The court’s ruling relatively clearly states that providers of security deposit services who forward funds as an ancillary activity should not be covered by PSD2.
However, the ruling is in different respects ambiguous. Hence, it is unclear how far-reaching the practical consequences of the ruling will be in scenarios where potential payment services are provided in an ancillary manner and without an account. It will therefore remain highly interesting to see how national competent authorities (NCAs) will implement the ruling and whether it will have any impact on the upcoming Payments Package.
Factual background
The case was brought before the ECJ in the form of a preliminary ruling within the meaning of Article 267 TFEU.
The court was faced with the question of whether the business activities of the plaintiff, Betaal Garant Nederland CV (Betaal), which offers, among other services, security deposits for construction contracts, fall under the definition of payment services. For the security deposit, Betaal enters into an agreement with the client and the building contractor.
On this basis, Betaal receives a part of the first instalment due from the client and retains it in a payment account in its own name until the construction is completed. Only when the client and contractor notify Betaal that the construction has been duly completed does Betaal forward the retained amount to the contractor.
The Dutch supervisory authority, De Nederlandsche Bank NV (DNB), considered this service to be a payment service in the form of the execution of payment transactions, more specifically the execution of a credit transfer under Article 4 point (3) in conjunction with point (3)(c) of Annex I to the PSD2, for which Betaal did not have the necessary licence.
Subsequently, DNB prohibited the further provision of this service and imposed a penalty payment on Betaal. After the Dutch court of first instance agreed with the DNB’s opinion, the court of appeal referred the case to the ECJ.
Participation of other member states and the commission
In the proceedings, the advocate general and a number of parties have submitted their opinions to the ECJ. These were quite diverse: the Dutch government followed the opinion of its supervisory authority and argued that the services should be regarded as a payment service. The Italian government and the European Commission disagreed, arguing Betaal’s business model did not constitute a payment service. The Czech government considered it a payment service only under certain conditions, and the Norwegian government considered it instead to be money remittance.
The ECJ's reasoning
The ECJ concludes that PSD2 “excludes from its scope providers of security deposit services which use, in an ancillary manner, payment services offered by other providers of such services as a primary service in the exercise of their regular occupation or business activity.”
The arguments leading to this conclusion shall be examined in the following.
Literal interpretation of PSD2 definitions
The ECJ begins with the literal interpretation of defined terms in PSD2. It holds that, for the “execution of credit transfers”, PSD2 requires the payment service provider to hold a payer’s payment account, as follows from Article 4(8) read in conjunction with Article 4(24) PSD2. Since, in the case at hand, Betaal does not itself hold an account for the payer, it does not fulfil the requirements of a credit transfer under PSD2.
The court generally states that in the context of the two sub-transactions (from the payer to Betaal and from Betaal to the payee), the execution of payment transactions falls under the responsibility of the respective payment service providers of the client and Betaal. In the court’s view, the contractual relationship between the client, the contractor, and Betaal is not relevant to the actual provision of the payment service (which is instead governed by the payment service contract each party has with its respective payment service provider).
Instead, the court holds that the actual service which Betaal offers, and which is the purpose for the payments, is a personal guarantee. The provision of such guarantee is neither defined nor governed by PSD2 and therefore falls outside its scope.
Systematic interpretation of PSD2 provisions
The ECJ goes on to note that, under Article 4(24) and point 3 of Annex I to the PSD2, the Directive is intended to apply only to payment services provided by entities falling within one of the categories listed in Article 1(1) PSD2. These include, inter alia, credit institutions, electronic money institutions, payment institutions and post office giro institutions.
The court’s argument in this regard seems to be that a company whose main business model does not fall into one of these categories should not be regulated under PSD2. The ECJ sees this line of argumentation supported by Recital 24 of PSD2, which limits the application of the PSD2 framework to payment service providers that provide payment services as a regular occupation or business activity.
More importantly, the court addresses proportionality concerns with regard to the strict regulatory regime that applies to payment service providers under PSD2. Since the classification as a payment service has significant legal consequences for any person offering such a service on a professional and regular basis, such classification is “not justified if transfers of funds are made only in order to carry out another service offered as the primary service […] which, in itself, does not fall under the provisions of that directive.” This argumentation seems to support the concept of a general ancillary activity privilege under PSD2, as was already expressed in the advocate general’s opinion.
Turning to the case at hand, the ECJ finds that Betaal does not fall under the categories of payment service providers listed in Article 1(1) PSD2, nor does it itself transfer funds in order to provide its security deposit service (but instead relies on other payment service providers to do so). Consequently, Betaal falls outside the scope of PSD2.
