Treading the payment tightrope: can you still rely on the ‘limited network exclusion’ or might you now need a licence to carry out regulated payment services?
13 April 2022
The European Banking Authority (EBA) has recently published final guidelines on the application of the limited network exclusion (LNE) under the revised Payment Services Directive ((EU) 2015/2366) (PSD2). The guidelines apply to national competent authorities (NCA), which post-Brexit does not include the UK FCA. The UK FCA published its updated guidance on the application of the LNE under the Payment Services Regulations 2017 (PSRs) in November 2021, through PS21/19, PERG 15 of its Perimeter Guidance manual, and the latest version of its Payment Services and Electronic Money - Our Approach document.
- Businesses that currently issue payment instruments – e.g. store cards, membership cards, or account-based payment instruments – and who rely on the LNE to avoid the need to be regulated in the EU under PSD2 or in the UK under PSRs, including those that operate cross-border and online marketplaces
- Businesses planning to issue such payment instruments in reliance on the LNE
The latest guidance illustrates the boundaries of application of the LNE. While there remains some uncertainty in application of the LNE, many of the grey areas have now been clarified. Businesses should check that they can still rely on the LNE. Failure to have a licence can lead to fines and is a criminal offence.
What is the LNE?
The LNE enables service providers to issue payment instruments or electronic money under certain conditions without requiring a licence in the EU under PSD2 or in the UK under the PSRs. Typical examples of payment instruments that may fall within the LNE include store cards, fuel cards, membership cards and other account-based payment instruments.
Under PSD2 the LNE is defined (article 3 (k)) as follows:
“services based on specific payment instruments that can be used only in a limited way, 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 issuer;
(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;”
Under PSRs the LNE is defined in Schedule 1, Part II, paragraph 2(k) as follows:
“services based on specific payment instruments that can be used only in a limited way and meet one of the following conditions—
(ii) are issued by a professional issuer and allow the holder to acquire goods or services only within a limited network of service providers which have direct commercial agreements with the issuer;
(iii) may be used only to acquire a very limited range of goods or services; or
(iv) are valid only in the United Kingdom , are provided at the request of an undertaking or a public sector entity, and are regulated by a national or regional public authority for specific social or tax purposes to acquire specific goods or services from suppliers which have a commercial agreement with the issuer.”
What do the EBA Guidelines tell us about when the LNE can be relied on?
The aim of the guidelines is to clarify how to assess whether a network of service providers or a range of goods and services qualify as “limited”, and therefore may satisfy the conditions of the LNE. The EBA sets out 7 detailed guidelines – highlights of which we discuss below.
Specific payment instruments. Under guideline 1, detailed guidance is provided on the nature of a payment instrument that may fall within the LNE.
- Such instruments may be used for acquiring both physical and digital goods and services.
- Funds may be transferred to such instrument via an intermediary other than the issuer – that transfer is to be considered as a separate payment service and is not part of the assessment of the instrument for the purposes of the LNE.
- Use of the payment instrument should be subject to technical and contractual restrictions limiting its use. Pure contractual restrictions should not be considered sufficient for the instrument to fall within the LNE. The technical restrictions should limit either the providers where the payment instrument can be used (LNE limb 1), the range of goods that it can be used to purchase (LNE limb 2) or geographical location, specific suppliers and specific purposes (LNE limb 3).
- Multiple payment instruments on a single card or other means of payment: all payment instruments on single card or single means of payment must satisfy the conditions of the LNE for it to apply.
- Redeemability of the monetary value stored on the payment instrument is not relevant to the LNE assessment.
- A single payment instrument may only fall within 1 of LNE limbs 1 to 3.
- A single payment instrument may only be used in a single limited network (see guideline 2 below)
Limited network of service providers. Guideline 2 sets out criteria for assessing whether a network of service providers is limited. The criteria include:
- A direct contractual agreement, for acceptance of payment transactions, concluded between the issuer of the payment instrument and each provider of goods and services (and where applicable each acceptor operating within the limited network).
