No Payment Services in Cases Pursuant to Section 2 (1) No. 10 a) and b) ZAG

In Germany, payment services may generally only be provided if the provider is authorized by BaFin pursuant to Section 10 (1) of the Payment Services Supervision Act (ZAG). However, a BaFin license is not required if the provider’s business activities do not constitute payment services within the meaning of the ZAG. This may be the case, among other things, if a sectoral exemption within the meaning of Section 2 (1) No. 10 ZAG can be made use of. In this context, the legal classification of services as payment services may be waived if the services provided by the provider are based on payment instruments that can only be used for payments within very limited fields. According to Section 2 (1) No. 10 a) ZAG, this may be the case, for example, if the payment instruments can only be used to pay for goods or services on the premises of the issuer of the payment instrument (e.g., so-called store cards or department store cards) or within a limited network of service providers who have a business agreement with the professional issuer of the payment instrument (limited networks). The sectoral exemption in Section 2 (1) No. 10 b) ZAG may be relevant if the payment instruments underlying the services can only be used to purchase a very limited range of goods or services (e.g., true fuel cards). In this sense, a very limited range exists if the goods or services offered are clearly defined. A very complicated and sophisticated casuistry has developed regarding the sectoral exemptions under Section 2 (1) No. 10 ZAG for store cards, limited networks of service providers and very limited ranges of goods or services, which is constantly evolving as a result of the EBA’s recommendations, the administrative practice of the BaFin and case law.

Requirement for a Personalized Payment Instrument

All four exemptions regulated in Section 2 (1) No. 10 ZAG have in common that they only apply if the services provided by the provider are based on payment instruments. The law defines the term “Payment Instrument” in Section 1 (20) ZAG as any personalized instrument or procedure agreed between the payment service user and the payment service provider and used to issue a payment order. The most common example of a payment instrument within the meaning of the ZAG are payment cards that work with PIN and TAN. However, a payment instrument can also exist in purely digital wallet solutions, provided that these are sufficiently personalized. Essentially, the payment instrument must be suitable for issuing a payment order to the service provider, which is also the case when filling out and signing a paper transfer form or when using telephone banking with a PIN. In terms of the underlying technology, the term “Payment Instrument” must therefore be understood in a very broad sense. However, it is also essential that the payment instrument is personalized. Sufficient personalization can generally be assumed if the recipient of the payment order issued via the payment instrument can assign the instrument to a specific payer. Therefore, prepaid cards or vouchers that can be used anonymously, regardless of whether they are issued in physical or digital form, are not usually considered payment instruments.

Obligation to Notify BaFin When Making Use of the Sectoral Exemptions

Services do not constitute payment services by law if they fall under one of the four exemptions set out in Section 2 (1) No. 10 ZAG. However, the use of the exemptions for payment instruments that can only be used on the provider’s premises or in limited networks (Section 2 (1) No. 10 a ZAG) and for payment in very limited goods and service offerings (Section 2 (1) No. 10b ZAG) triggers a notification requirement for the service provider to BaFin as soon as the threshold value of EUR 1,000,000 is exceeded within twelve months. To be on the safe side, companies are advised to notify BaFin at an early stage, i.e. before the threshold value is exceeded. BaFin expects a special form to be used for such notifications. Upon receipt of a notification, BaFin will check whether the conditions for the exemption actually apply. In this respect, it is strongly recommended that business models be carefully designed, taking into account regulatory developments at all times. If BaFin determines that the requirements of the exemption invoked are not met in an individual case, it may immediately terminate the business of the provider concerned and have it reversed and settled. Thorough regulatory planning of the business model and drafting of the general terms and conditions and customer contracts to be used should therefore be carried out before commencing business and not just shortly before the threshold is reached.

The lawyer responsible for advising on the ZAG and all questions relating to payment services requiring authorization and exemptions at our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).