries that prefer a smaller market. Will they set a percentage of the total processing/issued volume (quantitative criteria)? Or will it be more a soft/qualitative criteria, more aligned with current criteria upheld by member states while determining whether a company is carrying out payment services in that country (see below)?

Going even further back, should we not first determine when payment services are carried out in a country, before we look at the ‘at least part of it’ criteria? Again here, when a company is carrying out payment service business is not pre-determined at EU level and also open for local interpretation. Does this mean your merchants have to be based in that country? Or should the payment transactions processed originate from that country (see the Luxembourg example)? Or for E-Money Institutions, should you offer for instance your e-wallet product locally as well?

Member states have not aligned their criteria when payment services are being rendered in their country. There are a few options that can be taken, including the characteristic performance test or the solicitation test.

Characteristic Performance Test

The UK FCA upholds the characteristic performance criteria. SUP App 3.6.5 of the FCA Handbook clarifies that: “In determining, for the purposes of notification, whether a service is to be provided ‘within’ another EEA State, it is necessary to determine the place of supply of the service.” (https://www.handbook.fca.org.uk/handbook/SUP/App/3/6.html).

Solicitation Test

Some EEA States may apply a solicitation test. This approach is for instance taken by the Dutch Central Bank. On its website it clarifies (http://www.toezicht.dnb.nl/en/2/51-226040.jsp): “In general, it is not easy to give a precise indication of where ‘pursuing the business of’ begins and ends. In this respect, DNB uses a strict approach.” The Dutch Central Bank considers the following aspects (alone or combined) to be indications that payment services are pursued in the Netherlands (not limited): establishing legal relationships with or directly addressing local inhabitants, use of Dutch language and reference to Dutch legislation, local contacts or the Dutch tax system.

So which one will it be?

It will be interested to see whether any of these tests will be used for new article 11 paragraph 3 of PSD2 as well. For sake of consistency and legal certainty, it would be good if member states would not apply hard criteria: what if you expand to other countries, or a local payment method supplier terminates the relationship? Your processing volumes per country can change significantly and it would be very hard to manage. Soft criteria would be preferred. But if this approach is taken, it is advisable that member states will apply the same test (either characteristic performance or solicitation test) to avoid uncertainty and create harmonization. Perhaps this must be set at EU level and not left open for local interpretation.

Nadja van der Veer is a payments lawyer with almost 10 years of experience in the international Payments industry and a legal expert in rules and regulations involving PSD, AML and CDD and Card Schemes. Having worked for a PSP and an acquirer, she has a broad perspective on all legal and business aspects of (Card and Alternative) Payment processing in the global e-Commerce industry. She consults Merchant Acquirers, Payment Services Providers (PSPs/MSPs) and other FinTech companies in their start-up phases that want to expand their business internationally, while mitigating risk.

September 23, 2016