Ecommerce offers consumers and retailers a powerful digital platform which connects online sellers with potential buyers. Market players, such as Bol.com, Google Play, Alibaba, Amazon and innovating disruptors such as Uber and AirBnB are great examples of successful international digital platforms with a growing amount of loyal clients, some of which are associated (smaller) webshops / online sellers. This is where the phenomenon of store-within-a-store webshops and digital marketplaces arises, the subject of this article.
Online purchases made at webshops are often processed by intermediary Payment Service Providers (PSP) and Payment Facilitators (PF). European supervisory bodies consider these companies as financial institutions because they process payments and handle third party (client) funds. Therefore, they have to be compliant with a complex set of international regulations, rules which have been applied to mitigate the risk of both insolvency of such financial institution (i.e. the loss of client funds) and financial crime (i.e. cybercrime, fraud, money laundering).
Contrary to PSPs and PFs, store-within-a-store webshops and e-marketplaces remain out of scope of European regulations which have been applied to financial institutions. In several European countries these types of ecommerce platforms are exempted by the local regulator from such rules and regulations, a situation which the authors of this article deem inappropriate from a Risk Management perspective.
The reasons behind this unfortunate situation may be semantic. Let us take the Netherlands as an example. The Dutch Central Bank (DCB) prohibits companies “to attract, receive and / or hold repayable funds from the public” and it prohibits companies “to provide payment services without a license under financial service regulations (PSD)”. The definition which the DCB uses for repayable funds (repayment of funds to the originator) doesn’t apply to ecommerce platforms because these hold funds to be repaid to associated webshops, not to the originator (the buyer).
The authors of this article believe that these ecommerce platforms are, in fact, holding repayable funds on behalf of the associated webshops (as beneficiary). The interpretation of the DCB does not properly consider the statutory definition in the context of these innovative ecommerce business models. This creates an uneven playing field and an unacceptable risk for the associated (smaller) webshops and their customers, in an ecommerce landscape dominated by both regulated and unregulated parties. Interestingly, The Dutch Authority for Financial Markets (AFM) acknowledges that crowd funding platforms do attract, receive and / or hold repayable funds. According to the authors, similar cases should not be judged differently.
The DCB further states that the European Payment Services Directive (PSD) neither applies to companies which provide payment services as ancillary activity, nor to commercial agents resulting in exoneration of store-within-a-store webshops and digital marketplaces from financial services regulations. This article focuses on the commercial agent exemption. For a more detailed discussion about these exemptions and the legal implications, the authors have published an article in e-Finance & Payments Law & Policy journal of e-comlaw.com.
The commercial agent exemption creates a legal vacuum which leads to abuse. This risk is recognised by the European Commission. Consideration number 11 of the revised Payment Services Directive II, emphasises that (i) the current application of this commercial agent exclusion goes beyond the intended scope and potentially increases risks for consumers and that (ii) agents such as certain ecommerce platforms should only be excluded if they do not come into possession of client funds. Unfortunately, this consideration isn’t sufficient to push for legal change.
Notwithstanding the considerations of the European Commission and the acknowledgment of the AFM, these ecommerce platforms, however, manage payment services very similar to PSPs and PFs. They offer their customers various payment methods and they receive and hold funds on behalf of the associated smaller webshops, payments which they transfer to those webshops. In case of bankruptcy, the associated webshops (and their customers) run financial risk, as they will not be able to claim back their own funds. As lawyers, we believe that this creates an unacceptable legal vacuum in the regulated ecommerce landscape.
From a legal perspective, we believe that e-marketplaces and store-within-a-store webshops are ecommerce platforms which should be considered as financial (payment) institutions which handle transactions. They provide payment services on behalf of their associated webshops / online sellers and should be regulated as such under the PSD.
As a bare minimum, the funds they withhold should be defined as repayable funds under European banking regulations in order to prevent abuse and manage risk. The DCB should reconsider its current interpretation as published on its website and align these with both the scope and purpose of the PSD and the interpretation of other regulatory bodies, such as the AFM. Moreover, the authors feel it is advisable that the European Commission implements its consideration 11 as a Rule in the PSD-II.
About Hester Bais
Hester Bais is an attorney and advises / litigates on regulatory matters in respect of both investment and payment services. She also works as compliance officer with a Dutch payment service provider and has worked over ten years as a company lawyer in the financial markets before she became an attorney. As of 2007, she joined the Dutch Bar and worked successively as senior associate with Hogan Lovells LLP and Spigthoff N.V. In 2010, she started her own law firm BAIS Legal, specialised in Financial Regulatory Law.
About Nadja van der Veer
Nadja is a payments lawyer with almost 10 years of experience in the international payments industry. She has worked as a Deputy General Counsel for a global payment service provider and as a VP Legal & Regulatory for a European acquirer. With her broad perspective on all legal and business aspects of payment processing in the global ecommerce industry, Nadja has recently launched her own business, PaymentCounsel, where her partner and she consult merchant acquirers, payment services providers, solution providers and other fintech companies.
About PaymentCounsel
PaymentCounsel has been founded by Morgan Andrews and Nadja van der Veer, two experienced and passionate legal professionals with comprehensive (in-house and worldwide) experience that ensures a true understanding of our clients business and the challenges they may face. PaymentCounsel provides a breadth of services to companies spanning the payments value chain.
About Bais Legal
Bais Legal was launched in 2010. It both comprises of and works with attorneys who have previously worked for international and national firms. In addition, BAIS Legals structure is such that the layers of servicing are stripped away, with clients assured that their work is being performed by those with the appropriate level of skill and expertise to do so. The lawyers who work for BAIS Legal have a great passion for the law and enjoy their work. They are approachable and eager to help clients. They have in excess of ten years of specialised industry experience.
Editor of the present article is Shanty Elena van de Sande
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