The Payments Services Act – a balance between innovation and regulation

Earlier this year on 14 January 2019, the Singapore parliament passed the 209-page Payments Services Bill to provide a flexible framework for regulating the payments industry – both significant payment systems and provision of payment services – under the Payment Services Act (PSA). It is expected to be enacted in January 2020.

In this article, we explore a little bit more in detail about what it means.

The regulatory oversight of payments services in Singapore is currently regulated under two frameworks –

  1. The Payment Systems (Oversight) Act (PS(O)A), which was enacted in 2006, regulates payments systems and stored value facilities (SVF)
  2. The Money-changing and Remittance Businesses Act (MCRBA), which was enacted in 1979, regulates money changers and remittance businesses

The need for a new streamlined regulatory framework

The burgeoning fintech space with exciting new developments, faster and easier cross-border remittances, better ways of electronic payments have blurred the lines between activities under the two separate acts and pose a new set of risks for the payments industry.

The new Payment Services Act will streamline payment services and consolidate the two existing frameworks into one single legislation, repealing the older ones.

Payment service providers will only need to hold one licence to conduct specified payment activities.

There will be two parallel regulatory frameworks –

  1. The designation framework for Significant Payment Systems, which allows MAS to designate and regulate significant payment systems whose disruption will cause systemic financial instability (e.g. MEPS+), or affect public confidence in Singapore’s financial system (e.g. FAST, Interbank GIRO, NETS);
  2. The licensing framework for Payment Service Providers, which will regulate seven payment services – of which the providers of these services will need to hold a licence in respect of the type of payment service that is provided using an activity based approach.

Understanding the licensing framework

As I mentioned above, there are seven payment services to be regulated under the new framework –

  • Account issuance
  • Domestic money transfer
  • Cross border money transfer
  • Merchant acquisition
  • Electronic money (“e-money”) issuance
  • Digital payment token (“DPT”)
  • Money-changing

and there will be three different classes of licenses issued –

  • Money-Changing
    • Provide money changing services only
  • Standard Payment Institutions (SPIs)
    • Provide a combination of the seven payment services, but below specified thresholds
    • ≤ S$3m monthly transactions for any activity type
    • ≤ S$6m monthly transactions for two or more activity types
    • ≤ S$5m of daily outstanding e-money
  • Major Payment Institution (MPIs)
    • Provide a combination of the seven payment services above specified thresholds

At any one time, only one license need to be held, but it has to correspond to the risk posed by the scale of payment services provided.

For example, money-changing licensees can conduct only money-changing services, while Standard Payment Institutions can conduct any combination of regulated activities that are below specified thresholds.

For companies which are not licensed, then MAS will not allow solicitation in Singapore relation to any type of payment services.

Key differences with deposit taking institutions like banks

Payment service providers regulated differently from deposit taking institutions, for example, banks are regulated under the Banking Act and finance companies that conduct deposit taking and lending are regulated under the Finance Companies Act.

The differentiation will manifest itself in several forms. For companies regulated under the PSA, they are

  1. Prohibited from lending customers money, using customers money or interest on customers money to finance any activity carried on by the company wholly, or to a material extent
  2. Prohibited from offering cash withdrawals in Singapore dollars from payment accounts held by Singapore residents

Activity-based regulation means more comprehensive requirements for higher risk activities

MAS has crafted the PSA to be as comprehensive as possible to protect consumers, merchants and the industry. It has also taken careful steps to prevent overregulation and stifle innovation.

Varying levels of regulation and requirements for activities of different risk levels

There are several periodic reporting requirements to MAS under the PSA.

As part of the ongoing supervision of payment service providers, SPIs and MPIs need to report account statistics, transaction volumes, transaction values and e-money float monthly, among other reporting requirements.

Information on transactions for higher risk customers deemed to have a higher risk of money laundering or terrorism financing also need to be collected.

Key benefits for consumers and businesses

Safeguarding funds and e-money float

The PSA also requires licensees to safeguard customer monies from its insolvency through several means, including bank guarantees or through an undertaking by any bank in Singapore to be fully liable to the customer. They might also be required to segregate customer monies into a trust account maintained by a bank or prescribed financial institution.

The assurance of proper safeguards of customers monies will benefit both consumers and businesses.

Interoperability and common standards

The PSA mandates a common standard to be used for payments services in an industry with multiple standards for QR codes, multiple payment terminals and multiple wallet providers.

With a common standard such as the SGQR and unified Point of Sale (POS) terminals, merchants will benefit from cost savings, reduced complexity and better customer experience. Consumers will also love the increased merchant acceptance, simplified payment process.

Final Words

The entire Payment Services Act can be found here on the Singapore Statutes, and you will find more detailed information on the scope, definitions and obligations.

MAS taking proactive steps to protect consumers in light of new payment models and fintech businesses and giving them a greater peace of mind when it comes to safeguarding customer deposits, establishing common standards and governance is a big step in the right direction.

For example, only firms with proper safeguards and controls in place will be allowed to operate in Singapore.

On the business front, the simplified regulatory framework with a risk-based requirement will bring great benefits to companies that can demonstrate compliance and win the trust of consumers, leading to expanded wallet and market share.

I am hopeful that the Payments Service Act will strengthen industry-government partnerships and lead to new investments and businesses here in the years to come.

Sources:
Payment Services Act – Monetary Authority of Singapore

Derrick is a digital native, finance geek and avid photographer. He loves spontaneity but is a control freak at the same time.

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