German Banking Supervisory Law: What Do Online Trading Platforms Require In The Way Of Regulatory Authorization Under German Law?
When eBay, today’s largest internet trading platform, was launched on 3rd September 1995 under its former name AuctionWeb, an age-old concept merged together with cutting-edge data communication – although in principle, eBay is nothing more than a market place for buying and selling goods and services. The main innovation was merely that trading would no longer take place in a real market place or retail outlet, but rather virtually via data communication, and if need be, between the living rooms of both buyer and seller. E-commerce platforms of the likes, which naturally exist in abundance today, have facilitated a speeding-up of transactions from sales and service contracts – irrespective of geographical distance – and explicitly transformed the market. The antiquarian book trade has changed because any book can now be instantly searched and purchased from any location with internet access. The newspaper market has equally undergone change because buying a hard-copy paper is no longer considered necessary in terms of essential reading material. The used-car market has morphed because there are now specially designed online marketplaces available for the purpose etc. Today, it is however the smaller eCommerce trading platforms which are particularly facing problems in the form of banking supervision. According to a ruling by the Regional Court of Cologne, these kinds of eCommerce sales platforms, under certain circumstances, are operating payment services which require authorization and therefore consent from the German Federal Financial Supervisory Authority. Not every platform operator has given this thought. Attorneys at law ilex Rechtsanwälte outlines the background.
- What is the Regional Court of Cologne up against?
- What are the consequences of not obtaining consent?
- Who is not affected?
- Why has this issue arisen today?
- Does outsourcing payment services provide a valid alternative?
- What course of action needs to be taken?
A typical online trading platform conducts a form of business mediation, bringing buyer and seller, or indeed service provider and user, together. Depending on the arrangement, electronic payments might also be processed via the platform as an additional service. To a certain extent, the platform provider then serves as a separate “paying agent”, for instance when the buyer or service user does not pay the purchase price directly into the vendor or service provider’s account, but instead that of the intermediary platform operator. Should this be the case, the trading platform operator’s commission is immediately drawn and deducted as a result of his or her commercial activities. This constitutes a payment service according to the German Payment Services Supervision Act (Zahlungsdienstaufsichtsgesetz - ZAG), a law which supervises payment services, and the platform operator is therefore required to obtain prior authorization from the German Federal Financial Supervisory Authority (BaFin) for this purpose.
Operating payment services without authorization is not permitted. Violation may incur fines and terms of imprisonment.
Trading platforms unaffected by this law are those which do not process customer payments themselves, but leave it to the client to pay the agreed sum directly to the vendor or service provider, as liaised via the platform. Naturally, they are not providing any payment services. As for the rest, however, it really depends. On the one hand, the German Payment Services Supervision Act delineates the presence of payment services. And yet, it simultaneously has a string of exceptions at the ready. The devil literally lies in the detail.
Ongoing digitalization has rapidly reshaped the market for sales activities and trading platforms over the past 20 years. Real, traditional marketplaces have had to make room for online ones in terms of market share. This phenomenon has permeated pretty much every market segment suited to online trading. The print media crisis in the newspaper industry is ultimately a by-product of this phenomenon. Many commercial platforms – and indeed there are umpteen examples of them – which have partially specialized in the online retailing of certain products or services, have realistically speaking only sprung up over the last few years, and perhaps merely in the last ten. Just like eBay in 1995, numerous internet companies began as classic start-up enterprises. E-commerce platforms resulted from creative ideas by creative people who wanted to develop a niche around a particular product. Innovative, visionary start-up companies do not necessarily have a feel for the multitude of legal regulations and liabilities – an utter minefield of legal matters, when they embark on their entrepreneurial venture. Even as a company evolves, the existence of an internal legal department rarely features at the outset of its journey, but rather the creative spark. The Law is often perceived here as a hindrance. Nevertheless, it is vital for companies to rectify any oversights made during the dynamic inception phase as swiftly as possible. Heavy sanctions may certainly be imposed by the supervisory authority, creating a substantial liability case.
By outsourcing payment services, the trading platform operator is in fact inserting a service provider into the equation who already holds the official requisite permits, for example eBay with the help of its affiliate PayPal. However, experience has proven that the platform operator is obliged to meticulously investigate whether or not outsourcing will really lead to the desired result in terms of liability. To some extent, the payment option PayPal is often only widely offered for convenience purposes, in order to allow customers the freedom – for economic reasons – to choose whether they want to pay via debit or credit card, bank transfer, PayPal, or any other conceivable payment facility. In this kind of constellation, it would therefore be important to use a payment service provider that can legitimately offer a comprehensive range of popular payment methods. This additionally raises further questions which require full clarification, and above all thorough examination, if they are to lead to a favorable legal appraisal.
It is imperative that the advisor has completely digested and understood the trading platform operator’s business model in all its specifics before legally assessing whether or not the trading platform operator needs to change or similarly adapt to the current legal situation. Failing to investigate each and every business concept as a single entity and provide an individually tailored evaluation is not a valid option: General statements are simply not permitted.