- The envisaged maximum number of providers operating within the limited network.
- The provider offers goods and services under a common brand that characterises the limited network and provides visual manifestation to the user of the payment instrument.
Additional factors to be taken into account, based on size and specificity of the market, include the following:
- Geographical area set out by the issuer for provision of goods and services
- Envisaged annual volume and value of payment transactions via the payment instrument
- Envisaged maximum amount to be credited to the payment instrument
- Envisaged maximum number of payment instruments to be issued
- Risks faced by customer when using the payment instrument, as identified by the issuer
- Limited network can consist of physical stores only, online stores only, or mixture of both
Premises of the issuer. Under guideline 3, concerning use of payment instrument only in the premises of the issuer, this is limited to physical premises and cannot be used in online stores.
- A functional connection must exist between the goods and/or services that can be acquired.
- A functional connection can exist between physical and digital goods and/or services.
The same factors set out above under limited network, based on size and specificity of market, - concerning annual volume and value, maximum credit amount, maximum number of payment instruments, and customer risks - apply equally to limited range of goods and services. The guidelines are to be applied restrictively, so as not to allow a specific purpose instrument to develop into a general-purpose payment instrument.
How does this compare with UK guidance on the application of the LNE?
The FCA provided additional guidance on the application of the LNE in its Perimeter Guidance manual at PERG 15.5 Q40.
The FCA emphasised that a payment instrument may not qualify for the exclusion if, on a reasonable view, it is not sufficiently limited. Similarly to the EBA, the FCA guidance notes that the following would not be considered to be sufficiently limited:
- payment instruments that can be used to acquire goods and services within more than one limited network;
- payment instruments that can be used to acquire an unlimited range of goods and services;
- specific-purpose instruments which become general-purpose;
- instruments that can be used in a network of service providers which is continuously growing.
The FCA also noted the importance of functional restrictions in addition to customer terms and conditions, plus that the limitations be reflected in the marketing of the product.
Interestingly, in relation to use only in an issuer’s premises, it appears that where a card can be used on an issuer’s website in addition to its physical premises, that prevents it falling within the LNE – so, the EBA appears to have taken a stricter stance on this point.
The FCA has clarified that while store cards that can be used on a department store website to purchase items from concessions may benefit from the exclusion, payment instruments that can be used on on-line marketplaces are unlikely to do so. This is because the scale of the operation and the very broad range of the goods and services that can be sold or the sellers that can sell through such marketplaces mean that instruments that can be used on them are unlikely to be sufficiently limited.
The other interesting clarification provided by the FCA concerned the number of firms within a network. Its view is that placing an arbitrary cap on the number of firms that can be within a network, without any reference to the specific characteristics of the case, is not an appropriate approach and that a cap on membership numbers volunteered by an issuer without reference to any independent limitation will not be an appropriate approach. This is a potentially stricter approach than that suggested by the EBA – where the maximum number of providers in a network is a freestanding criteria not directly linked to the size and specificity of the market.
The EBA guidelines on the application of the LNE under PSD2 will apply as of 1 June 2022 with an additional 3 month transitional period for issuers that already benefit from the LNE to submit a new notification to their NCA.
Key takeaways and action needed?
The effect of the guidance may narrow the scope of application of the LNE.
Online marketplaces that issue payment instruments in reliance on the LNE should consider this guidance carefully and check whether they can still rely on the LNE or need to seek authorisation to carry out payment services . This applies to those operating in the UK and /or EU. Compliance with the EBA rules does not necessarily mean that you comply with FCA rules (and possibly even vice versa).
Other issuers or intended issuers relying on the LNE should revisit their assessment of where their card can be used or the range of goods it can be used to purchase to determine whether it remains truly limited either in terms of the network of service providers accepting it or the range of goods and services that can be purchased.