Join Us
Payment system regulations: blessing or curse for mobile payment？
27 September ,2016
Contrary to popular belief, new mobile payment methods often gain popularity faster in developing countries. This is because the immature banking sector gives rooms for adoption of new payment methods. [1] In many Western countries and Hong Kong, availability of payment methods such as contactless credit cards has caused technological lock-in which hinders development of mobile payment systems that are not directly linked to credit cards.
One of Apple Pay’s merits is that it streamlines the process of credit card payment with technology, making the process faster and safer than it was before, but it does not replace credit cards. From this perspective, Apple Pay is an electronic wallet that carries credit cards, rather than a prepaid or value-storing electronic wallet. As Apple Pay only exists to simplify credit card payment, there are few extra regulatory implications.[2] Since the process is still tied to credit cards, financial regulators just have to ensure the safety and integrity of the credit card system. A smartphone’s ability to pay becomes the product of agreement between the banks and the phone-making companies (or in some case application developers). The government has no role in this; it is a textbook example of the free market’s intrinsic ability to improve and regulate itself. As credit cards are all registered under real names, often requiring proof of residence during the application process, the government would not be concerned about illicit dealings done with Apple Pay any more than it worries about credit cards. The payee, recipient, and other information of each exchange can be traced at the bank.
On the other hand, the explosive development of prepaid electronic wallet services has created many loopholes and grey areas that require regulators to step in and rectify. Hong Kong users of TaoBao would remember how AliPay required its Hong Kong, Macao and Taiwan users to register under a real name, or have their account and prepaid credit frozen otherwise. The real name registration process requires the user to have two bank cards from different Mainland China banks and their valid Mainland Travel Permit for Hong Kong and Macao Residents, as well as a Mainland phone number tied to the aforementioned bank cards.[3] AliPay’s strict measure has attracted a multitude of complaints from its users, but this policy is intended to address the safety concerns of prepaid electronic wallets.
According to China UnionPay’s “2015 Mobile Internet Payment Safety Research Report”, 13% of the interviewees have suffered financial losses from Internet fraud in 2015, nearly 90% have not been compensated.[4] Beyond fraud, there are more complicated means of criminal scam such as peer-to-peer fraud, illegal fundraising, and Ponzi schemes, with no lack of victims who have suffered from these dishonest and illicit activities. As it is too easy to start a WeChat account, prepaid electronic wallets that are not registered under real names make it impossible to trace a specific sum of money after a transfer is made, making the service easily exploitable for cons and criminals.[5] The People’s Bank of China released a “Guideline for Regulating Non-Bank Financial Institution Payment Services” in December 2015,[6] which regulated the scope of business of prepaid electronic wallets as well as 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. From this we can tell the main emphasis of Mainland China’s regulations on prepaid electronic wallets is to ensure traceability of cash flow in order to curb illegal activities.[7]
Hong Kong regulators are clearly more concerned with risk management. According to “Payment Systems and Stored Value Facilities Ordinance” which came out on 13th November in the same year,[8], prepaid electronic wallet service providers need to have a Stored Value Facilities license issued by the Hong Kong Monetary Authority. The licensee must have a paid-up share capital of not less than HK$25 million worth.[9] To ensure users’ deposits will not be used to pay debt in the case of a company’s foreclosure, the aforementioned share capital must be insulated from the company’s operation budget. Some service providers and legislators find this clause to be too restrictive, citing worries that it is raising the barrier for technology companies to enter the prepaid electronic wallet market.[10] Beyond the paid-up deposit of HK$25 million, the Monetary Authority also requires service providers to map out sufficient risk management policies and procedures;[11] this is to ensure that the service provider will always have sufficient capital for its 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 (AMLO), using it as the basis of regulation[12], which is quite fitting for an international financial hub like Hong Kong.
Shifting our gaze to the United States, prepaid electronic service providers are categorized as non-bank financial institutions.[13] Banks in the United States are legally required to insure deposits of at least $250,000 per customer per insured bank.[14] 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 has decided last year to insure their users’ deposit in Google Wallet under the Federal Deposit Insurance Corporation, 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. As for general regulations for service providers, requirements differ between the federal government and state governments, and each state has their own set of regulations as well.[15]
Singapore’s approach towards prepaid electronic wallet service is much more flexible. Multipurpose prepaid payment mechanisms that hold below a total of S$30 million (approximately 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 do not require the approval of the Monetary Authority of Singapore.[16] If the total stored value of the prepaid mechanism exceeds S$30 million, then the service provider is required to have the Monetary Authority of Singapore upgrade its status to a “widely accepted stored value facilities” as an official stamp of sanction and approval; the service provider must also deposit the stored value in an approved bank that “has undertaken to be fully liable for the stored value”.[17] Such regulation gives space for newly developed prepaid electronic wallet service providers to grow its customer base and develop their business, whilst protecting the deposits of the masses of users by regulating companies that have hit the critical mass.
