How to create smart and compliant payment flows as a franchise organization

The beauty of a franchise organization is that both parties reinforce each other. The entrepreneur brings products and services from a local branch to a local audience and can use various facilities of the national or international organization.

For retailers and service providers, this often includes a central webshop where consumers can purchase products or services. Typically, the nearest franchise handles the order and payment is collected from the head office and settled with the franchisee. However, handling these cash flows is now regulated by PSD2 legislation. This means that in these situations, the parent organization is considered a payment service provider and must be licensed to do so. Moreover, various requirements imposed by the regulator must be met.

What is PSD2?

PSD2 (Payment Service Directive) is a European directive that provides regulation of payment services and payment service providers. PSD2 is the successor to the first version of the directive, which will be transposed into local financial legislation by EU member states. This means that the implementation of this legislation may vary from country to country.

PSD2 aims to create a single digital payments market for all European member states and should bring innovation and renewal. At the same time, the revision of the first directive also ensures that more parties are covered by the regulation.

What must franchise organizations comply with?

An important change under PSD2 is the scope of application. The first version of the PSD directive only applied to organizations for whom the provision of payment services is their core activity. However, under PSD2, organizations for which payment services are a secondary activity must also comply with the directive.

Once a franchise organization processes ‘third-party funds’ - that is, collects money from a self-managed bank account and passes it on to beneficiaries - it falls under the new PSD2 legislation.

What options are there?

To comply with the European PSD2 directive, franchise organizations have two options:

1. Apply for a licence from the local regulator

2. Outsource payment transactions to a specialized payment service provider

Want to know more about these two options? In our white paper you'll read everything you need to know!