Key developments of interest over the last month include: the UK Treasury publishing a review and call for evidence on the Payment Services Regulations 2017 and a post-implementation review of the Payment Card Interchange Fee Regulations 2015; stablecoin regulation legislation being introduced to the U.S. Senate; and Orange Money agreeing to create the first digital wallet for use in the metaverse.
In this Newsletter:
For previous editions of the Global Payments Newsletter, please visit our Financial Services practice page.
United Kingdom: HM Treasury publishes review and call for evidence on Payment Services Regulations 2017 and post-implementation review of Payment Card Interchange Fee Regulations 2015.
On 13 January 2023, HM Treasury (HMT) published a review and call for evidence on the Payment Services Regulations 2017 (PSRs), as well as the outcome of a post-implementation review of the Payment Card Interchange Fee Regulations 2015 (PCIFRs).
PSRs review and call for evidence
HMT is required by law to carry out a review of the PSRs (which implemented PSD2) and publish a report setting out its conclusions. Its review has found that, while the PSRs have fostered a strong, innovative, and competitive UK payment sector that is recognised globally, the regulations have not gone far enough on their own.
The speed of market change has also required the UK, like other major jurisdictions, to take account of broader payments developments to ensure that regulation keeps pace with market developments, including but not limited to the emergence of cryptoassets.
Recognising these continued market developments, and the UK’s ability to determine its own approach to payments regulation post-Brexit, there are several key areas where the current regulatory framework for payments is potentially not working as well as it could.
Areas where further developments are expected sooner rather than later are:
- Changes to the safeguarding regime: The government invites the FCA to consult on this later in 2023.
- Access to payment systems: As previously indicated in its consultation on the systemic perimeter, the government intends to ensure there is a single and effective regime governing access to payment systems, in place of regulatory overlap. The government will set out its next steps on this later in 2023.
- Treasury response to consultation on payments regulation and the systemic perimeter: HMT confirms that it is currently considering responses to its July 2022 consultation and that it will set out its response later in 2023.
- Fraud prevention and customer protection on termination of payment services: In addition to the above, HMT also suggests that the measures on enhancing fraud prevention and the fair protection of customers in relation to the termination of payment services referred to in the review may be subject to an ‘accelerated timescale’.
The government is also planning a review of the Payment and Electronic Money Institution Insolvency Regulations 2021 in due course.
The call for evidence accompanying the review focuses on how UK payments regulation should evolve to continue to meet the government’s aims and address the specific challenges highlighted in the review. It closes on 7 April 2023.
PCIFRs post-implementation review
The PCIFRs implemented aspects of what is now the on-shored version of the EU Interchange Fee Regulation 2015 (UK IFR), which caps interchange fees charged for the acceptance of consumer debit and credit cards. The PCIFRs also designated the Payment Systems Regulator (PSR) and the FCA as the co-competent authorities responsible for monitoring the UK IFR.
HMT has found that, based on the current regulatory framework, the policy objectives of appointing competent authorities with appropriate expertise, while making use of existing regulatory structures and processes to ensure efficiency and avoid unnecessary additional costs, could not be achieved in another way that imposes less onerous regulatory provisions.
The government’s wider approach to interchange fee policy will be determined under its programme to enact the repeal of retained EU law in financial services and build a smarter UK specific financial services regulatory framework. The UK IFR itself, as retained EU law, will be repealed in due course, and replaced by a comprehensive FSMA model of regulation through implementation of the Future Regulatory Framework, after the Financial Services and Markets Bill receives Royal Assent.
Take a look at this Engage article by members of the Hogan Lovells London office for more on this development.
United Kingdom: UK Finance report on regulating unbacked cryptoassets
On 15 December 2022, UK Finance and KPMG published a report titled The future regulation of unbacked cryptoassets in the UK. This report considers the regulation of unbacked cryptoassets in the context of the FCA's operational objectives - consumer protection, market integrity and effective competition. It investigates how unbacked cryptoassets interact with financial services' cross-sectoral regulatory requirements, including financial resilience, operational resilience, financial crime and governance.
Three specific use cases are discussed relating to trading, custody and payments, and UK Finance provides thoughts on:
- the risks and harms regulators try to address in relation to the activity;
- the tools used to address comparable risks in traditional finance;
- challenges and opportunities in applying these tools to cryptoassets; and
- novel risks posed by cryptoassets and the market that has developed.
