Global Payments Newsletter October Issue – 2015 Hogan Lovells – Global Payments Newsletter 1 Key Developments Key developments of interest this month include: Mobile payments proliferate: More people are using contactless and mobile payments than ever before whilst digital payments attract attention, acquisition and investment. Bitcoin and virtual currencies considered as commodities: US Commodities Futures Trading Commission ruled that a Californian company offering option contracts on bitcoin had broken the law. Interim voluntary code of conduct: Payments UK publishes interim voluntary code of conduct for indirect access providers to enhance experience for indirect payment service providers with a formal consultation in late 2015. Welcome to the Hogan Lovells Global Payments Newsletter. In this monthly publication we provide an overview of the most recent Payments regulatory and market developments from major jurisdictions around the world as well as sharing interesting reports and surveys on issues affecting the market. For our latest news and commentary on payments innovation, follow us on Twitter @HLPayments. For more information on our Payments Services team please click the link here. For more Financial Institutions resources please click the link here. 2 Hogan Lovells – Global Payments Newsletter Europe United Kingdom: FCA feedback statement reports on call for input on terms and definitions for services linked to payment accounts and subject to fees On 15 September 2015, the FCA published a feedback statement in which it reports on the main issues arising from its call for input on the terms and definitions for services linked to payment accounts and subject to fees (FS15/4). The UK (along with other member states) is required under Article 3 of the Payment Accounts Directive (2014/92/EU) (PAD) to develop a list of the key services linked to payment accounts that are subject to a fee in the UK. The FCA published its call for input in June 2015, seeking views on the services it proposed to include on the list and its suggested terms and definitions to describe those services. In FS15/4, the FCA summarises the feedback received to the call for input and explains how it has used that feedback to finalise the provisional UK list of services, terms and definitions. Respondents were generally supportive of the FCA's proposals and made some helpful suggestions for amendments. In response, the FCA has: added five additional services to the list (direct debit, standing order, withdrawing pounds in the UK, debit card payment in pounds and cancelling a cheque) and set out the terms and definitions to describe these additional services; changed the term "unplanned overdraft" to "unarranged overdraft"; and made minor amendments to some of the definitions. In line with the PAD, the FCA had to submit the list to the European Commission and the European Banking Authority (EBA) by 18 September 2015. The EBA will standardise the terms and definitions of the services that appear on the provisional national lists of at least a majority of member states. It will consult on draft regulatory technical standards (RTS) on the proposed EU standardised terms and definitions. All providers of payment accounts will be required to use the standardised terminology in marketing, pre-contractual and contractual information provided to consumers in relation to payment accounts falling within the scope of the PAD. At present, the FCA considers it unlikely that the new terminology will have to be used by providers before autumn 2017. See the feedback statement here. United Kingdom: PSR confirms members of Payments Strategy Forum On 10 September 2015, the Payment Systems Regulator (PSR) published a press release confirming the members of the Payments Strategy Forum. The 21 members have been appointed jointly by the PSR and the forum chair, Ruth Evans, for an initial term of two years. They include advocates for consumers, retailers, small and Regulatory Developments Hogan Lovells – Global Payments Newsletter 3 medium sized businesses, corporations, government and individuals who are experienced payment service providers from emoney firms, credit unions and high street banks. The forum will also create working groups of people with expertise in different areas to inform its work and help it achieve its goals. Payment system operators have been asked to form one of these expert groups, and a seat on the forum has been reserved for their representative. See the press release here. United Kingdom: Interim voluntary code of conduct for indirect access providers On 1 September 2015, Payments UK published an interim voluntary code of conduct that covers indirect access to UK payment systems for payment service providers. The code has been developed in response to the PSR's policy statement (PSR PS15/1), which was published in March 2015 and announced the launch of two market reviews. The main aim of the code is to improve the experience of indirect PSPs by clearly setting out the responsibilities of indirect access providers that have subscribed to the code. It has been developed by Payments UK on behalf of the industry, and in association with the industry's primary indirect access providers (that is Barclays Bank plc, HSBC, Lloyds Banking Group and the Royal Bank of Scotland plc (RBS)) and in discussion with the PSR. The code is being launched on an interim basis and Payments UK will conduct a formal consultation on it across the wider payments industry in late 2015. Feedback from the consultation, along with any relevant information from the PSR's market review into indirect access, will be considered in the further development of the code for publication next year. Barclays, HSBC, Lloyds and RBS intend to subscribe to the code by 30 