Depending on how Internet payment methods are configured, providers need to take various regulatory requirements into account. Licensing requirements under the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) may be relevant. Certain requirements under the German Banking Act (Kreditwesengesetz – KWG), the ZAG and the Money Laundering Act (Geldwäschegesetz – GwG) must be observed in the licensing procedure and in granting licences.

Licensing requirement

BaFin must check each individual case as to whether an Internet payment method requires a licence (see info text Individual examination). Providers wishing to provide payment services in Germany as payment institutions or to conduct the business of electronic money issuance as an electronic money institution (see info text "Payment services and e-money business"), require a licence pursuant to section 8 (1) sentence 1 of the ZAG or section 8a (1) sentence 1 of the ZAG. For payment services, this applies only if the provider intends to do so commercially or on a scale that requires a commercially equipped business operation.

Businesses are considered to be commercial if the operation is intended to continue for a certain length of time and is conducted with the intention of making a profit. Remuneration for services is a particular indication of the profit motive. Whether the volume of business requires a commercially equipped business operation also depends on the type of business and not just on the number of transactions. For the purposes of the licensing requirement it is irrelevant whether the operation is actually performed commercially.

Credit institutions within the meaning of the Capital Requirements Regulation (CRR) which are authorised to operate a business in Germany do not require a separate licence in order to provide payment services or to issue e-money. However, they must observe certain requirements of the ZAG if they, for example, issue e-money or exchange it for central bank money.

At a glance: Payment services and E-money business

According to section 1 (2) nos. 1 to 6 of the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG), the following payment services exist:

• Deposit and disbursement business
• Payment business without the extension of credit (direct debit business, credit transfer business, payment card business)
• Payment business involving the extension of credit
• Payment authentication business
• Digitised payment business
• Money remittance business

Pursuant to section 1a (2) of the ZAG, the electronic money business is the issuance of e-money.

Credit transfer and direct debit business

Credit transfers and direct debits are usually carried out by credit institutions. They execute these payment transactions outside the Internet as part of their traditional business activities for their clients. In contrast, thus far only a few payment and electronic money institutions are active in the payment business.

Direct debit is defined in Article 2 no. 2 of the SEPA Regulation (Regulation on the Single Euro Payments Area) and accordingly in section 1 (4) of the ZAG. Under this definition, a direct debit is a payment service initiated by the payee for debiting a payer’s payment account on the basis of the payer’s consent. In practice, the existence of the payer’s consent is not currently verified by its account-holding institution. The German SEPA Council, whose goal is the user-friendly migration to SEPA, would like direct debit to remain a possible payment method on the Internet.

The SEPA Regulation defines a credit transfer as a payment service for crediting a payee’s payment account with a payment transaction from a payer’s payment account based on an instruction given by the payer. Two types of Internet payment methods have been established – advance payment and invoicing, i.e. credit transfer before or after delivery. The customer can also execute the transfer via the Internet banking service of the credit institution.

Definition of payment business

No payment business is, however, conducted by a service provider that only makes use of the Internet banking of the credit institution and only transmits data(sets). This is true both when customers are routed via the website of the operator to their Internet banking to make a transfer, and when the customer generates a credit transfer via the website of the operator. The aim of this procedure is to give the merchant certainty that the transfer order will be made or executed.

Payment business may, however, also be deemed to be conducted by a provider outside the established banking sector when the business model represents a multilateral clearing circle. In this case, payment transactions within the meaning of section 675f (3) of the German Civil Code (Bürgerliches Gesetzbuch – BGB) are executed by means of credit transfers and direct debits by corresponding transfers to payment accounts that are maintained centrally. This does not apply if the business model only provides for the forwarding of deposit money. Regardless of this, such forwarding may qualify as money remittance business.

If the provider of a payment method accepts payments between customers and merchants by credit card and settles them, or if the provider issues such cards, in addition to payment business, this may qualify as payment authentication business.

Digitised payment business

Digitised payment business may be deemed to exist when, for example, payments are made via mobile phones with Internet connectivity. This is defined in section 1 (2) no. 5 of the ZAG as “the execution of payment transactions where the consent of the payer to execute a payment transaction is communicated by means of any telecommunication, digital or IT device and the payment is made to the telecommunication, IT system or IT network operator, provided that the operator is acting only as an intermediary between the payment service user and the supplier of the goods or services (digitised payment business)”.

Digitised payment business has thus far been of little significance with regard to the granting of licences. This type of business may exist when customers give their consent to execute the payment via a mobile phone and the operator is involved solely as an intermediary in the payment transaction to the merchant. The operator collects the payment from the customer with the mobile phone bill. If, however, this exclusively involves digital goods or services in whose creation the operator is involved, the exception rule may apply, under which, pursuant to section 1 (10) no. 11 of the ZAG, digital payments in digital transfers are exempt from the licensing requirement, even though the operator is involved in the payment process.

Money remittance business

If the service provider is involved in the payment process between the customer and the merchant without keeping payment accounts for the payment service user – for example the provider of an online trading platform – this is money remittance business. To execute the payment services, the service provider makes use of the credit institutions which maintain payment accounts in its name (collective accounts).

According to section 1 (2) no. 6 of the ZAG, money remittance business are “services where funds are received from the payer, without a payment account being created in the name of a payer or a payee, for the sole purpose of transferring a corresponding amount to the payee or to another payment service provider acting on behalf of the payee, or where the amount is received on behalf of and made available to the payee”.

How the payment service user ultimately provides the amount of money, whether in cash or by credit transfer, check, electronic cash, direct debit mandate, and the like, is of no significance with regard to the legislation. Thus all payment methods via accounts such as credit transfers, direct debits or credit card payments are captured if the service provider makes use of another payment service provider in executing the payment transaction, in particular the account-holding credit institution.