UK Finance notes that the existing tools of the FCA's rules in CASS, requirements derived from the Markets in Financial Instruments Directive (2014/65/EU), the retained EU law version of the Market Abuse Regulation (596/2014), and the Payment Services Regulations 2017 (SI 2017/752) should form the foundation of the regulatory approach. However, these will need to be adapted for regulating cryptoassets, something which may be helped by the Future Regulatory Framework and the Financial Services and Markets Bill.
The report concludes that the existing regulatory framework, though not perfectly suited to the new innovations, is nevertheless a helpful starting point.
United Kingdom: Bank of England deputy governor for financial stability discusses crypto regulation plans
On 23 December 2022, Sir John Cunliffe, the Bank of England's deputy governor for financial stability, was interviewed by Sky News and discussed the position of crypto in the wider financial markets, and current plans to regulate crypto.
Sir John noted that crypto asset trading is not currently significant enough to threaten to destabilise the financial system, but it is moving in that direction. The increased size of the crypto sphere, combined with many assets having no intrinsic value means that regulation is necessary, as demonstrated by the collapse of FTX. Sir John noted the importance of bringing crypto within the regulatory framework to better protect consumers, and to make the most of crypto's potential to provide economic benefits. Related to this is the Bank of England's work on the possibility of a central bank digital currency, which will shortly be consulted on.
United Kingdom: UK Finance announces establishment of UK Forum for Digital Currencies
On 11 January 2023, UK Finance (UKF) announced that UKF, the City of London Corporation, Digital Pound Foundation, The Payments Association and TheCityUK have come together to form a new alliance – the UK Forum for Digital Currencies (UK FDC). A joint policy statement issued by the UK FDC provides that it aims to develop better policies, practice and regulation around digital and cryptocurrencies.
United States: Stablecoin regulation bill introduced to the Senate
On 21 December 2022, the United States Senate Committee on Banking, Housing and Urban Affairs announced that Senator Pat Toomey had introduced the TRUST Act to the Senate. The Transparency of Reserves and Uniform Safe Transactions (TRUST) Act seeks to establish a federal framework for "payment stablecoins" and would form the basis for Congress' regulation of stablecoins.
The legislation would treat "payment stablecoins" more like traditional fiat currency. It would prevent payment stablecoins from being classified as securities and mean that issuers of payment stablecoins would not be regulated as investment companies or advisors. The Office of the Comptroller of the Currency would be given the ability to grant federal licences for issuing stablecoins.
This aims to protect consumers and the wider economy, whilst allowing the benefits of a digital U.S. dollar to be enjoyed and promoting innovation in the digital currency space.
Argentina: Senate considers cryptocurrency promotion regulation
On 28 December 2022, it was reported that Argentina's Senate has started to consider introducing legislation to limit the advertisement of crypto products and require suppliers of crypto products to take action to educate potential customers. Regulators expressed concern about the current low level of regulation Argentina imposes on crypto institutions relative to traditional financial institutions and how this enables some crypto firms to engage in misleading advertising, to the detriment of consumers.
India: Central Bank calls for regulators to coordinate on crypto
On 29 December 2022, the Reserve Bank of India published its Financial Stability Report for December 2022, highlighting the problems experienced by the crypto markets during 2022. The events of the past year have demonstrated crypto's volatility, high correlation with equities, inadequacy as a hedge against inflation, and governance issues. In addition, the levels of leverage in the market mean that losses are compounded and can easily result in firms failing.
The Reserve Bank set out three possible approaches:
- Adopting the "same-risk same-regulation" principle;
- Banning cryptoassets; and
- Allowing the crypto market to fail without regulating it – this is ruled out due to the risk to other parts of the financial system.
The Reserve Bank has called for a more coordinated global regulatory regime to tackle the problems of crypto markets. India plans to begin the coordination process during its presidency of the G20, which started on 1 December 2022.
Japan: Financial Services Agency to lift the ban on foreign stablecoins
On 27 December 2022, it was reported that a revised Payment Services Act would lift Japan's ban on foreign-issued stablecoins in 2023. Under the new legislation, the Financial Services Agency plans to permit Japanese entities to transact using foreign stablecoins. This is subject to those entities adhering to existing asset management and anti-money laundering guidelines, and the imposition of a cap of 1 million yen (USD 7,500) per transaction involving foreign-issued stablecoins.