September 2015. Other indirect access providers can also apply to subscribe to the code from 1 September 2015. Compliance with the code will be assessed via a self-certification approach. See the interim code here. United Kingdom: Chief economist of the Bank of England muses on cryptocurrency and ZLB On 18 September 2015, Andrew Haldane, chief economist of the Bank of England gave a speech to the Portadown Chamber of Commerce in Northern Ireland entitled "How low can you go?" Central to his speech was the "Zero Lower Bound problem" ("ZLB"). This arises from the inability to set negative interest rates on currency. While it is possible to set negative rates on bank reserves, without the ability to do so on currency, there is an incentive to switch to currency whenever interest rates on reserves turn negative. This hinders the effectiveness of monetary policy. Mr Haldane raised the prospect of negative interest rates, a move traditionally resisted as it leads to savers taking money out of banks and hoarding cash. The mere idea of reducing interest rates is at odds with Bank of England Governor Mark Carney, who has indicated that interest rates may rise form 0.5% early next year. Other options include raising inflation targets and quantitative easing but Mr Haldane's preferred solution is more innovative. The introduction of an electronically-issued government-backed currency would preserve the social convention of a state-issued unit of account and medium of exchange and would allow negative interest rates to the be levied on currency easily, relaxing the ZLB constraint. 4 Hogan Lovells – Global Payments Newsletter This option could be explored by examining crytocurrencies and blockchain technology, which has "real potential" according to Mr Haldane See the speech here. Europe: European Parliament announces indicative date for PSD2 plenary session On 11 September 2015, the European Parliament updated its procedure file to include an indicative date for its plenary session on the proposed Directive on payment services in the internal market (PSD2). The Parliament will consider the proposed Directive in its plenary session to be held from 5 to 8 October 2015. On 29 September 2015, the European Parliament's Committee on Economic and Monetary Affairs (ECON) published a supplementary report on PSD2. See the procedure file and report here and here Hogan Lovells – Global Payments Newsletter 5 Americas USA: US Commodity Futures Trading Commission (CFTC) defines bitcoins and virtual currencies as commodities. CFTC (which normally examines the trading of metals, energy and grains) ruled on 17 September 2015 that San Francisco based company, Coinflip Inc was in violation of the Commodity Exchange Act and CFTC regulations. The decision against Francisco Riordan, the chief executive of Coinflip Inc, states that from March 2014 to at least August 2014 the company operated an online bitcoin options exchange Derivabit. Although the platform never had more than 400 users, Mr Riordan had failed to correctly register the company with US regulators or meet the rules for an exemption. Violation of any CFTC rule can be punishable with jail time but Coinflip did not pay a fine and was issued with a cease and desist order. This may be due to the company and Mr Riordan cooperating with the investigation. The implications of this decision are more significant than the punishment in this case. The upshot of the US CFTC's classification is that to legally operate a market for bitcoin derivatives for US users, a company must comply with a number of CFTC hurdles. Increased regulation of bitcoin is driving up costs for start-ups and may stop them from operating in the American markets. It also means that the CFTC could under its market manipulation authority police fraudulent activities on exchanges where bitcoins, and not just bitcoin derivatives, are traded. See the article here. USA: Bitcoin start-up Circle becomes the first firm to be granted New York BitLicence Circle, which provides consumers with a bitcoin wallet, allows its users to send, hold and receive US dollars and bitcoin and does not require transferability between the currencies. This protects consumers from the price volatility which is often associated with the nascent cryptocurrency. New York's State Department of Financial Services' (NYDFS) offers BitLicences as a way of navigating the regulatory issues associated with bitcoin. The BitLicence is designed to provide a framework where digital currency firms can develop their services but also protect consumers with enhanced compliance with cybersecurity and anti-money laundering guidelines. In August 2015, NYDFS had received 22 applications to operate virtual currency businesses under the BitLicence rules. See the article here Asia Japan: Mt Gox CEO charged with embezzlement and data manipulation Mt Gox was one of the world's first bitcoin exchanges which at its peak accounted for 80% of global bitcoin trading In February 2014, activity was suspended concerning increased speculation about untoward activity. In August 2015, Mark Karpelès, the Mt Gox CEO, was arrested concerning the loss of millions of pounds worth of bitcoin when the exchange collapsed. 