If we are to believe the predictions of the advertising industry, then so-called Social Commerce is the sales model of the future. What is it all about? Consumers are to be courted on social media—and ideally make their purchases there and then. The concept is still in its infancy, but it faces an old regulatory problem. How can marketplaces be organized on platforms without a license to provide payment services?
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In the land of unlimited shopping
The TikTok shop is a land of unlimited opportunities for Dollar shopper and shopping queens. Among offers for chicken hearts, cameras, and a “men’s business watch” for €3, a 20-year-old woman promotes a device for facelifting. An older woman films herself unpacking her massage device. Many products can be purchased for less than ten euros. The sellers advertise however they see fit, with a Swabian dialect from their living room and shaky video footage. The customers participate, wanting to comment on every product. And they are young. While boomers still process their frustration over a bad purchase in a scathing review on Amazon, Gen Z has long been engaging in participatory consumption and seeking direct contact with the seller. Just like at an unsorted flea market in analog life, social participation and purchasing are blurring together here.
Social commerce – the advertisement of the 21st century?
In advertising language, the term “Social Commerce” has become established for this phenomenon. This expresses the fact that the seller does not approach the buyer in a professional role, but rather in a completely private, authentic manner. This is not only the case on TikTok, but also on many other platforms, such as Instagram or Pinterest. Anyone looking for escapism from their office job in the evening by watching cat videos is always just a swipe away from a bargain. Most of the time, these are low-priced products. A provider of relevant software sums it up: “If you incorporate social commerce into your Facebook advertising strategy, you can generate excellent impulse purchases from users who would otherwise have ‘only’ interacted with your content […].” Not all advertising on social media works this way. Traditional advertising clips still exist on TikTok. But Social Commerce is becoming increasingly important.
A new business model with old regulatory problems
The TikTok shop is operated by TikTok Technology Limited, based in Ireland (for simplicity’s sake: TikTok). Legally, this is a so-called platform model. This means that TikTok is not formally a party to a purchase contract but rather acts as an intermediary between buyers and sellers – without the end customer having to leave the interface of the application they are familiar with. For example, anyone who wants to buy a gold necklace with a green agate stone for €18.80 in the TikTok shop is gallantly redirected to the Xingjiyuan shop’s offer. However, the current legal situation puts platform operators in a conflict of interest. In fact, it would be in the economic interest of platform operators to collect the payment from end customers themselves, retain a commission, and pay the purchase price to the sellers. The end customer would pay the platform operator they are familiar with – not the Xingjiyuan shop, which is probably unknown to them – and the platform operator would have access to the payment flows.
The facts of the payment service
However, such a business model usually constitutes a payment service requiring authorization under the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz, ZAG). According to this act, a payment service is provided by anyone who accepts and settles payment transactions. This is often already the case when the parties set up simple business models in a chain relationship between payer, payment intermediary, and payee. A license may therefore quickly become necessary if the payment service proves to be absolutely incidental from the parties’ point of view and they are not even aware of the Regulatory Law. As the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdiensteaufsicht, BaFin) clarifies in its guidance notice on the Payment Services Supervision Act: There is no general privilege for secondary activities. This means that even if, from the parties’ point of view, the actual service provided by the platform operator is the design of the website and the facilitation of purchases, the platform operator may fall under a variant of the payment service by transferring funds.
The exceptions and why they usually don’t apply
There are exceptions to this rule, but they do not usually apply to platform models. It is always worth considering the derogation for business models with a very limited range of goods or services (known as limited range). A textbook example of limited range are fuel cards that can be used to purchase not only fuel but also lubricants (“everything that moves the car”), but not sweets (“what moves people”). However, this clearly shows that the TikTok shop obviously cannot be a case of limited range – after all, you can buy almost anything there. In most cases, it is also not in line with the desired business model of online shops in general to limit themselves too much to certain products. A legal alternative would be to redesign the platform operator’s business model so that it falls under the so-called commercial agent exemption. According to this, it would not be considered a payment service if the platform operator were allowed to negotiate or conclude contracts on behalf of one or the other party. In practical terms, this would mean that TikTok itself would determine the prices of the goods sold in the shop. What does the legislator want to achieve with this regulation? A platform that would be so obviously biased would not claim the same trust in neutrality as a typical payment service provider. Again, it often contradicts the platform operator’s goal to be so heavily involved in the sellers’ pricing. For this reason, the commercial agent exemption is usually off the table.
Chain transactions – possible, but not desirable
Many other business models are undesirable for economic reasons. Theoretically, it would be conceivable to handle the purchase in two independent sales transactions. The Federal Financial Supervisory Authority refers to this as a “chain transaction” (Reihengeschäft). To do this, TikTok would have to offer the gold necklace itself, sell it to the end customer, and then purchase it from the retailer. However, the platform operator is unlikely to want to act as the seller itself and be liable for the goods. In addition, The Federal Financial Supervisory Authority applies strict criteria, because a purchase and sale that does not result in the platform actually acting as the seller (e.g., through stockpiling) is often classified as circumvention by the supervisory authority when viewed from an overall economic perspective.
The integration of a payment service provider
How can this conflict of objectives be resolved? Most platform operators use payment service providers that collect payments from end customers, divide them between the platform operator and the seller, and then forward them accordingly. Typically, platform operators choose so-called “white label solutions,” in which the end customer initiates a payment to the payment service provider but notices as little of it as possible. The payment service provider should be inconspicuous and not interfere with the platform’s branding. TikTok, for example, uses the payment service provider Stripe (specifically: Stripe Payments Europe, based in Ireland). This is where the buyer pays when they decide to purchase the necklace, click on “Buy Now,” and select a payment method. Stripe accepts the payment, forwards the commission to TikTok – generally 5% – and transfers the remaining amount to the seller’s payout account. The catch with this solution is that it can be expensive and is not always economically viable.
Social platforms as the subject of contract drafting
Due to regulatory requirements, not every business model that is economically viable can be implemented. Further pitfalls may arise, for example, from data protection, consumer protection, or tax law. This makes it even more important to take advantage of the existing doctrinal leeway when drafting contracts. With a dash of civil law creativity, it is often still possible to find a way to implement certain business models. This depends not only on the textbook subsumption of legal facts, but also on the administrative practice of the competent authorities. In this respect, however, Social Commerce does not differ from more conventional marketplaces in terms of its fundamental challenges and legal standards. The problem lies elsewhere: marketplaces on social media such as TikTok have particularly high user-friendliness requirements (in jargon: the UX, or user experience). They work, or are supposed to work, because they fit almost seamlessly into our viewing and swiping habits. For legal practice, this means that designing such a model is particularly challenging.