European Union: European Parliament to consider MiCA and recast revised WTR at 17 to 20 April 2023 plenary session and European Commission provisional call for advice to EBA on delegated acts under MiCA
On 11 January 2023, the European Parliament updated its procedure files on the proposed Regulation on markets in cryptoassets (MiCA) (2020/0265(COD)) and on the proposed Regulation on information accompanying transfers of funds and certain cryptoassets ((2021)0241(COD)) (recast revised WTR) to indicate that the Parliament will consider the proposed Regulations during its plenary session to be held from 17 to 20 April 2023. They had previously indicated that the proposed Regulations would be considered at a plenary session in February 2023. The Parliament and the Council reached political agreement on the proposed Regulations in June 2022, so consideration of the texts by the Parliament is the next step.
On 4 January 2023 the EBA published a letter from the European Commission (dated 21 December 2022) and accompanying provisional call for advice, requesting technical advice on certain delegated acts to be adopted under MiCA. The delegated acts relate to classification of asset-reference tokens and e-money tokens and related fees. The request for advice is provisional as MiCA has not yet entered into force. The EBA is asked to provide the technical advice by 30 September 2023. The Commission intends to adopt the delegated acts before the application of the relevant parts of MiCA.
Italy: Parliament approves 26% tax on cryptocurrencies in 2023 budget
On 2 January 2023, it was reported that on 29 December 2022 the Italian Parliament agreed to introduce a 26% capital gains tax on gains from cryptocurrencies of more than €2000. Losses greater than €2000 will qualify for tax deduction status for the following tax period.
To gather the necessary information to audit those trading cryptocurrencies, the legislation will introduce a 3.5% tax on undeclared cryptocurrencies held before 31 December 2021, with a 0.5% fine for each year they remain undeclared.
Global: Basel Committee finalises global standard on prudential treatment of cryptoassets
On 16 December 2022, the Basel Committee on Banking Supervision (BCBS) finalised its global prudential standard on cryptoasset exposures. The final standard will be incorporated into the consolidated Basel Framework. Authorities from BCBS members have agreed to implement the standard by 1 January 2025.
Nepal: Digital payments sector is opened up to foreign investment
On 9 January 2023, the Nepal Rastra Bank issued a policy statement (link in Nepalese) amending the rules concerning foreign policy involvement in the digital payments market to permit foreign investment. Under the new rules, Nepalese payment service providers (PSPs) and payment systems operators (PSOs) can receive up to 15% of their total capital from foreign investors.
This comes as part of an effort to improve the financial position of PSPs and PSOs, most of which are running at a loss, according to the central bank. Additionally, to reduce risks to the stability of the Nepalese payments system, the Nepal Rastra Bank has increased the paid-up capital requirement for companies providing digital payments. The minimum for PSPs operating payment cards has been increased from Rs 5o million (USD 380,000) to Rs 250 million (USD 1,900,000). Similarly, the requirement for a PSO has been increased from Rs 100 million (USD 760,000) to Rs 400 million (USD 3,000,000), and to Rs 800 million (USD 8,000,000) for PSOs handling payment transactions outside of Nepal using payment instruments issued in Nepal.
Australia: Central bank sets out intended regulatory reforms
On 14 December 2022, the Governor of the Reserve Bank of Australia, Philip Lowe, gave a speech outlining regulatory reforms sought by the bank. These included:
- requiring mobile wallet providers to offer least-cost routing options for merchants by the end of 2024 so merchants are not locked into using their currency system;
- improving Australia's fast payments system, the NPP, and the use of PayID;
- continuing to work on making cross-border payments faster and cheaper;
- assessing the possibility of introducing a central bank digital currency, if a cost-benefit analysis suggests this would be of net benefit; and
- modernising the regulatory regime in Australia.
Italy: Parliament approves charge for payments firms with high fees
On 21 December 2022, it was reported that the lower house of the Italian Parliament, the Chamber of Deputies, approved a measure in the 2023 budget that will impose a levy on payments firms and banks if they do not agree lower fees on electronic transactions with retailers. This follows widespread complaints by retailers about payment processing fees after the introduction of fines for shops that refused to take card payments in June 2022.