Teleological interpretation of PSD2
Finally, the ECJ rejects the argument that the goal of ensuring a high level of consumer protection requires a broad interpretation of payment services under PSD2.
This objective, according to the ECJ, “cannot, in itself, alter the scope of the provisions of PSD2 beyond their literal meaning.” Moreover, such an extensive interpretation would run counter to the objective of ensuring legal clarity in the area of payment services.
The court surprisingly also turns to national legislation and notes that, under Article 767 of Book 7 of the Netherlands Civil Code, the security deposit services offered by Betaal constitute an alternative to the security deposit with a notary. PSD2, however, is not intended to cover such services performed by notaries.
While the ruling does not provide for an explicit conclusion to this comparison, the court’s argument seems to be that two comparable services, i.e., the security deposit services performed by a notary and the same services offered by a private company, should not be treated differently, and both should not be regulated by PSD2.
Further aspects of the ECJ’s ruling
The ECJ did not uphold all the advocate general’s arguments—in particular, it did not assess the services from a money remittance perspective, did not rely on the Rasool case (C-568/16), and did not uphold the argument that a payment order must be irrevocable.
However, the court did follow his main line of argument regarding the disproportionality of applying PSD2 to persons who carry out payment services only in order to provide other services outside the scope of PSD2, and also regarding the fact that using an account with another payment service provider could bring an activity outside the scope of PSD2.
Interestingly, the ECJ also picked up the argument that a comparable activity performed by a notary would not fall within the scope of PSD2, which is consistent with many member states’ competent authorities’ (including the German regulator Bafin) approaches.
Practical impact on the payments sector
While court rulings normally are only binding between the relevant parties, there are particularities regarding preliminary rulings of the ECJ: member states, including their regulatory authorities and courts, are, in general, required to observe the judgment as part of their obligation of sincere cooperation under Article 4(3) TEU.
Therefore, NCAs will now have to assess the entirety of the arguments deployed by the ECJ and potentially amend their administrative practice. In particular, this applies to NCAs that have interpreted the PSD2 licensing requirement more widely. We assume that this assessment is likely to take months rather than weeks.
In terms of substance, first feedback from national regulators implies that affected parties should reevaluate whether they would still fall within the PSD2 licensing requirement after the ECJ’s decision and discuss their assessment with their NCA. The practical consequences of such assessment will depend on each entitiy’s current position. Entities licensed as payment institutions might consider returning their licence (and, hence, falling outside the scope of ongoing PSD2 requirements such as reporting, monitoring, own funds, and business requirements).
Meanwhile, entities currently applying for a PSD2 licence might consider whether to proceed with their application, weighing the reputational benefits of being licensed against the costs this will incur (on an ongoing basis). Finally, for those entities who have decided not to apply for a license so far, the legal assessment supporting this decision might become more robust.
Deciding on the next steps raises practical challenges, as the judgment still leaves questions open.
First, there is the question of how payment services other than credit transfers are affected by the judgment. In Germany, Bafin has traditionally interpreted payment services, in particular money remittance, quite broadly. Although the ECJ’s judgment did not specifically cover money remittance services, it argues that the bespoke activities do not fall within the remit of payment services under PSD2 in general, albeit without going further into detail.
Second, and potentially even more consequential, is the ECJ’s argument that the provision of a payment service does not fall within the scope of PSD2 if it serves to carry out another main activity not covered by PSD2. Many member states have, so far, not granted an “ancillary activity privilege”, which would remove ancillary activities from the scope of application of the authorisation requirement. Should the ruling in fact have to be interpreted as meaning that PSD2 provides for such a general ancillary activity privilege, this would have far-reaching consequences.
Entire market segments might consequently fall outside the scope of the authorisation requirement under PSD2, e.g., facility, escrow, and paying agents, which have incurred extensive costs in obtaining authorisations and in setting up and maintaining the organisational structures required for their businesses. Also, other business lines providing payments services as an ancillary activity, such as e-commerce, could potentially benefit from an ancillary activity privilege.
Against this backdrop, it also remains unclear how national and European legislators will respond to such a paradigm shift, particularly in light of the soon-to-be-published European Payments Package.
The impact of the ECJ’s ruling will to some extent depend on the jurisdiction where a service provider is located, as the NCAs’ previous approach was not uniform. The largest impact will be on jurisdictions where, like in Germany, a position similar to the DNB’s has been applied so far.
Persons who (potentially) carry out payment services in order to provide other services that fall outside the scope of PSD2 should now proactively engage with their NCA to discuss the implications of this judgment for their specific circumstances.
