By Caroline Hometh
For more than four decades, ISOs and member service providers (MSPs) wanting to conduct business in Europe were required to access MasterCard Worldwide and Visa Europe through proprietary bank members, just as they are required to do in the other regions of the world.
Such bank sponsorships were the only way ISOs and MSPs could gain access to multiple currency processing and domestic or regional acquiring in the European locales where they wanted to do business. And to gain better management over these mission critical functions, ISOs and payment service providers (nonbanks) often contracted with multiple sponsor banks.
"It got to be that we needed more than one bank to play it safe," said Benjamin Nachman, Chief Executive Officer of Credorax, a Europe, the Middle East and Africa-licensed payment institution acquirer.
The Directive on Payment Services (PSD) changed that requirement for European Union member countries. The PSD provides the lawful groundwork for the creation of an EU-wide single market for payments. Its focus is on establishing a contemporary, comprehensive set of regulations relevant to all payment services in the EU. Its purpose is to make cross-border payments simple, efficient and safe.
But for ISOs and MSPs, the PSD has provided the first opportunity for nonbanks to become licensed as proprietary members of the card schemes - without the need for bank sponsorship.
Originally proposed in December 2005, the new regulations, called Payment Services Regulations, became EU law in November 2009. The regulations are monitored and enforced by designated financial services authorities (FSAs) operating within the member countries.
"Being a UK solicitor, I was privy to the proposed laws," Nachman said, adding that sometime in 2006 he saw the beginning of the law and realized that becoming a licensed, proprietary member would be a viable option for his company.
Scott Galit, now CEO of Payoneer, Inc., was Group Head of Global Prepaid for MasterCard from 2005 to 2007 during the inception of the changes; he gained first-hand knowledge of the role the prepaid sector played at the time. "MasterCard was instrumental in supporting the growth of the prepaid industry in Europe and the first to enable e-money institutions to apply for a license," Galit said. "The revised ruling by MasterCard was driven by nonbanks who wanted to grow the industry and saw e-money as a way to allow them to better compete.
"There were so few bank issuers of prepaid cards that the opportunity to become directly regulated and an issuer was viewed as very strategic. Nonbanks really pushed for this as a way to gain more control over this mission critical aspect of their business."
Prior to the directive, European payment service providers were blocked from effectively competing and offering their services across the EU. The directive allows newly licensed payment institutions (money remitters, retailers, phone companies, payment service providers) the same rights to acquire and issue merchant accounts as banks.
The licensing is accomplished through FSAs established separately in each member country. The FSA licensing process works to reinforce rights and protections for consumers, retailers and businesses across Europe and covers credit transfer, direct debit and card payments. Just as importantly, it ensures faster payments to merchants. Settlement used to take 72 hours, but as of January 2012, settlement must be by the end of the next day.
A decade ago, cross-border transactions were on the increase. E-commerce merchants wanted to allow their international customers to shop and purchase in the currency they were most familiar with. Multiple currency processing was needed for acquirers focused on card-not-present merchants. With 34 percent of global e-commerce sales occurring in Europe, U.S. merchants wanted access to these buyers as well. Quickly ISOs, Internet payment providers and multinational merchants began contacting European acquirers. ISOs - used to owning the merchant accounts, underwriting and carrying their own liabilities - found that turning these functions over to a partner in another country limited their ability to expand and control their businesses.
U.S. operations had improved to where an ISO could easily approve and board a merchant within a day or two. In Europe, acquirers often take weeks to approve and board a merchant. The application and agreement documents are separate and require two sets of signatures.
In most cases, the ISO does not own the merchant relationship. In addition, the operations and risk assessment teams had limited access to settlement data, which reduced their ability to effectively manage potential fraud and provide online chargeback management.
The ISO model was little used outside the United States, and European acquirer sponsorship options were limited in comparison to what ISOs were used to in the United States. Some ISOs began leveraging under collateralized banks in remote locations of the world.
And European acquirers were frustrated with the high-risk merchant accounts received by their resellers, making effective partnerships difficult.
"The [European] banks were slow to understand the complex needs of e-commerce merchants," Nachman said. "Business models were evolving faster than the banks could respond."
Why does the PSD matter to U.S. ISOs?
Additionally, when a transaction can clear interchange either domestically or within the same region, the rates often are lower. With added leverage come added responsibilities and accountability. Licensing and card scheme membership require ISOs to address the end-to-end transaction processing requirements; if they are not already doing so, ISOs will need to leverage outsourced solutions, license one or build their own. If they are offering multiple currency merchant accounts, it will mean they need to address the foreign exchange issues as well.
Regarding his company's decision to become licensed, Nachman said, "We were comfortable with these requirements and wanted more control over our business, especially the mission critical aspect of it: direct access to the card schemes."
What is involved? Obtaining an FSA license requires a comprehensive business plan outlining a three-year financial projection and a program of operations and information technology (IT) systems. Often this means working with a consulting company for advice on regulatory rules and limitations.
