Changes to the commercial agent exemption require action, but they will bring benefits to all involved
You may not have heard of the ‘commercial agent exemption', but if you have an online marketplace or gig/sharing economy business, you may have benefitted from it. Business such as these, known as ‘platform businesses’, connect buyers and sellers and pass payments between them, usually charging a commission.
What is changing?
Previously, platform businesses were able to act in this way without needing to become a licensed provider of regulated financial services. This was due to the commercial agent exemption, which enabled platform businesses to accept payments on behalf of sellers as their ‘commercial agent’ and later transfer them to their bank accounts.
However, the Second Payment Services Directive (PSD2) introduced in January 2018 changed this, though many firms are still unaware. Regulators found that in the platform business example, the platform is acting as not only the commercial agent of the seller, but also of the buyer, as they are receiving and processing orders on the buyers behalf. By being the commercial agent of both and taking all funds centrally, additional risk falls upon both buyers and sellers. Consumers run the risk that their money will be taken and be processed incorrectly, preventing them from receiving their good/service. As for merchants, they risk providing goods/services and their payments being delayed, mismanaged, incorrect or not received at all due to the problems with the platform.
One of the aims of PSD2 was to address this risk. PSD2 states that the exemption can be applied to a firm clearly acting on behalf of a seller or a buyer, but not both. Firms that do act on behalf of both, as with all platform businesses, must become licenced as a Payments Institution, or partner with a firm that is.
How to get licensed
Becoming licensed as a provider of regulated financial services is no small feat. You will need to obtain a licence from your country’s payment service regulator - with application processes often taking months or even years. In order to ensure you are meeting the requirements of your licence you will need to establish a compliance framework, which will necessitate dedicated staff. Due Diligence will need to be performed on all merchants/suppliers on your platform and a notoriously difficult to obtain client safeguarded funds account will be required for any of this to happen. Not only will all of this and more need to be delivered, but in a UX friendly way as to not deter customers and merchants from using your platform.
The simpler, faster, cheaper alternative is to partner with a regulated payments provider. Whilst it is easy to interpret the change to the commercial agent exemption as a new obstacle for platform businesses, it can also be viewed as a blessing. Partnering with a payments provider not only allows you to meet the new regulatory requirements, but it passes the responsibility of managing customer funds to the payments provider. This is the reason Paybase was created - to allow firms to get on with doing what they do best, instead of being bogged down in payment reconciliation, compliance, KYC and everything else.
Partnering with Paybase will offer security to your consumers, merchants and yourself as a platform, all whilst alleviating the part of your business you don’t like dealing with. Embrace PSD2 - it’s there for a reason!