PSD2 Fact 6: Limitations to the Limited Network Exclusion
Payment transactions based on a specific payment instrument within a limited network – for instance a chain of department stores or fuel cards – are outside the scope of the Directive. However, practice has shown that the exclusion often entails companies processing significant payment volumes and values while offering hundreds/thousands of products/services. The EC has clarified that such activities do not fit the purpose of the limited network exclusion and implies greater risks and no legal protection for payment services and an unlevelled playing field for regulated payment companies issuing payment instruments. Even though no major changes were made to the relevant provisions under PSD2 (compared to PSD1) that would affect its application (other than being more specific) further considerations on this exclusion has been extensively provided in the recitals of PSD2.
Recital 13 clarifies: “To help limit those risks, it should not be possible to use the same instrument to make payment transactions to acquire goods and services within more than one limited network or to acquire an unlimited range of goods and services. A payment instrument should be considered to be used within such a limited network if it can be used only in the following circumstances: first, for the purchase of goods and services in a specific retailer or specific retail chain, where the entities involved are directly linked by a commercial agreement which for example provides for the use of a single payment brand and that payment brand is used at the points of sale and appears, where feasible, on the payment instrument that can be used there; second, for the purchase of a very limited range of goods or services, such as where the scope of use is effectively limited to a closed number of functionally connected goods or services regardless of the geographical location of the point of sale; or third, where the payment instrument is regulated by a national or regional public authority for specific social or tax purposes to acquire specific goods or services.”
The Line between Specific-Purpose versus General-Purpose
Recital 13 gives examples of payment instruments that are potentially covered by the exclusion: store cards, fuel cards, membership cards, public transport cards, parking ticketing, meal vouchers etc. However, “Where such a specific-purpose instrument develops into a general-purpose instrument, the exclusion from the scope of this Directive should no longer apply. Instruments which can be used for purchases in stores of listed merchants should not be excluded from the scope of this Directive as such instruments are typically designed for a network of service providers which is continuously growing.”
The question is when the ‘specific-purpose’ line is crossed and the payment instrument becomes a general-purpose instrument. What is a limited range of goods? 5? 10? 20? Some regulators may apply this more strictly than others. The Dutch Central Bank has – already under PSD1 – indicated that the room to maneuver is limited as already a non-associated product to the purpose of the instrument (such as a can of soda bought at a gas station while using a fuel card) would result in the exclusion becoming non-applicable.
In the opinion of the UK FCA, for instance ‘city cards’ (providing access to a broad range of goods and services offered by a city’s shops and businesses) is in general not expected to fall within the exclusion. Based on the current PSD1, the FCA refers to the following cards that could still apply the exclusion, such as staff catering cards, tour operator cards (issued for use only within the tour operator’s holiday village or other premises) and store cards – where the card can only be used at the store’s premises. According to the FCA: “The issue of whether or not a “limited network” is in existence is ultimately a question of judgement that, in our view, should take account of various factors (none of which is likely to be conclusive in itself). These include the number of service providers involved, the scale of the services provided, whether membership of the network is open-ended, the number of clients using the network and the nature of the services being offered. While a “limited network” could include transport cards, petrol cards, membership cards and store cards, we would not generally expect “city cards” to fall within this exclusion, to the extent that these tend to provide users with access to a broad range of goods and services offered by a city’s shops and offered by a city’s shops and businesses.”
At a European level, the European Commission has also provided – even though less detailed than the FCA – clarifications (already pursuant PSD1) through its Q&A. The intention of the exclusion is to exempt instruments like e.g. store cards (only used in a specific shop or chain of stores) and club cards (only used within a holiday compound).
I would not expect that PSD2 will result in any alterations to any of these clarifications, since they seem to fit within the added considerations under PSD2 (and since no specific definitions are provided). However, the FCA clarification implies a broader acceptance of the definition of ‘specific purpose’ and would mean a can of soda at a gas station being paid with the fuel card, would not result in the impossibility to apply the exclusion. It would not immediately turn out to become a ‘general purpose’ instrument. But where do regulators draw the line is not sure. It is a gliding scale, but at which point will it no longer glide?
As proclaimed by the EC, in order to ensure a more coherent supervision of such networks across the EU, PSD2 provides that potential payment service providers applying the exclusion and carrying out the activities (under article 3 point (k) points (i) and/or (ii)), when their activities reach a certain value (exceeding 1 mio EUR total value over last 12 months), shall notify these activities to competent authorities, so that these can assess whether or not the network shall apply for a licence as a payment institution. This is to ensure that the financial risks for consumers are minimised. . The notification must be send to competent authorities containing a description of the services offered and under which exclusions the activity is considered to be carried out. Based on such notification, the competent authority shall assess whether the exclusion is indeed duly applied (decision shall be duly motivated) and the activities so notified can be considered to be activities provided in the framework of a limited network.
As said the boundaries of specific-purpose versus general-purpose are not laid down at EU level, leaving room for different interpretations by different Member States as is already the case under PSD1. As the EC already indicated in its Q&A under PSD1, the exclusion article does not specify any conditions or criteria for the determination of what ‘limited’ means, this will have to be determined on a case by case basis. This has not been further addressed under PSD2 and since authorization by the Member State itself will be required under PSD2 prior to applying a restriction, it will increase discrepancy the legislator has been trying to reduce and jeopardize the level playing field the legislator has been trying to achieve with the clarified limitations to the limited network exclusion.