Multi-sided platforms, or marketplace businesses, are among the most exciting internet businesses transforming how we buy and sell today. From on-demand services to business-to-business platforms, crowdfunding to the sharing economy, and ecommerce platforms to booking platforms, marketplace businesses are unlocking access to global customer bases, broadening consumer choice, and enabling sellers to scale their businesses far beyond what was possible before. Stripe supports many of these platforms on Connect, a uniquely compliant product for platform payments.
Online platforms function as central portals that enable transactions between buyers and sellers. From early pioneering platforms such as eBay and Amazon, to more recent successes such as Shopify, Etsy, and Kickstarter, a hugely diverse platform industry has developed globally, providing both customers and suppliers with new markets and choices. Europe has been the birthplace of many innovative platforms, such as Deliveroo, Catawiki and BlaBlaCar, as well as new fintech platforms, such as Zopa and Monzo.
As platforms become increasingly important drivers of digital commerce in Europe, their role has attracted heightened regulatory scrutiny, which seeks to ensure that customer protection, anti-money laundering, and competition rules keep pace with technological innovation. From our experience powering payments for thousands of platforms around the globe, we’ve encountered many of the regulatory questions and challenges platforms face. In this guide, we’d like to share some perspectives on how platforms can best navigate upcoming regulatory changes in Europe that impact how platforms manage payments. Although not legal advice (platforms should independently assess their own regulatory positions), our views are based on our experiences of the complex payments regulatory landscape on which our platform payments product, Connect, is built.
This guide describes how many platforms managing their own payments in Europe currently rely on the so-called "commercial agent" exemption from payments licensing. We explore how this exemption is changing in January 2018 under the new European payments regime—the second Payment Services Directive or PSD2—which poses significant questions for platforms to consider in structuring their payments. The key change for platforms is that if they act on behalf of both the buyer and the seller, platforms can only avoid obtaining their own payments license if they do not possess or control funds and instead rely on a licensed payment service provider. Finally, we describe how Stripe Connect addresses the regulatory concerns of platforms by abstracting away the complexities of payments licensing and making regulatory compliance less burdensome for platforms.
How do platforms operate today?
In Europe, many online platforms are set up so that the customer (Buyer) owes a payment for the product or service purchased to the seller (Seller) and not to the platform (Platform). The Platform generally passes liability and economic risk to the Seller such that sales to the Buyer are always made by the Seller. Therefore, the Platform often does not contract with the Buyer and instead the Seller contracts with both the Buyer and the Platform.
In this way, the Platform facilitates sales made by the Seller but does not act as a seller or reseller to the Buyer. This means that Sellers, rather than Platforms, take on the economic risk but also certain financial, legal, and tax obligations associated with the sale of products or services to the Buyer. This is often essential to the economic success of Platforms, many of which could not exist otherwise. Examples of obligations that may fall on the Seller, rather than the Platform, include liability for products delivered to a consumer, returns, local VAT requirements, and licensing or mandatory insurance requirements for products or services that are licensed or insurable (e.g., mandatory third party insurance for taxis).
Platforms running under this legal construct typically try to ensure their role is merely to facilitate the sale of products or services by including language in their contracts with Sellers such as: "the contract for the supply of the service will be between you and the seller"; or “the platform only plays a facilitation or supporting role”; or “the responsibility of the platform is limited to facilitating the availability of the site, application, and services”.
Even though the Buyer owes a payment to the Seller, many Platforms look to manage payments themselves by acting as intermediaries between Buyers and Sellers.
When the Buyer makes an upfront payment for the product or service, the payment is received by the Platform and subsequently paid out to the Seller (usually within a pre-agreed timeframe or after the product or service has been provided). Even though the Platform does not make the sale or have contractual liability to the Buyer, the Platform is receiving payment from the Buyer. In other words, the Buyer’s debt to the Seller is not settled or extinguished when the Platform receives the funds. As illustrated below, contractual liability is not expressly aligned with the flow of funds.
As the Platform comes into possession of payments for sales made by the Seller, the Platform handles money which is beneficially owned by the Seller. Most interpretations of European payments law—both the current Payment Services Directive (PSD1) and the imminent Payment Services Directive 2 (PSD2)—consider this to be regulated activity, which would require the Platform to obtain a payments license unless it falls within an exemption. Many Platforms that manage their own payments in this way have relied on the "commercial agent" exemption under PSD1 as their basis for not being licensed.
What are regulated payment services and who can provide them?
Before exploring the commercial agent exemption, under which many Platforms in Europe operate today, it is useful to understand what payment services are regulated under PSD1 and PSD2. In essence, entering into possession or control of funds in a payment flow is a critical factor in assessing whether a regulated payment service is being provided. When a Platform receives or moves money that belongs to another party, that activity attracts heightened security and oversight. The following activities are considered regulated payment services in Europe.
