Thursday, September 21, 2017

Ceci n'est pas une 'payment instrument': a reflection on fuel cards and the PSD2

In september this year, the FCA published its policy statement and approach document on the PSD2. I've been eagerly watching this document to find out what their final take would be on the understanding of the limited network exemption in relation to the specific nature of fuel cards. Because there is more than meets the eye here.

In essence, some fuel cards effectively function as a purchase button on a website. They don't initiate payment orders at all. They would thus fall outside of the PSD2-scope, as any other shopping-button on websites. Due to a twist of faith however, the bank supervisors seem to be keen to ignore this reality for fuel cards and bring those under the PSD2.

In this post I will highlight the flaws in this approach and conclude that the result is that if all regulators start re-writing the definitions themselves, we better label the PSD2 the Purchase Service Directive (see also the full  and more elaborate analysis on the subject here).

In the original payment services directive article 3k provided for a proportional application of the PSD1. Instruments with a limited geographical reach and scope, such as store cards and fuel cards were not subject to its provisions. The exemption 3k) was thus called the limited network exemption.
3 (k) services based on instruments that can be used to acquiregoods or services only in the premises used by the issuer orunder a commercial agreement with the issuer either withina limited network of service providers or for a limited rangeof goods or services;
In its proposal for the new version of the PSD, the Commission claimed the existence of payments systems, waivered as “limited networks” with massive volumes, which imply greater risk and no legal protection for payment users as “feedback from the market”. However, this feedback was not really a result of the external impact analysis onthe economic impact of the PSD1

What could be seen though is that the interpretations of local supervisors ranged from strict to very lenient, which distorted the playing field in Europe. In addition, some observers noted that there was a strong desire by supervisors to have stricter rules for in particular the fuel cards market (see the mystery of unregulated massive payment volumes, as discussed in the Paysysreport of March 2014).

In the end, the net result was a very strict version of article 3k in the PSD2, to ensure that its future application would be for truly limited networks only. In addition, any organisation that uses this specific exemption has to notify the supervisor. But let's take a good look at the pre-amble and the exemption text.

The definitions
The pre-amble states that payment instruments covered by the limited network exclusion could include store cards and fuel cards, but it isn't conclusive. They could, but they could also not.
(14) Payment instruments covered by the limited network exclusion could include store cards, fuel cards, membership cards, public transport cards, parking ticketing, meal vouchers or vouchers for specific services, which are sometimes subject to a specific tax or labour legal framework designed to promote the use of such instruments to meet the objectives laid down in social legislation.
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 limited network exclusion should apply in combination with the obligation of potential payment service providers to notify activities falling within its scope.
Article 3k is actually more clear, certainly in comparison to the previous version. It now refers explicitly to services based on specific payment instruments
(k) services based on specific payment instruments that can be used only in a limitedway, that meet one of the following conditions:

  • (i) instruments allowing the holder to acquire goods or services only in the premises of the issuer or within a limited network of service providers under direct commercial agreement with a professional issue;
  • (ii) instruments which can be used only to acquire a very limited range of goods or services;
  • (iii) instruments valid only in a single Member State provided at the request of an undertaking or a public sector entity and regulated by a national or regional public authority for specific social or tax purposes to acquire specific goods or services from suppliers having a commercial agreement with the issuer; 

The legal conclusion is thus: first you need to have something that is a payment instrument and then it may fall under a limited network exemption. 

The FCA's approach: let's not be clear about the payment adjective
The above may not be how the FCA are looking at it. Both in their consultation and further guidance they seem to that 3k is written as pertaining to all instruments, not just payment instruments. I pointed this out in a response to the consultation (see this separate blog) and asked for further clarification.

Yet, their feedback document, doesn't mention anything on this definition question at all, which is a bit disappointing given the timely and good job efforts that the FCA usually put in with all their consultation work. So the ambiquity stays: while the notification forms clearly outline that applications must clarify the nature of the involved payment services and payment instruments, all the guidance does is steer towards an understanding of the 3k article as pertaining to all instrument (as under PSD1). 

This still leaves us with the question: when would a fuel card qualify as a a payment instrument. Or is it just as exempt from the PSD as a purchase button in an Internet-webstore? 

Fuel card as a payment instrument or purchase device?
Let’s have a closer look at the workings of a fuel card and what it does in terms of business processes. Generally speaking, fuel cards are delivered by oil companies to corporate fleet owners, sometimes distributed via resellers or co-branding arrangements. They effectively are a tool that validates the legal competency of its holder, to take out goods/services from service delivery stations.

The company to which the cards are provided takes full responsibility for all services/goods delivered to the users of the cards and receives a monthly overview of all purchases done with the cards. It can set usage levels per card, ensuring that no more than a certain amount of goods and services are to be delivered to the cardholder. It can also set the range of goods to be delivered from narrow (fuel only) to wide (fuel and shop goods).

