Regulatory challenges for purchased payment facilities

The current problem with the regulatory system in Australia for purchased payment facilities is its uncertainty. Australia has a complex framework for regulating payments.

Relevant provisions are contained in a number of laws, regulations and instruments administered by ASIC, APRA and the Reserve Bank Payments System Board.

There is no clear guide for new entrants that outlines regulatory requirements.

If PPFs are widely available and redeemable upon demand for Australian currency, such as PayPal’s stored balance, they are considered a banking business and subject to prudential regulation by the Australian Prudential Regulation Authority (APRA).

As a result there has only been one PPF provider registered by the Australian Prudential Regulation Authority (APRA) namely PayPal Australia Pty Limited.

PPFs that are not widely available or not redeemable for Australian currency (such as general loyalty schemes, gift card facilities, electronic road toll devices and pre-paid mobile phone accounts) are either authorised or exempted by the RBA.

PPFs originating from overseas, such as Alipay and WeChat, are redeemable on demand. However, because they are not redeemable for Australian currency, — they require a Chinese bank account to redeem stored value — they do not fall under APRA’s prudential regulation.

In addition, any PPF is exempt if its total obligations does not exceed $10 million, is used by 50 people or fewer, or is guaranteed by an ADI or government authority.

As a result of these exemptions, the RBA does not regulate any PPFs.

Between APRA and the RBA is a gap.

In addition the ASIC Australian Financial Services Licence regime for non-cash payment facilities is unclear regarding PPFs.

Proposals for change

The Financial System Inquiry Report in 2014 recommended introducing a new two-tier framework for prudential regulation of purchased payment facilities which would offer PPFs a choice between two tiers.

It recommended that:

1. APRA should publish clear thresholds for the new regime so that it only captures PPFs of sufficient scale. For example, it could only apply to PPFs that hold more than $50 million of stored value and enable individual customers to hold more than $1,000.

2. APRA should remove exemptions for services providers that do not allow deposits to be redeemed for Australian currency.

But no action was taken to implement that change.

The Productivity Commission in its draft 2018 Report agreed that a tiered regime for PPFs would be more likely to encourage potential new entrants and reduce barriers for small PPFs to grow and offer an important alternative to incumbent payments systems.

PPFs would have the chance to prove themselves while keeping at-risk funds relatively low.

It has recommended that:

1. PPFs with stored value below $10 million remain exempt from both RBA and APRA regulation .

2. PPFs with stored value between $10 million to $50 million must be regulated by the PSB or otherwise specifically exempt.

3. PPFs with stored value above $50 million and individual customer deposits above $500 would fall under APRA’s regulation and choose to comply with either the lower or higher tier of prudential regulation.

The uncertainties in regulation need to be resolved.

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