The Future of Direct Carrier Billing in Europe and e-money

Transcription

1 The Future of Direct Carrier Billing in Europe and e-money

2 Executive Summary The adoption of direct carrier billing (DCB), a type of mobile payment that allows consumers to charge the cost of a purchase to their phone bill, has grown significantly over the past decade. Once used solely for the purchase of ringtones and wallpapers on feature phones, it is now used to buy many types of goods and services through multiple channels, including desktop computers, smartphones, Smart TVs and game consoles. While DCB is used in virtually every part of the world, adoption has been particularly high in Europe. In fact, the market for mobile content purchased using DCB alone is projected to be almost $6B by Despite its widespread use in the EU, growth has been hampered by regulatory constraints. In this whitepaper, we examine these constraints, their impact on the growth of the payment method and review a new approach which remedies these limitations and paves the way for substantial growth in the use of direct carrier billing in Europe $2.9B Mobile Content Revenues Billed to Direct Carrier Billing (includes Western, Eastern & Central Europe) 2017 $5.9B 1. Source: Juniper Research, Mobile Content Business Models: OTT and Operator Strategy and Forecasts Table of Contents Executive Summary... 2 What is Direct Carrier Billing (DCB)?... 3 Regulation of Direct Carrier Billing in Europe... 3 The PSD Exemption for Direct Carrier Billing... 4 Limitations of the PSD Exemption... 4 The PSD 2 & Implications for Direct Carrier Billing... 5 VAT Related Challenges... 5 The Future of Direct Carrier Billing in Europe & e-money... 6 Conclusion... 7 The Future of Direct Carrier Billing in Europe and e-money 2014 Boku, Inc. 2

3 What is Direct Carrier Billing? Direct carrier billing (DCB), also referred to as direct operator billing, is a mobile payment method that allows consumers to buy things by adding the cost of the purchase directly to their mobile phone bill or by deducting the cost from their prepaid phone balance. Beyond consumers, there are typically three major players involved in the DCB ecosystem: Merchants that offer their customers the ability to pay using the DCB payment method Billing Platform Providers, including companies like Boku, that provide the technology that allows merchants to connect with many MNOs through a single interface. Mobile Network Operators (MNOs) that provide the billing infrastructure that makes it possible for consumers to charge purchases to their phone bills 2 - Select Pay By Mobile 12:45 Digital Co. You re buying: 100 Coins for Select an item to buy Mobile number to be charged: change 3 - Confirm your purchase I agree to the terms of use. THE ECOSYSTEM Continue Merchants Billing Platform Providers Mobile Network Operators Regulation of Direct Carrier Billing in Europe Payments across Europe are regulated by the Payments Services Directive 2007 ( PSD ). The PSD is an EU wide directive designed to increase pan-european competition and participation in the payments industry from non-banks, and to provide a level playing field by harmonizing consumer protection and the rights and obligations for payment providers and users. The final version of the PSD went into effect on December 25th, 2007 and was required to be transposed into national legislation by all EU and EEA member states by November 1, The PSD contains two main sections: 1. The market rules describe which type of organizations can provide payment services. Next to credit institutions (i.e. banks) and certain authorities (e.g. central banks, government bodies), the PSD mentions Electronic Money Institutions (EMIs) and also created the new category of Payment Institutions with its own prudential regime rules. Organizations that are not credit institutions or EMIs, can apply for an authorization as a Payment Institution if they meet certain capital and risk management requirements. The initial capital requirements for payment institutions range from 20,000 euros to Terms & Support Payments across Europe are regulated by the Payments Services Directive 2007 ( PSD ) SECURE 125,000 euros depending on the payment institution s activities. Other prudential and capital provisions include the need TESTED DAILY 26-SEP to have sufficient capital for the level of payment activity being undertaken and to hold client funds in separate safeguarded accounts. 2. The business conduct rules specify the information that payment service institutions need to provide to customers, including details of charges, exchange rates, transaction references and maximum execution time. These rules also stipulate the rights and obligations for both payment service providers and consumers, how to authorize and execute transactions, liability in case of unauthorized use of payment instruments, refunds on payments, revoking payment orders, and value dating of payments 2. Payment service institutions are also required to implement know your customer (KYC)/due diligence procedures, comply with anti-money laundering and counter terrorist funding policies, monitor their system for suspicious activity and make reports about suspect transactions to the relevant authorities. The Future of Direct Carrier Billing in Europe and e-money 2014 Boku, Inc. 3 Privacy Policy 2. Source: Wikipedia: Entry for Payment Services Directive