Every month, the fleet owning company receives an invoice with an overview of all purchases made and the rebate applied (mostly volume based). This specifies the purchases made in the network of the oil company itself as well as those in other networks and by other service providers. These other networks of service stations may also deliver goods/services to the card holder. What happens in practice is that prior to the actual delivery, the cardholders’ oil-company buys the whole service/goods package that the card-holder wishes to take out at the selected other networks with whom the oil-company has struck delivery and service agreements.

This results in a chain sale of goods/services from:
-              the service station dealer to its country organisation,
-              the service station country organisation to the oil company national organisation
-              the oil company in a country to the corporate client that distributed its cards to the employees.
While technically there may be many variations to this flow, it does serve to achieve an important effect in VAT-terms. It allows the involved oil companies and networks to reclaim the relevant VAT from local authorities and thus lower the end-fee to the corporate fleet-owners.

What's the difference between purchase and payment?
In the table below, I've summarized the functional difference between the use of a payment card or a purchase card at an oil station.

Using a purchase tool
Using a payment instrument
Used to instruct the retailer or service station to deliver goods/services
Used to instruct the bank to make a payment to a third party bank account
The amount to be paid is unknown. At the end of the month, rebates are applied and the reconstruction of what the actual equivalent price at this moment of sale would have been, is always a mathematic reconstruction.
The amount to be paid is clear.
Authentication of the card holder equals the right to receive goods/services up to a certain threshold
Authentication of the card holder equals the digital signature of the payment transfer
Positive response by oil company equals the formal sale of the services/goods from service station to oil company and the mandate to provide the services/goods to the card holder
Positive response equals the proper processing of the payment instruction
Holder of purchase instrument is not (by definition) authorised to give payment orders that relate to the billing account of the fleet owner
Holder of instrument is by design authorised to give payment orders from that account to the payees account
Holder only receives proof of purchase / delivery but not proof of payment
Holder receives proof of payment and possibly also proof of purchase
No cash-back possible
Cash back might be possible under the rules of the cards-account
Oil company may design its own purchase, control and billing procedures, use its own set of purchase tools and may set its own acceptance and risk parameters. Intercompany delivery agreements will apply.
Card is a payment instrument and payment transactions with it fall under legislation (PSD) and payment brand regulation, with bank specific acceptance and risk parameters
VAT-recovered and rebate applied to purchases by all cardholders of the fleet-owner
VAT-recovery not included
Aggregated invoice for goods and services delivered, sent to the corporate treasurer of the fleet owner, and paid for using the direct debit instrument
Periodic account statement for payments made or (as in the case of credit cards): aggregated invoice for total value of payments made, followed by direct debit.

While the bank card ticks all the boxes, the fuel cards as outlined above, do not qualify as payment instruments under the current Payment Service Directive. There is no request being made to place, withdraw or transfer funds, hence there is no payment transaction, no payment order and no payment instrument. Hence, article 3k is nowhere close to being relevant. 

What will happen to the fuel cards niche?
As the editors of the Paysys report outlined earlier in March 2014, there may exist a hidden regulatory agenda in Europe to capture fuel cards under the 3k article of the PSD2.

This seems to be exactly the discussion right now for the relevant stakeholders around this subject in Europe. While technically the legal argument is straightforward, leading to fuel cards being out of scope, some lawyers point to the spirit of the article or the statements of regulators (in whichever respect being made) to claim that fuel cards do fall under article 3k and require notification.

As in many situations, it's not the final legal analysis that is relevant but the legal uncertainty. Arguing the above case with a regulator may take too much time and is not the preferred option for risk-averse large issuers of fuel cards. So we may well see some players in the oil industry ending up not arguing their legal case and abiding with a flawed regulator view that takes fuel cards into the exemption scope of PSD2.

The wider implications: Payment Service Directive becomes Purchase Services Directive
If the fuel card case is not being challenged in courts, it sets an interesting precedent. Because in essence, there is no analytical difference between the fuel card and PIN mentioned above and the user-id / password combination that is in use by retail customers that are shopping at websites, using purchase buttons. Both tools are and should be out of scope for a payment service regulator. Just arguing that the instrument looks to much like a payment instrument is just not enough. Ceci n'est pas une pipe 'payment instrument'.

Forgetting the adjective 'payments' in article 3k means that the second Payments Services Directive may well turn into a full swing Purchase Services Directive. And by the looks of it, this is what the FCA may be doing in the fuel cards niche right now. This leaves the rest of the market wondering if their niches may follow at some point in time. 

Supervisors should however not cross that Rubicon and avoid transforming the PSD2 into a Purchase Services Directive. They should stick to the legal definition and if they don't like the consequence should not take justice in their own hands by forgetting adjectives that stand in the way of their (hidden) agenda's.  

Let commerce be commerce and payments be payments.