E-Loyalty: Multi-partner bonus programs under review from a ZAG perspective
Since 13 January 2018 the new payment services directive (PSD2) also applies in Germany as a result of changes to the ZAG and the BGB. The new BaFin guidance note regarding the ZAG contains a lot of information regarding the implementation of the directive in Germany and the expected administrative practice of BaFin. In its guidance note, BaFin also considers the question when a multi-partner bonus system constitutes a e-money business subject to authorisation. So what about e-loyalty?
In Germany, there are numerous multi-partner bonus systems on a card basis (increasingly also as an app), such as Payback, Lufthansa Miles & More, DeutschlandCard. Additionally, there are various local systems (often called City-Cards) that operate according to the same principle. The bonus points collected can even be used immediately as a monetary unit for payments at the till (e.g. filling your tank at Aral with your Payback card or paying for a kilogram of bananas at Edeka with your DeutschlandCard).
The phenomenon of multi-partner bonus systems
In actual fact, these are similar to three-party card system. There is an issuer (who also acts as the acquirer at the same time), a payment instrument (card or app), a payer (card holder) and a payment recipient (merchant). For ordinary card systems, such as e.g. Amex, the requirement for legal authorisation is undisputed. This begs the question how this is to be evaluated from a legal perspective. The volume of non-regulated bonus points is far higher in terms of value than the regulated e-money volume, if you exclude the e-money “PayPal“. The insolvency of Air Berlin, that participated in the “topbonus“ program shows that the collected bonus points of frequent travellers need to be protected.
The phenomenon of multi-partner bonus systems also exists in other EU member states, such as e.g. Nectar in the UK, Airmiles in the Netherlands and Payback now also in Italy and Poland. As far as is, no system in Europe is subject to an authorisation requirement as a payment service or e-money transaction, even though American Express as the owner of Payback offers the best possible requirements for this. I have recently made some enquiries at the British system Nectar but already my question was met with a complete lack of understanding. How bizarre!
Well, the question is not as far-fetched as you may think. The bonus systems are not just on BaFin‘s radar. As part of the review of the 2nd e-money directive, the Commission also considered this question. In some documents, the Commission already regards the bonus points as e-money. The Austrian supervisory authority FMA also shares this opinion. If you look at the monetary value units in detail and compare them to the definition of e-money, the bonus points fulfil all criteria.
So what does BaFin say in its new guidance note?
The following requirements must be met in order for the issuing of bonus points that can be used as a method of payment at various partner companies to not constitute e-money business subject to authorisation:
- Buying additional value units outside of a concrete payment transaction is excluded
- It must also be possible to collect points at partner companies that accept bonus points as a method of payment.
Generally speaking, it is possible to collect and spend points at the same partnercompany. However, a quick check at Miles & More showed that there are at least two partner companies that only accept miles as a payment method. The same applies to Payback. The bonus systems need to be improved in this respect so that they remain exempt from the authorisation requirement.
The criterion “additional purchase“ remains unclear. At Miles & More it was possible – if the amount of miles was insufficient – buy additional miles. Now, this option is not available anymore. However, in many multi-partner systems miles are purchased with ordinary money but not by the consumer but by the participating merchant. The merchant acquires the points from the issuer, then passes the points on to its customers, acquires the points from customers if they are used as a payment method and then passes these points back to the central office in exchange for real money. Does this purchase constitute an “additional purchase“? A dealer who generously awards points to its customers as part of a special offer will need to make an “additional purchase“ of points from the issuer. Does it make a difference with e-money from a legal perspective to whom the e-money is issued on receipt of funds? Does it matter what the purchaser of the e-money does with it (collect it, gift it on, use it as a payment method or – not unimportant for the business case – forget about it and not use it)? It would appear that the answer to these questions is ‘no‘.
Maybe the most practical way is easier to navigate than the systematic way. If the bonus systems adhere to the requirements listed above and only interpret the criterion “additional purchase“ in respect of the end consumer, these systems can opt for the area exemption of “limited networks“ (in accordance with Sec. 2 para. 2 No. 10 a). According to BaFin, this exemption is not only available to local Citycards but also to the nationwide systems.
Can therefore operators now lean back if they fulfil the criteria for the ZAG limited network exemption? I fear not!
Letter “a” of the relevant paragraph is complicated. The following criteria must also be met:
- The payment instrument must be exclusively used within the country. However, with my M&M miles I can make purchases at numerous partners abroad.
- A limited network excludes the multi-partner usage in two or more limited networks. However, I can change my Paypack points into M&M miles.
- For rechargeable instruments (this is usually the case for bonus systems), an upper limit of €250 per calendar month applies. However, if my points account has a high balance, I can currently shop without any upper limits.
This will most likely only delight the DeutschlandCard issuer.
Does an authorisation as an e-money institute provide a solution? This would solve some of the problems quite well but careful – this bears new problems. At the request of the owner of the money, it must always be possible to redeem the bonus points e-money back into cash. The redeemed amount must be the nominal value of the amount of money accepted, i.e. the same price that the merchant paid as the primary purchaser of the e-money. This is a terrible perspective for the business model of a bonus system.
E-money or not? How about a classification as a “virtual currency (VC)“? This sounds good at first, appears to be modern and leads to a fireworks in the share price of the issuer. The ECB considers frequent traveller bonus programs as virtual currency. There are good reasons to view this critically as the ECB has not properly understood the concept of e-money in its report. In the nearly finalised 5th Anti-Money Laundering Directive (5AMLD), the definition of virtual currency goes far beyond crypto currencies such as Bitcoin and others. It looks more like a catch-all provision. A clear methodological distinction between e-money and VC also does not yet appear to exist. This would at least represent a glimmer of hope as currently VC are not yet subject to regulation. But we also need to be careful here! After the implementation of 5AMLD (expected sometime in the second half of 2019), intermediaries (like platforms) are obliged persons from an anti-money laundering perspective. In consequence, collectors of bonus points would need to be KYC-identified. Additionally, the area exemption is very narrow here: It would only apply to regional VCs.
Cholera or pest?
However, there is no choice with regard to the new notification obligation if a bonus system would like to benefit from the ZAG limit network exemption. All non-local bonus systems are likely to have to report to BaFin by 30 April 2018 due to their turnover (> €1 m per year).
P.S. The new PaySys report deals with the regulation of e-loyalty in more detail. I am happy to send the report to you (please send your requests to email@example.com).
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