- Operating a payment account and enabling cash to be placed on and withdrawn from a payment account - e.g., holding funds for a specific merchant in a bank account before releasing the funds pursuant to the merchant’s instructions
- Executing payment transactions - e.g., processing payments from customers to merchants
- Issuing and/or acquiring "payment instruments" under PSD1 or “payment transactions” under PSD2 - e.g., acquiring and processing credit card transactions through the card networks
- Money remittance - e.g., transferring funds on behalf of a payer to a payee
- Payment initiation services - new under PSD2, e.g., initiating a payment, such as a bank transfer, from a customer’s online bank account to a merchant
- Account information services - new under PSD2, e.g., providing consolidated or aggregated information regarding payment accounts held with payment service providers
With Stripe Connect, we provide regulated payment services to Platforms in Europe, pursuant to our authorisation as an Electronic Money Institution. Currently, there are three categories of licenses for providers of regulated payment services in Europe:
The distinction between a Payment Institution operating a payment account, an Electronic Money Institution issuing e-money, and a Credit Institution taking deposits can be quite nuanced. As a guide:
Operating payment accounts - where funds are paid into an account and held for a specific user for the purpose of a payment being executed by a payment service provider.
Issuing e-money - where funds are paid into an account and converted into an electronic token or credit, which is accepted as a means of payment by a third party.
Deposit-taking - where funds are paid into an account, potentially but not necessarily bearing interest, to be repaid on demand or after an agreed period of time and without the purpose of making a payment.
In addition to regulating various payments services, PSD1 and PSD2 set out a number of exemptions. Platforms that come into possession of funds owed to their Sellers, and would otherwise be considered to be providing regulated payment services (such as operating a payment account, executing payment transactions, or money remittance), have typically relied on one of these exemptions, the so-called "commercial agent" exemption.
What is the commercial agent exemption?
The commercial agent exemption applies to "payment transactions from the payer to the payee through a commercial agent authorised to negotiate or conclude the sale or purchase of goods or services on behalf of the payer or the payee".
Platforms have invoked this exemption on the basis that they are acting as a commercial agent authorised to negotiate or conclude the sale or purchase of goods or services on behalf of the payer (the Buyer) or the payee (the Seller). Under this construct, the Buyer is considered not to be paying the Platform but instead to be paying the Seller, via its commercial agent (the Platform). The Seller is treated as receiving payment, in legal terms, as soon as payment is received by its agent, the Platform. Many Platforms have chosen to rely on this exemption in lieu of becoming a licensed provider of regulated payment services.
Many hold the view that Platforms, in aggregating market supply with market demand, are acting as an agent for both the payer (receiving orders and payments from the Buyer) and the payee (sending orders and payments received to the Seller). However, this poses problems for Platforms as the commercial agent exemption has been applied quite differently across Europe. Pre-PSD2, some countries have permitted a commercial agent to act on behalf of both the payer and payee, but other countries have applied the exemption more strictly, and only permit the commercial agent to act on behalf of either the payer or the payee, but not both. In addition, some regulators hold the view that since there is no actual negotiation or conclusion of the sale or purchase by the Platform, the Platform should not be considered a commercial agent. This jurisdictional variance in the application of the commercial agent exemption is problematic for platforms as, unlike a payments license, an exemption cannot be passported across Europe.
Faced with this existing regulatory uncertainty, many hundreds of Platforms with Sellers across Europe have already chosen to rely on a licensed payment service provider, such as Stripe, rather than having to obtain their own payments license or fit within a narrow exemption.
How does the new payments framework impact platforms?
The commercial agent exemption under PSD2
PSD2 clarifies the grey area regarding commercial agents. A widely-held view throughout Europe is that Platforms managing their own payments will no longer be able to rely on the commercial agent exemption from licensing. PSD2 restates the commercial agent exemption as including:
"payment transactions from the payer to the payee through a commercial agent authorised via an agreement to negotiate or conclude the sale or purchase of goods or services on behalf of only the payer or only the payee"
This change is explained in the preamble to PSD2 which states that the commercial agent exemption:
"is applied very differently across the Member States. Certain Member States allow the use of the exclusion by e-commerce platforms that act as an intermediary on behalf of both individual buyers and sellers without a real margin to negotiate or conclude the sale or purchase of goods or services. Such application of the exclusion goes beyond the intended scope set out in that Directive and has the potential to increase risks for consumers, as those providers remain outside the protection of the legal framework. Differing application practices also distort competition in the payment market. To address those concerns, the exclusion should therefore apply when agents act only on behalf of the payer or only on behalf of the payee, regardless of whether or not they are in possession of client funds. Where agents act on behalf of both the payer and the payee (such as certain e-commerce platform), they should be excluded only if they do not, at any time enter into possession or control of client funds."
Therefore, from the final implementation date of January 13, 2018, it appears that the commercial agent exemption will only be available when a commercial agent very clearly acts on behalf of either the payer or the payee. If acting for both, a Platform will only be able to avoid a licensing requirement if it does not possess or control funds (i.e., relies on a licensed payment service provider to do this).
To illustrate this, the Financial Conduct Authority (FCA) in the UK has stated:
"An example where a platform will be acting for both the payer and the payee would be where the platform allows a payer to transfer funds into an account that it controls or manages, but this does not constitute settlement of the payer’s debt to the payee, and then the platform transfers corresponding amounts to the payee, pursuant to an agreement with the payee."