4 The PSD Exemption for Direct Carrier Billing The Payment Services Directive provides for a number of exemptions and one, in particular, exempts MNOs engaged in DCB for certain classes of goods and services from having to adhere to its requirements. Specifically, Article 3(l) excludes from the scope of the PSD: payment transactions executed by means of any telecommunication, digital or IT device, where the goods or services purchased are delivered to and are to be used through a telecommunication, digital or IT device provided that the telecommunication, digital or IT operator does not act only as an intermediary between the payment service user and the supplier of the goods and services. The Payment Services Directive has an exemption that exempts MNOs engaged in carrier billing from having to adhere to the requirements that it outlines. In order to take advantage of this exemption, Article 3(I) has been typically interpreted to impose two distinct requirements; 1. First, the goods or services purchased by the consumer need to be delivered to and used through a telecommunication, digital or IT device and 2. The MNO cannot act only as an intermediary (i.e. the MNO must add value to the goods or services delivered to the device). Transactions that fall under the scope of the exemption do not need to comply with the PSD. In practical terms, this means that: 1. The arrangements between the MNO and its customers do not have to comply with detailed information requirements and rights and obligations outlined in the PSD 2. The MNO does not have to satisfy the capital and safeguarding requirements in the PSD 3. The MNO does not need to become an authorised payment institution This removes a considerable regulatory burden from the MNO. In fact many MNOs have stated that they would not be able to continue offering DCB if they were required to comply with the PSD. Limitations of the PSD Exemption Nevertheless, conforming to the exemption in the PSD presents several key limitations and challenges for parties engaged in offering direct carrier billing: 1. It limits the types of goods and services that can be purchased using DCB The PSD exemption limits the scope of what can be purchased using DCB to digital goods only. In turn, this limits the types of merchants that can offer carrier billing only to those selling digital goods. 2. It leads to a lack of standard application The translation of the PSD into national law and its enforcement is a matter for the Member states. Inevitably, inconsistencies between countries have developed, leading to a lack of legal certainty for MNOs and Merchants. Rather than being pan-european, different regulations and regulators have emerged within each country in response to particular requirements of the individual market. As such, the treatment of carrier billing and, therefore, the requirements imposed, varies from jurisdiction to jurisdiction. The ultimate regulated entity in most models is the MNO, which has led to each MNO implementing processes and procedures in line with their interpretation of the national regulatory requirements. As a consequence, rules and processes are fragmented, both across and within jurisdictions. 3. It creates considerable on-boarding friction for merchants that want to offer DCB The aforementioned lack of standardisation leads to merchants having to do different things in different countries in order to be compliant. Differences include those related to the consumer flow, information required as part of the on-boarding process, as well as spend limits and refund policies. This problem is particularly acute in the case of large merchants who wish to launch a service in multiple jurisdictions simultaneously. Additionally, many merchants who are accustomed to using financially regulated payment instruments are entirely unfamiliar with telecom regulation. This again causes friction; merchants must first satisfy themselves that their product can be sold under the PSD exemption, then they have to adjust their internal infrastructure to allow for a new set of processes to accommodate the telecom specific rules. In many cases, this significantly delays implementation and, in other cases, prevents launch entirely. 4. It prevents MNOs from investing further in DCB Given the ambiguous wording of the current exemption, some MNOs have been reluctant to expand their DCB businesses further because of the potential risk that they may have to become an authorised payment institution in order to offer the service. The Future of Direct Carrier Billing in Europe and e-money 2014 Boku, Inc. 4

5 + P The PSD 2 & Implications for Direct Carrier Billing As part of the recent review of the PSD, the European Parliament and the European Digital Goods & Services Council noted that the developments in the market have stretched the scope of the PSD exemption beyond its intended limits. The PSD s drafters originally intended that the Article 3(l) exemption would allow for DCB purchases for items such as ring tones and premium SMS services. Consequently, the Commission felt it would be appropriate to restrict the scope of the exemption in an updated version of the PSD (referred to as the PSD 2 ), which has yet to be implemented. The current proposed wording for the exemption governing the use of DCB in the PSD2 is: payment transactions carried out by a provider of electronic communications networks or services where the transaction is provided for a subscriber to the network or service and for purchase of digital content as ancillary services to electronic communications services, regardless of the device used for the purchase or consumption of the content, provided that the value of any single payment transaction does not exceed EUR 50 and the combined value of payment transactions does not exceed EUR 200 in any billing month. The proposed wording maintains the digital content limita- tion, strengthens the linkage Physical Goods & Services of the service provision to the P MNOs and introduces strict transaction limits (proposed to be EUR 50 for single transactions and EUR 200 for transactions per billing month). In essence, the Commission s view is that the exemption should focus on micro-payments for digital content, such as ringtones, wallpapers, music, apps, games and videos. What does this mean for MNOs, merchants, and consumers? If enacted in its current form, the PSD 2 will not only continue to limit the types of goods and services for which DCB can be used, but it will do so in a way that is even more restrictive than the original PSD. According to The Association for Interactive Media & Entertainment (AIME), the proposed wording could also limit a proportion of the existing market for premium rate services as these services might be deemed non-ancillary (e.g. charitable donations or TV voting). The definition of digital content may also exclude services that are not strictly digital e.g. chat, gambling, ticketing etc. One certainty is that any plans MNOs might have to expand DCB into new merchant categories will be severely hampered if not halted all together. Providers of these digital content services are still likely to be subject to specific telecom regulation in their local jurisdiction, leaving in place the current on-boarding difficulties. ADMIT VAT Related Challenges Restrictions on the type of content and the telecom regulations are not the only inhibitors with which users of DCB have to contend. There are also significant VAT related issues. When DCB is used by private consumers to buy digital goods such as games, online books, music, videos etc. VAT treatment in different Member states has been inconsistent. In some cases, VAT is deducted by the carrier, in others the funds are remitted without deduction of VAT. In the worst case, when merchants and carriers are located in different jurisdictions, merchants have suffered double taxation whereby the carrier pays tax on the sale to their local tax authorities and the merchant is also required to pay VAT a second time on the same transaction to their local tax authority, leaving the merchant considerably out of pocket. Whilst new EU VAT legislation taking effect from 1st January 2015 attempts to clarify that VAT is payable to tax authorities in the consumer s country and which party is responsible for making the payment, this legislation is untested, requires potential invoicing and contractual adjustments in the chain of supply, and does not provide certainty to all parties. The Future of Direct Carrier Billing in Europe and e-money 2014 Boku, Inc. 5