By examining the above cases from all over the world, we can see an array of emphases and considerations of their payment system regulations. Mainland China focuses on verifying the identities of users in order to combat fraud. The United States follows the tradition of laissez faire. Singapore encourages innovation and entrepreneurship, therefore providing room for budding mobile payment companies to grow. Hong Kong currently has sanctioned five prepaid electronic wallets service providers.[18] The current stipulation of the Hong Kong Monetary Authority 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.
1. Written by Ben Popper, edited by Bill Gates, “Can mobile banking revolutionize the lives of the poor？” The Verge, published on 4th February 2015, accessed on 21st September 2016.
http://www.theverge.com/2015/2/4/7966043/bill-gates-future-of-banking-and-mobile-money
2. Samuel Rubenfeld, “Apple Pay Faces Lighter Compliance Than Paypal, Google” The Wall Street Journal, published on 20th October 2014, accessed on 21st September 2016.
3. Yànnán Jiāng, Xīnyí Sū, “When AliPay uses its own way to implement real name registration, what can its overseas users do？”,The Initium, published on 20th May 2016, accessed on 22nd Sept 2016. (Chinese only) 端傳媒:〈當支付寶用「自己的方式」推實名制，它的海外用戶怎麼辦？〉；記者：江雁南、蘇昕琪；2016年5月20日。
https://theinitium.com/article/20160520-mainland-alipayrealname/
4. Qiūyú Wú, “China UnionPay Releases Research Report: Stellar Growth in mobile internet payment in 2015”, People’s Daily Overseas Edition, published on 25th December 2015, accessed on 22nd September 2016. (Chinese only)
《人民日報》海外版：〈中國銀聯發調查報告 2015移動互聯網支付增長強勁〉；吳秋余；2015年12月25日。
http://media.people.com.cn/BIG5/n1/2015/1225/c40606-27974216.html
5. Yànnán Jiāng, Xīnyí Sū, “When AliPay uses its own way to implement real name registration, what can its overseas users do？”, The Initium. (Chinese only)
6. Full text of “Guideline for Regulating Non-Bank Financial Institution Payment Services” released by the People’s Bank of China in December 2015. (Chinese only)
中國人民銀行於2015年12月發佈的《非銀行支付機構網絡支付業務管理辦法》原文。
http://www.gov.cn/xinwen/2015-12/28/5028628/files/efb9b6d430d64ec78ca2e160d77ed8d3.pdf
7. Jiàn Chén and Hǎixiá Lǐ, “Spokesperson from the People’s Bank of China responding to the press on ‘the Guideline for Regulating Non-Bank Financial Institution Payment Services’”, People’s Daily Online, 28th December 2016. (Chinese Only)
人民網：〈人民銀行有關負責人就《非銀行支付機構網絡支付業務管理辦法》答記者問〉記者：陳鍵、李海霞；2015年12月28日。
http://www.gov.cn/zhengce/2015-12/28/content_5028605.htm
8. Full text of “Cap 584 Payment Systems and Stored Value Facilities Ordinance”, published in Hong Kong Government Gazette on 13th November 2015.
9. “Explanatory Note on Licensing for Stored Value Facilities“, Hong Kong Monetary Authority, November 2015, 18.
10. Cyberport + StartupBeat, “Internet Finance: How Hong Kong should catch up and regulate it”, Hong Kong Economic Journal, 11th November 2015.
《信報》：〈互聯網金融──香港如何追上？又如何監管？〉；2015年11月11日。
http://startupbeat.hkej.com/？p=23240
11. “Explanatory Note on Licensing for Stored Value Facilities“, HKMA, 6, 19-21.
12. Ibid. 17, 18, 20.
13. Mandi Woodruff, “YAHOO FINANCE EXCLUSIVE: Google Wallet funds are now FDIC-insured”, Yahoo! Finance, published on 20th April 2015, accessed on 21st September 2016.
http://finance.yahoo.com/news/google-wallet-venmo-paypal-fdic-insurance-215842545.html
14. “Who is the FDIC？” Federal Deposit insurance Corporation, last updated on 30th October 2014, accessed on 21st September 2016.
https://www.fdic.gov/about/learn/symbol/
15. “Government’s Responses to the Follow-up Actions Arising from the Discussion at the Meeting held on 2 March 2015”, Hong Kong Legislative Council Bills Committee on Clearing and Settlement Systems (Amendment) Bill 2015, LC Paper #: CB(1)656/14-15(10), Presented by the Financial Service and the Treasury Bureau, Hong Kong Monetary Authority on 20th March 2015 , Annex A, 3-4.
http://www.legco.gov.hk/yr14-15/english/bc/bc03/papers/bc0320150323cb1-656-10-e.pdf
16. Ibid. 4-5.
17. “Stored Value Facilities Overview and Regulations”, Monetary Authority of Singapore, last updated on 12th August 2016, last accessed on 22nd September 2016.
18. “Granting of stored value facilities licences” Press Release from the Hong Kong Monetary Authority, published on 25th August 2016, last accessed on 22nd September 2016.
http://www.hkma.gov.hk/eng/key-information/press-releases/2016/20160825-3.shtml