The FCA also offered the specific example of an online fundraising platform, which accepts donations before transmitting them to the intended recipient. It said such a platform would be unable to rely on the commercial agent exemption because it is "not a commercial agent authorised via an agreement to negotiate or conclude the sale or purchase of goods or services on behalf of either the payer or the payee but not both the payer and the payee."
As evident from the preambulatory language of PSD2, the narrowing of the commercial agent exemption aims to protect consumers and avoid distortions of competition. Where a Platform is managing its own payments, the Seller providing the product or service is not only taking on the contractual obligation to the customer, but also the additional credit risk of default by the Platform (e.g., if the Platform goes insolvent before paying out, the Seller has provided their product or service without receiving payment). From a competition perspective, PSD2 attempts to level the playing field across Europe with regard to how individual Member States apply the commercial agent exemption.
The regular occupation or business activity test
In approaching this topic, Platforms should also consider whether their payment services are a "regular occupation or business activity". While this is not defined, the preamble to PSD2 states that licensing is “confined to service providers who provide payment services as a regular occupation or business activity”. The FCA’s understanding of this is informative. It has stated that “the services must be provided as a regular occupation or business activity in their own right and not merely as ancillary to another business activity” but also that “the fact that a service is provided as part of a package with other services does not, however, necessarily make it ancillary to those services.” It’s very difficult to imagine that receiving payments from customers and paying Sellers for all transactions conducted through a Platform would merely be considered ancillary and not a regular occupation or business activity of such a Platform.
The limited network exemption
Finally, under PSD2, even if Platforms fall within the extremely narrow scope of the "limited network exemption" (an alternative to the commercial agent exemption), they have to notify the relevant regulator if their payment transactions over the preceding 12 months exceed €1 million, upon which the regulator may require them to obtain a payments license.
How does Stripe approach payments for platforms?
When we designed Stripe Connect, we wanted the payments regulatory burden in Europe to fall on Stripe and our e-money license, rather than on Platforms. To do this, we created an entirely new product, designing payment flows to ensure that Platforms do not come into possession or control of funds. The preamble to PSD2 also provides guidance here:
"Where agents act on behalf of both the payer and the payee (such as certain e-commerce platform), they should be excluded only if they do not, at any time enter into possession or control of client funds."
For the reasons discussed above, commercial realities mean most Platforms don’t have an option to deviate from their contractual design, and so it is business critical that these Platforms do not come into possession or control of funds. This is the central regulatory pillar behind Stripe’s development of Connect, and one of the primary reasons many Platforms in Europe have chosen Stripe.
With Connect, Stripe has direct contractual relationships with both the Seller and the Platform to settle payments to the Seller and fees to the Platform. Funds that are owed to the Seller are never in the possession or control of the Platform. Instead, these funds are held in Stripe’s regulated client money bank account for the benefit of the Seller, before being paid out to the Seller by Stripe. The regulated payment services are rendered by Stripe instead of the Platform, so the Platform does not incur the significant regulatory and compliance overhead of getting a payments license or exemption. Returning to our combined liability and funds flow diagram, Connect operates like this:
In addition to taking on the payments regulatory burden, Connect’s product design also provides other benefits and safeguards for Platforms:
- Onboarding and KYC identity verification - Stripe onboards Sellers as Stripe users and verifies their identity in accordance with applicable anti-money laundering obligations.
- Customised control of the Seller’s experience, e.g., Sellers can agree to let the Platform manage the Seller’s experience, including the UI, reporting, payouts management, and communicating with the Stripe API.
- Innovative payment functionality within Connect to support any business model, e.g., One-to-Many, Many-to-Many, Holding Funds, Account Debits, Instant Payouts and many more.
- Local transaction routing, resulting in better acceptance rates and lower-cost payments from customers in 135+ currencies and payment types including SEPA direct debits, Sofort, AliPay, WeChat Pay and more.
- Local payouts to sellers in local currencies, allowing Platforms to internationalise their businesses without local entities or bank partners (enabling payouts in 15+ currencies in 25+ countries around the world).
- Tracking payments with Stripe-generated information through a Stripe dashboard offering reporting, querying, and payments management, or alternatively a Platform interface, where Sellers can see their earnings, refunds, disputes and payouts.
- Protection of sensitive card information to a PCI Level 1 standard so Platforms don’t have to worry about being PCI compliant.
- Advanced modeling and machine learning, which powers Stripe Radar, to monitor transactions from end to end, detect and prevent fraud, and take action where we find suspicious activity.
In summary, Connect provides Platforms in Europe with a sophisticated and compliant payments flow that enables Platforms to design their agreements with their Sellers in compliance with local payments regulation, without having to pursue their own payments licenses. Stripe shoulders this regulatory burden so that Platforms can focus their energies on running their businesses. Once again, this guide is not legal advice but is provided for informational purposes and Platforms should independently verify their own unique regulatory positions. If you have questions regarding Connect, we’d love to hear from you.