6 The Future of Direct Carrier Billing in Europe & e-money To address these issues a new form of DCB has been developed which allows the expansion of direct carrier billing into all types of goods and services, removes the current uncertainty and legal obstacles, and addresses the VAT related challenges. In the new version of DCB (called edcb, for e-money direct carrier billing), pioneered by companies like Boku, billing platform providers operate as authorised Electronic Money Institutions (EMIs), which are one of the entities that can provide payment services under the jurisdiction of the PSD. EMIs are able to offer an electronic money (e-money) based version of DCB as a fully regulated financial service without having to rely upon an exemption to the PSD provided that: 1. they are in possession of an e-money authorisation and 2. they are able to comply with the rules and regulations outlined in the PSD. Importantly, this new solution can be delivered with virtually no change to the consumer experience. The implications of this new e-money based solution are significant and include full regulatory oversight over direct carrier billing with: consumers being able to buy any type of goods or services, including physical goods using DCB (i.e. DCB is no longer restricted only to digital goods). consumers also benefiting from the consumer protection provisions in the PSD including disclosure obligations, service levels, and access to the financial ombudsman service. MNOs gaining the ability to deliver DCB to their subscribers without needing to become an authorised payment institution. merchants able to handle tax for payments originating from DCB related charges in precisely the same way that they do for any other payment method such as bank transfers or card payments. In common with other regulated payment methods, the funds are remitted directly to the merchant without deductions for VAT and the merchant is responsible for paying their taxes. merchants benefitting from the rights set out in the PSD, including protection of funds through safeguarding obligations. all ecosystem participants benefitting from a clear regulatory framework that safeguards existing DCB services. EMIs being subject to prudential regulation relating to IT systems and controls, corporate governance, and own funds obligations. Digital Goods & Services + ADMIT Physical Goods & Services P Conclusion As a method of payment, direct carrier billing offers compelling benefits what could be simpler than using your phone number to buy something? For consumers, it offers one of the most accessible forms of payment while being safe and easy to use. Merchants offering DCB are able to sell more and convert more potential customers while MNOs are able to leverage the existing customer relationships they have to gain a new Digital revenue Goods stream. & Services Millions of consumers in Europe have adopted DCB as a form of payment. And yet, despite this adoption, this form of payment has yet to realize its full potential. In Europe, its growth to date has constrained by a regulatory structure that was originally conceived with a limited vision of the utility that DCB could provide. The arrival of the new e-money based version of direct carrier billing (edcb) marks a seminal moment in the industry, as it removes these regulatory Physical Goods & Services constraints and paves the way for the accelerated growth of this form of payment in the years to come. Merchants and MNOs ADMIT intent on future proofing their Pexisting DCB services and on expanding the scope of those services would be well served by utilizing this new e-money based model. The Future of Direct Carrier Billing in Europe and e-money 2014 Boku, Inc. 6

7 About Boku Boku, the leading direct carrier billing mobile payments company, brings bank-grade payments technology and mobile users together, creating a trusted, accessible platform for consumers, merchants, and carriers alike. Based in San Francisco with offices in Europe, Latin America, and Asia, Boku reaches nearly 4 billion consumers worldwide across 67 different countries with more than 250 operators. Boku partners with global merchants including Facebook, Spotify, Sony, and Electronic Arts. Leading Silicon Valley entrepreneurs and venture capitalists fund Boku including Andreessen Horowitz, Benchmark Capital, DAG Ventures, Index Ventures, Khosla Ventures, and NEA. In 2014, Boku unveiled a new e-money based direct carrier billing solution (edcb) in partnership with leading MNOs in Europe. Boku secured an e-money authorisation from the UK Financial Services Authority (now the Financial Conduct Authority) in 2012 and has passported this authorisation to all of the countries of the European Union. Boku s e-money solution has been implemented with virtually no change to the consumer experience. MNOs and merchants that partner with Boku can offer an improved direct carrier billing service, with Boku bearing the responsibility for the entire compliance envelope. Boku s e-money solution makes direct carrier billing a mainstream payment method that can be used for the purchase all types of goods and services. For more information about Boku, visit