There is no surprise that marketplaces have been booming as they provide online shoppers with incredible convenience and easy access to a range of products and services. Let’s take a closer look at what it takes for such a business to scale in the European Economic Area (EEA) and ensure that the key element of their success – payments operations – is working smoothly across different countries.
The Payment Services Directive (PSD1) came into effect in 2007 as an effort to unify the European payments landscape as well as ensure safer and more efficient services across the EU. PSD1 standardised rules for certain types of electronic payments, such as credit transfers, direct debits, card payments, mobile and online payments.
While being a strong step forward towards building a solid payments regulatory framework, PSD1 did not tick all the boxes. For instance, many businesses, especially marketplaces, used the ‘commercial agent exclusion’ loophole to conduct purchases of goods or services on behalf of either buyers or sellers. This means they bypassed the need to acquire a financial license – a costly process, both time and investment-wise – and become regulated as a payments service provider.
In 2017, following proposed amendments for PSD1, the European Commission introduced PSD2, which focused more on regulating marketplace businesses, while still offering plenty of benefits and certain exceptions. It is important to note that PSD1 applied only to intra-EU payments, while PSD2 expanded the scope to to-and-from third countries.
For a marketplace business to remain compliant with PSD2, it can either apply for a financial license, granted by a local Central Bank, or apply for an exemption. However, the reality is not as simple as it looks on paper.
Firstly, obtaining a financial license that enables a marketplace to conduct payments can be a strenuous, time-consuming, expensive, and complex process. As a result, this is often not an option for companies that are not incredibly well-funded or have immense resources to sustain extensive and ongoing compliance-related work. In the case that a business is financially sufficient, a company, strongly focused on its growth, more often may divert such resources to other processes that would fuel its expansion and, when it comes to payments, choose to partner with a payment service provider.
Another way would be to apply for an exemption, however, under PSD2, the process has become more difficult than it was under PSD1. In addition, exemptions, unlike a payment license, cannot be passported. Also, even with an exemption, marketplaces no longer have the permission to act on behalf of both parties – buyers and sellers – as they did with PSD1, unless they choose to obtain a PSP license.
Regulatory details add to the complexity of the scaling checklist. Each country interprets regulatory policies in its own way, resulting in subtle nuances that companies must be mindful of when entering a new market. For instance, the lack of a united approach when it comes to PIS (payment initiation) and AIS (account information) services. When enabling PIS, some banks require to provide more personal data and account information, while others do not. The lack of consistency across regulatory policies requires country-by-country analysis, which can considerably slow down new market entry and adds on top of the already hefty expansion costs regarding ensuring compliance with PSD2.
To successfully scale across the European Economic Area, a business needs to be able to navigate across an ocean of complex expertise, starting with regulatory laws, AML/CFT compliance, to the newest innovation in technology development and best practices to optimise user experiences.
When it comes to compliance, choosing a trusted payment service provider is one of the ways marketplaces could take the regulatory intricacies off their shoulders and focus on their business. This is the motto we operate by as well – focusing on what we do best while enabling our clients the opportunity to concentrate their efforts in the areas that would help them scale faster.
Trying to tackle the question of payments in-house remains one of the options. However, it does require a careful examination of resources on hand as well as figuring out if this is truly something the team has the luxury to shift their attention towards (would this bring the most value to the company?).
All in all, a greater focus on a company’s strategic priorities leads to greater efficiency. As a result, greater efficiency often leads to higher profits. Whether it is tackling the complexities of payments themselves or partnering up with experts that would help ease off the load – there is no one-size-fits-all solution, as marketplaces need to evaluate where they can achieve the best ROI.
Business and Technology executive with 15+ years of proven track record in developing digital products and accelerating growth in various enterprises. Experienced in Global Finance industry, Marius is proficient at delivering highly scalable and reliable systems and platforms. Well versed in organisational development and navigating teams of experts towards common goals.
One of the fastest growing EMI companies in Europe, ConnectPay offers an all-in-one financial platform. With extensive functionality and expert support, the platform is able to be integrated into various online business, thus removing the need for companies to rely on multiple financial solutions and providers. ConnectPay is licensed and regulated by the Bank of Lithuania and is subject to the regulatory framework of the European Central Bank.
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