Money remittance business is also deemed to exist if an online trading platform receives the customer's money and forwards it to the merchant. This also includes escrow services. In this case, the provider of the online trading platform accepts the purchase price of the customer in advance and holds it in escrow on its own account and forwards the amount to the merchant once the customer confirms that he has received the goods without defects. This is intended to counter the problem that with distance selling, unlike with point of sale, services and considerations cannot be made step by step.

Factoring and assignment of claims as a way out?

In light of the provisions of section 32 (6) of the KWG, the provision of payment services such as money remittance business is not excluded by the assignment of the claim to the provider , regardless of whether the other conditions of the factoring under section 1 (1a) sentence 2 no. 9 of the KWG are present.

Not all operators of online trading platforms know this. Formally, the operator collects its own claim and also fulfils its own liabilities when it buys a claim. However, it is not uncommon that payment service providers have the claim which is the basis of the payment assigned to it, for example, as with the issuance and settlement of credit cards. The assignment of a claim is a processing method; the underlying payment service is, however, not affected by it.

Online trading platforms

In accordance with section 1 (10) no. 2 of the ZAG, commercial agents and central settlers are exempted from the licensing requirement pursuant to section 8 (1) sentence 1 of the ZAG. With reference to this exemption, operators of online trading platforms often assert that an online trading platform provides no payment services, since they are intermediates to the purchase contract.

However, operating an online trading platform is not enough to fall under this exemption. The commercial agent or central settler must actually be authorised to negotiate or conclude the relevant contract. According to the law, this authorisation represents a certain level of authority to make decisions or take actions. The concept of negotiation describes the agreement on the substance of the underlying transaction, i.e., in particular about the price and the condition of the purchased item. The term conclusion relates to the declaration of intent that the underlying transaction, for example the purchase agreement, should come into being under certain conditions. If an operator only forwards the declaration of intent, however, it has no authorisation to conclude a contract.

The authorisation to negotiate or conclude also includes acting only for one of the parties involved in the transaction, i.e. for the buyer or the merchant. Online trading platforms normally have no such power, since they contribute in an automated manner to the conclusion of an agreement between customer and merchant, but do not conclude the contract for only one party. This cannot even be changed by provisions in the General Terms and Conditions of the platform under which a provider formally acts as representative of the customer or the merchant, or that stipulate certain conditions for contracts which come into being on the platform.

E-money business

Certain payment methods on the Internet are, in accordance with section 1a (2) of the ZAG, the e-money business of an electronic money institution. Under section 8a (1) sentence 1 of the ZAG, anyone issuing electronic money in Germany as an electronic money institution requires a licence from BaFin. E-money is a monetary value. Pursuant to section 1a (3) of the ZAG, the monetary value must represent a claim on the issuer which is issued on receipt of funds and is stored electronically. It must be designed to make payment transactions within the meaning of section 675f (3) of the BGB and be accepted for this purpose by other natural or legal persons. The legislation appears to completely exclude the possibility of the creation of money: By law, e-money is generally created in exchange for central bank money.

The rules on e-money can be relevant depending on the method, for example, for vouchers. Customers acquire them for cash, deposit money or other electronic money at the point of sale or on the Internet and pay with them at various online retailers.

Licensing rules under the KWG

Payment methods on the Internet can include not only payment services and factoring, but also one of the types of banking business in accordance with section 1 (1) sentence 2 of the KWG. For example, if the service accepts unconditionally repayable funds from customers, this may be deposit business. If the operator of a payment system provides an advance on payment obligations of third parties – for example, by paying money to merchants before their clients pay the equivalent to the operator – this may be lending business. If the operator assumes the liability for the payment for third parties, this may be guarantee business.

The provisions described may be particularly relevant when Internet payment methods are used without the required licence. If the undertaking is licensed as a payment institution or electronic money institution, the client funds that it accepts for the issue of e-money or the execution of payment transactions are not considered as deposits or as other repayable funds from the public. Loans may be granted in connection with certain payment services by payment institutions and electronic money institutions under the provisions of section 2 (3) of the ZAG. Payment institutions and electronic money institutions may engage in factoring without a licence according to section 32 (1) sentence 1 of the KWG. If they do assume del credere liability for payment services, this is usually not considered a guarantee business.

Licensing procedure

The licensing procedure for institutions in accordance with section 1 (2a) of the ZAG follows similar rules to that for credit and financial services institutions. The business activity must be based on a viable business plan. The directors must be suitably qualified and trustworthy, the owners of major holdings must be trustworthy. Sound administrative procedures, an appropriate corporate governance structure and internal control mechanisms must be set up. The capital requirements that must be proven and kept available on an ongoing basis are comparatively low; the requirements arise primarily from the actual payment volume and the average outstanding electronic money, in addition to a low level of minimum initial capital. Given the lower equity and the absence of deposit insurance, payment and electronic money institutions must safeguard client funds in trust accounts at credit institutions or by guarantee or the insurance of a credit institution or insurance undertaking.

Another special feature of the granting of a licence for payment institutions and electronic money institutions is that BaFin may require a spin-off. In principle, a payment institution or electronic money institution may also provide other transactions. If these transactions could affect the soundness of the institution or have a negative impact on audit procedures, BaFin may, however, require them to be performed in a different undertaking.

Individual examination

This paper does not claim to be exhaustive with regard to all matters relating to the German Banking Act (Kreditwesengesetz – KWG), the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG) and the Money Laundering Act (Geldwäschegesetz – GwG) in full. In order to assess conclusively whether licensing requirements are to be observed, BaFin must consider the contractual arrangements of the planned activities on a case-by-case basis.