25 October 2016
The explosive development of prepaid electronic wallet services has created many loopholes, requiring regulators to intervene and rectify. Photo: HKEJ
The explosive development of prepaid electronic wallet services has created many loopholes, requiring regulators to intervene and rectify. Photo: HKEJ

Payment system regulations: Blessing or curse for mobile sector?

Contrary to popular belief, new mobile payment methods often gain popularity faster in developing countries.

This is because their underdeveloped banking sector creates ample room for adoption of new payment methods.

Conversely, availability of payment methods such as contactless credit cards has caused technological lock-in which hinders development of mobile payment systems not directly linked to credit cards.

One of Apple Pay’s merits is that it streamlines credit card payment with technology, making the process faster and safer without replacing credit cards.

From this perspective, Apple Pay is an electronic wallet that carries credit cards.

As Apple Pay only exists to simplify credit card payment, there are few extra regulatory implications.

A smartphone’s ability to pay becomes the product of agreement between the banks and the phone-making companies, a textbook example of the free market’s intrinsic ability to improvise.

As credit cards are registered under real names, the government would not be concerned about illicit dealings done with Apple Pay any more than it worries about credit cards.

On the other hand, the explosive development of prepaid electronic wallet services has created many loopholes, requiring regulators to intervene and rectify.

According to China UnionPay’s 2015 Mobile Internet Payment Safety Research Report, 13 percent of interviewees suffered financial losses from internet fraud in 2015.

Given the ease of starting a WeChat account, prepaid electronic wallets without real-name registration make it impossible to trace the money after a transfer is made, making the service easily exploitable for criminals.

The People’s Bank of China released Guideline for Regulating Non-Bank Financial Institution Payment Services in December 2015, establishing a real name registration system.

The guideline defers the management of prepaid credits to a prior Guideline for Regulating Financial Institutions’ Prepaid Card Business, which also focuses on real name registration and preserving transaction records.

Clearly, the emphasis is to ensure traceability of cash flows.

Hong Kong regulators are more concerned with risk management.

According to the Payment Systems and Stored Value Facilities Ordinance which came out on Nov. 13, 2015, prepaid electronic wallet service providers need to have a stored value facilities license issued by the Hong Kong Monetary Authority (HKMA).

The licensee must have a paid-up share capital of HK$25 million (US$3.22 million) worth at least, which must be insulated from the company’s operating budget.

Some stakeholders find this too restrictive, seeing it as a barrier for companies to enter the market.

HKMA also requires service providers to map out sufficient risk management policies to ensure there will always be enough capital for users to exchange their prepaid credits back into cash.

As for measures against money laundering and other illegal activities, the ordinance defers the issue to the Anti-Money Laundering and Counter-Terrorist Financing (financial institutions) Ordinance.

In the United States, prepaid electronic service providers are categorized as non-bank financial institutions.

Banks in the US are legally required to insure deposits of at least US$250,000 per customer per insured bank.

As electronic wallet operators fall out of that category, users’ credits or deposits made in these electronic wallets may be gone forever in the case of a foreclosure.

Yet, Google decided last year to insure their users’ deposit in Google Wallet under the Federal Deposit Insurance Corp., raising the bar of protection for their users’ deposits to the standards of bank deposits.

This is a self-motivated protection Google has offered for its users and it does not involve regulations or policies on the federal level.

Singapore’s approach is much more flexible.

Multipurpose prepaid payment mechanisms that hold below a total of S$30 million (HK$170 million) in stored value do not need to be registered or sanctioned; they just have to indicate clearly to their users that their service does not require the approval of the Monetary Authority of Singapore (MAS).

If the total stored value exceeds the above limit, then the service provider is required to have the MAS upgrade its status to a “widely accepted stored value facilities” as an official stamp of approval; the service provider must also deposit the stored value in an approved bank that is “fully liable for the stored value”.

Such regulation gives space for newly developed prepaid electronic wallet service providers to grow its customer base and develop their business while protecting the deposits of the masses of users by regulating larger companies.

From examining the above cases from all over the world, we can see an array of emphases and considerations from their regulation on mobile payment.

Hong Kong has sanctioned five prepaid electronic wallets service providers.

The present stipulation of the HKMA has set a capital barrier of entry.

The reassuring protection of users’ deposit can help promote usage.

If set at a right level, the requirement can prevent destructive competition without stifling proper market competition.

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