The regulators will look for the organization's safeguard measures, detailed organizational structure, risk management procedures and money laundering controls. They also will look at the management's competence, capabilities and reputation. Those who wish to become licensed must retain counsel in Europe to prepare a legal brief on intended activities.
A license can be made applicable across Europe. In the initial stage of working with the regulators, it is essential to let them know if this is your intent. Having the license be available across the EU and receiving full membership with the card schemes will allow your business to acquire merchants across the region.
Nonbanks have been successful in licensing with a number of European FSAs. Many have found that licensing in Malta provides the best solution. Choosing a country is dependent on access to regulators, taxation concerns, and educated and experienced payment personnel. As the smallest of the EU's member states, Malta has emerged as a highly credible jurisdiction for financial services, banks and hedge funds.
Kenneth Farrugia, Chairman of the Board of Governors of FinanceMalta, a public-private initiative established to promote Malta's International Financial Centre, discussed his country's efforts to become a financial service center.
"We established the foundation as a partnership between the government sector and private organizations to raise Malta's profile as a quality finance center internationally," he said. "Since we joined the European Union in 2004, and starting with a small group of banks, in four years we now have 25 financial institutions conducting international business from Malta.
"We have an accessible, single regulator: the Malta Financial Services Authority. Malta is an attractive 'tried and tested' EU financial services center with the presence of a meticulous yet accessible regulator providing efficient licensing service. There are strong operational infrastructure options and a cost competitive jurisdiction featuring highly skilled and responsive practitioners and operators."
Farrugia also pointed out that licensed members must be domiciled within the EU, which makes the quality of life an important consideration. "In a recent International Living 2011 survey that ranked 192 countries, Malta ranked first, with a score of 100 out of 100 for climate and freedom," he added. "It is near the top score in categories leisure, culture, risk and safety."
Discussing the business climate in Malta, Nachman said, "We wanted to work with an English speaking Financial Services Authority. In Malta, we had better access to regulators in order to explain our business model. The Malta financial community are strong civil servants, wanting to serve their country. It is a very good environment to work in. Plus, there are tax advantages."
Applications for financial entities have been identified as an expansion sector by the government of Malta, resulting in faster application time frames. "We found the Malta Financial Services Authority (MFSA) to be the most responsive financial authorities in the EU," Nachman said.
Farrugia noted that "lower labor costs and better availability of language skills compared to other EU states, a stable social and economic environment, and sophisticated IT infrastructure makes Malta an attractive option for a U.S. business wanting to become licensed as a financial institution in the European Union."
But licensing isn't enough. The ISO must work with Visa and MasterCard to receive principal level membership. Nachman noted that "integration to the associations can be cumbersome."
Each country's FSAs encourage organizations considering licensing to work with the appropriate legal counsel, as well as with consultants experienced in assisting with completing the application pack and providing guidance throughout the authorization process. Malta-based QGen Group is one of the companies that provide specific professional advice on all the aspects of this process.
Damian Mifsud, CEO of QGen Group, said, "We're a business process outsource company, providing a one-stop shop for organizations needing assistance with this licensing and providing local support for the risk management, back-office solutions and full call center services for chargeback processing and multilingual customer support.
"We have worked with clients to help them achieve regulatory approval and to secure the card scheme [Visa and MasterCard] licenses they require to conduct their business. We have assisted a number of clients to obtain a payment institution license under the latest Payment Services Directive.
This process included scoping and drafting all the required documentation, as well as supporting the entire application process with the regulator."
Clearly, because of complexities and costs, this isn't always the right solution for every ISO. But the option to become a global acquirer and proprietary member is now available. ISOs now have the choice to control and own their European merchants and be in full control of their payment destiny.
"It wasn't easy or cheap or fast," Nachman said. "Getting the license was difficult, and getting the principal level of membership even more difficult. But now we are a principal member of MasterCard Worldwide and Visa Europe. We have a multiple currency, end-to-end proprietary gateway and processing platform that allows us to have access to over 200 fields of data, which gives us significant information in order to decrease fraud.
"Our Partners Portal allows ISOs the ability to key in merchant data, upload pertinent 'know your customer' data and board a merchant very quickly. We have BINs in 27 countries, which gives us domestic processing all across Europe, improved issuer approvals and reduced costs. We are very happy with the results of the licensing and membership."
In a world where technology has made it far easier than ever before to do business globally, it might make sense for your ISO to become a full-fledged merchant acquirer in Europe. Why not explore the opportunity?
Caroline Hometh is Managing Director for RocketPay LLC, a global payment advisory service to acquirers, ISOs and Internet payment service providers worldwide, specializing in establishing relationships that foster the growth of international payments. RocketPay will carefully consider your global initiatives and provide both strategic recommendations and hands-on assistance and expertise. Hometh can be reached via email at firstname.lastname@example.org; via office phone at 978-255-3109, wireless at 978-807-5047 and direct at 978-462-3459; and via the web at www.rocket-pay.com.
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