6 Hogan Lovells – Global Payments Newsletter Karpelès was charged in mid-September 2015 for embezzling £1.7m. It is reported more than $100 million is still missing. See the article here. Hogan Lovells – Global Payments Newsletter 7 United Kingdom: Barclays to test a bitcoin "proof-of-concept" model for charities Although widely reported by The Sunday Times and Ars Technica, Barclays is not, as of yet, going to be the first bitcoin accepting UK bank. However, Barclays is working with charity clients in a proof-of-concept model to investigate further how fundraising could be generated using bitcoins. This builds on Barclays' agreement with bitcoin exchange Safello, reached in June 2015, that planned to explore creating new payment platforms which support the virtual currency. See the articles here and here. United Kingdom: Scotland considers proposals for digital currency – ScotPound – similar to bitcoin A report published by the New Economics Foundation (NEF) proposes a digital currency, ScotPound, similar to bitcoin to boost the economy. ScotPound would be created along with ScotPay (a free at point of use public payment system, operated by a public enterprise BancaAlba) and would work alongside sterling. NEF state their report was conceived in the midst of independence referendum discussions and the heightened potential for financial innovation. See the articles here and here. United Kingdom: Worldpay Group plans to raise $1.4 billion in IPO Worldpay Group, the British payment processor states it expects to raise £890 million or $1.4 billion in an initial public offering in October. Worldpay is owned by private equity firms Advent International and Bain Capital. It intends to seek a listing on the London Stock Exchange and to sell around 25% of its shares. Worldpay was carved out of Royal Bank of Scotland to become a stand-alone business in 2010. See the article here. Global: Launch of One Touch by PayPal PayPal have issued a press release in relation to their One Touch product. One Touch is a payment means developed by PayPal which allows customers to pay for their purchases online (via a computer, digital tablet or smartphone) on a simplified basis. By using One Touch, the customer is able to make online payments through a PayPal account without having to enter a username, password or payment information for each payment. The payment is registered by using the One Touch button and without rerouting to a PayPal payments page. One Touch had been launched in the US last Payment Market Developments 8 Hogan Lovells – Global Payments Newsletter year, followed by Canada and the UK. It was then extended to 13 new countries in August. The 16 countries where people can now access PayPal One Touch are the following: Australia, Austria, Belgium, Denmark, France, Germany, Netherlands, Norway, Poland, Spain, Sweden, Switzerland, Turkey, USA, Canada and the UK. See the PayPal press release here. Global: Investment Banks back blockchain initiative Nine major investment banks (Goldman Sachs, J.P. Morgan Chase, Credit Suisse, State Street, RBS, BBVA, UBS, Barclays and Commonwealth Bank of Australia) are looking to partner with distributed ledger start-up R3CEV. The group are investing in R3CEV, a New York based group, to accelerate the development of blockchain technology. The banks are seeking to develop standards that could be used within the broader financial industry. See the article here. Global: Visa, Nasdaq and Citi amongst others invest $30 million in blockchain start-up San Francisco-based start-up Chain Inc. has received a $30 million injection from investors including Visa Inc., Nasdaq Inc., Citi Ventures, Capital One Financial Corp, Fiserv Inc. and Orange SA. Chain Inc. uses blockchain technology to develop ways to trade and transfer financial assets. These financial assets can include stocks, reward points, prepaid minutes or stored value cards. See the article here. USA: Google debuts Android Pay in US Google's mobile payments service, Android Pay was launched in September. It allows people with mobile phones running on Google's Android mobile operating system to upload credit and debit card information to a mobile wallet. USA and South Korea: Samsung Pay launched Samsung Pay launched in the US at the end of September having already launched in South Korea. Samsung Pay processed a total of $30 million transactions in its first month in South Korea. Colombia: YellowPepper rolls out mobile wallet with Grupo Aval Colombia's Grupo Aval is employing the technology from US-based banking start-up YellowPepper to power a new Aval Pay mobile wallet. Grupo Aval is the parent company to the Colombian financial institutions Banco de Bogota and Banco de Occidente as well as other smaller institutions. Aval Pay will be loaded with discounts and loyalty programs and also involves YellowPepper partnering with CredibanCo, a Colombian payments processing network. See the article here. India: Snapdeal team up with FINO PayTech to launch mobile wallet Snapdeal have joined with FINO PayTech to create the FreeCharge Digital wallet. The development means around 87 million Snapdeal users will receive the wallet. As credit card penetration in India is very low, mobile wallets are seen as the most convenient and practical method of making and receiving Hogan Lovells – Global Payments Newsletter 9 payments. See the article here. Ivory Coast: Orange launches mobile crowdfunding Orange, using their Collecte platform, have launched a mobile crowdfunding platform in the Ivory Coast where users can make and receive donations via their Orange Money accounts. Private individuals and charities can finance their charitable and personal projects by making an appeal through the mobile network. Orange is working with charitable giving platform HelloAsso to run the project. HelloAsso has raised more than €13 million for 7000 charities registered on the site. See the report here. 10 Hogan Lovells – Global Payments Newsletter United Kingdom: Deloitte release Mobile Consumer 2015 Report Key facts and figures from the report include security being the largest concern for consumers not using in-store mobile payments. 13% of UK adults have now made an in-store mobile payment up from 3% last year. See the report here. United Kingdom : Bitcoin bonanza on the Isle of Man The Isle of Man has become an important hub for bitcoin, blockchain and digital currencies as reported by Bloomberg. 25 or so start-ups working with digital currencies or blockchains are based on the island with the number growing steadily. E-commerce accounts for more than 20% of the Isle of Man's £4 billion annual gross domestic product (GDP) with financial services accounting for around 35%. The Isle of Man's government, like the fintech startups, has embraced the technology. The government is currently creating a register of the island's cryptocurrency companies and will use a blockchain to store the results. This will be the first government ever to use a blockchain to store official data. The Isle of Man's parliament, the Tynwald, whilst being receptive to the financial innovation has enforced anti-money laundering and know-yourclient requirements with the island's financial regulator enforcing compliance. See the article here. United Kingdom: Banks are key driver towards increased use of mobile payments A study by VocaLink suggests one-in-two people are more likely to use a new mobile payment method if it comes from a bank. The key concerns for the 5000 UK consumers sampled were confusion over how mobile payments worked and a lack of knowledge of brands working in the space. Security was less of a concern that it had previously been. This counters the research conducted by Deloitte Mobile Consumer 2015 report which highlighted consumers' concerns over security (See above). See the article here. Global: World Economic Forum predicts trends of an increasingly digitalised world The World Economic Forum (WEF)'s Global Agenda Council on the Future of Software and Society included the results of a survey of more than 800 information and communications executives and experts. Amongst the tipping points expected to occur by 2025, 91.2% predicted 10% of people wearing clothes connected to the internet; 73.1% believed tax would be collected for the first time by a government via a blockchain and 58% believed 10% of global GDP would be stored on blockchain technology. Surveys and Reports Hogan Lovells – Global Payments Newsletter 11 The strong predictions for wearable technology mirror the enhanced use of the technology for Singapore commuters this month (see here) and at fashion weeks (here) and as a concept which has become a recipient of seed fundraising from angel investors (see here). The 21 shifts outlined in the report predict a bold and increasingly connected world. See the report here. 12 Hogan Lovells – Global Payments Newsletter Hogan Lovells’ global payments practice is made up of financial services and technology lawyers working closely together as a single team from our network of offices, including offices in all the major financial centres. The practice covers traditional payment services as well as technology driven innovations that affect products, business structures, services and markets. Our Clients The team provides strategic advice to all market participants including: lenders card issuers (including banks and e-money institutions) acquirers money remitters payment schemes mobile operators retailers payments platform or technology providers payments processors networks and settlement services How we can help In addition to advising on payment specific regulation, the team: advises on all related regulation such as money laundering, data and privacy, technology law and IP, e-commerce and consumer protection negotiates commercial contracts leads or supports on mergers and acquisitions in the payments sector engages with Government on new regulation and implementing new legislation advises on multi-party arrangements to develop new payment services or networks and on related loyalty and incentive programmes negotiates outsourcing of payments processing and settlement drafts related customer and commercial documentation The global payments practice is part of Hogan Lovells market leading Financial Institutions Group, one of the largest practices of its kind with approximately 200 lawyers worldwide. Our Global Payments Team Hogan Lovells – Global Payments Newsletter 13 Local Contacts Primary Contacts Europe Americas Asia Roger Tym London T +44 20 7296 2470 [email protected] Veronica McGregor Silicon Valley T +1 415 374 2308 [email protected] Andrew McGinty Shanghai T +8621 6122 3866 [email protected] Europe Emily Reid London T +44 20 7296 5362 [email protected] London Roger Tym Julie Patient Emily Reid Jonathan Chertkow Amsterdam Victor de Vlaam Frankfurt Richard Reimer Nils Rauer Tim Brandi Madrid Joaquin Ruiz Echauri Miguel Garcia Stuyck Warsaw Beata Balas-Noszczyk Anna Tarasiuk-Flodrawska Moscow Alexander Rymko Paris Sébastien Gros Rome Jeffrey Greenbaum Johannesburg Leishen Pillay Singapore Stephanie Keen Brazil Claudette Christian Wylie Levone Hong Kong Mark Parsons Shanghai Andrew McGinty Beijing Roy Zou San Francisco/Silicon Valley Veronica McGregor Washington Timothy Tobin Christopher Wolf Mark Brennan Caracas Gonzalo Rodriguez-Matos Miami Jose Valdivia Gaston Fernandez Mexico City Federico De Noriega Olea Juan Fransisco Torres Landa Ruffo www.hoganlovells.com Hogan Lovells has offices in: Alicante Amsterdam Baltimore Beijing Brussels Budapest* Caracas Colorado Springs Denver Dubai Dusseldorf Frankfurt Hamburg Hanoi Ho Chi Minh City Hong Kong Houston Jakarta* Jeddah* Johannesburg London Los Angeles Luxembourg Madrid Mexico City Miami Milan Monterrey Moscow Munich New York Northern Virginia Paris Perth Philadelphia Rio de Janeiro Riyadh* Rome San Francisco São Paulo Shanghai Silicon Valley Singapore Sydney Tokyo Ulaanbaatar Warsaw Washington DC Zagreb* "Hogan Lovells" or the "firm" is an international legal practice that includes Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses. 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