The charge has been set at 50% of the net proceeds from payment processing where merchants and payment processors fail to agree on a "fair and transparent level of fees" by 31 March 2023.
United Kingdom: PSR publishes working paper on UK-EEA cross-border interchange fee increase
On 15 December 2022, the PSR published a working paper MR22/2.4 on the impact of the UK-EEA cross-border interchange fee increases, as some fees charged on consumer card transactions have increased significantly post-Brexit. This is part of the PSR’s work on its market review into UK-EEA consumer cross-border interchange fees, as reported on in the November 2022 Global Payments Newsletter.
The working paper explains how the PSR considers how the increases in the fees that acquirers pay to issuers when consumers use a Mastercard or Visa debit or credit card for online transactions between the UK and the EEA are affecting UK service users. The working paper includes:
- an overview of how four-party card systems operate;
- an overview of the changes in the rates of multilateral interchange fees (MIFs);
- the PSR’s current position on how increases in MIFs might be detrimental to UK service users; and
- how merchants and acquirers could mitigate the impact on their business.
The PSR is accepting comments on the working paper until 19 January 2023. It plans to publish a report on the market review with interim conclusions in Q2 or Q3 2023 and a final report in Q4 2023.
United Kingdom: Bank of England publishes consultation on supervisory approach to wholesale cash distribution
On 14 December 2022, the Bank of England (BoE) published a consultation paper on its supervisory approach to wholesale cash distribution.
The BoE is being given new powers in the Financial Services and Markets Bill 2022-23 (FSM Bill) to ensure that the wholesale cash infrastructure is effective, resilient and sustainable as cash usage further declines. The consultation paper outlines how the BoE will use its new powers and the proposals cover:
- The BoE's approach to wholesale cash distribution oversight;
- The principles for the wholesale cash distribution market oversight regime;
- High-level codes of practice for participating members (to be consulted on by the BoE in more detail in Q1 2023);
- The fees required to fund the BoE's supervisory activity; and
- The BoE's proposed approach to prudential supervision of a systemic entity in the wholesale cash distribution market (in the event that a systemic entity emerges in the wholesale cash distribution market).
The consultation closes on 10 February 2023. Following this and the consultation on the detailed codes of practice for the market oversight regime, the BoE plans to publish a final supervisory approach document, principles, codes of practice and the fee schedule for the market oversight regime before the new powers come into force.
United Kingdom: Bank of England publishes FPC financial policy summary and record for November and December 2022
On 13 December 2022, the Bank of England published the financial policy summary and record (FPSR) of its Financial Policy Committee (FPC) meetings on 28 November and 8 December 2022.
The FPSR included a discussion of cryptoassets, with the FPC noting that the failure of FTX highlighted vulnerabilities in the crypto industry and the need for more comprehensive regulation and law enforcement. The FPC urged firms to take a cautious approach to engaging with crypto until an enhanced regulatory regime has been introduced.
The FPSR also reviewed the findings of the first phase of the FPC's exploratory cyber stress testing. This looked at a hypothetical data integrity scenario in retail payments. The FPC will report insights from the test in due course.
European Union: EBA publishes peer review report on authorisation under PSD2
On 11 January 2022, the EBA published a report on its peer review on authorisation of payment institutions and e-money institutions under PSD2, which looked at how competent authorities have implemented its 2017 guidelines on authorisation. The exercise covered authorities from all EU member states and two European Economic Area (EEA) states from 1 January 2019 to 31 December 2021.
The EBA found that authorities have largely implemented the guidelines but some authorities have not. The identified deficiencies mean that applicants remain subject to different supervisory expectations across the EEA. This results in a number of issues, including "forum shopping", and undermines the objectives of PSD2 and the guidelines of establishing a single EU payments market.
The EBA sets out follow-up measures for specific authorities on how they should improve practices to fully implement the guidelines. There are also follow-up measures for all authorities in key areas. The EBA plans to review implementation of these measures during its follow-up peer review in two years' time.
The EBA also sets out recommendations addressed to the European Commission in the context of its ongoing PSD2 review work.
United Kingdom: Money laundering threshold increased to £1,000
On 15 December 2022, the Proceeds of Crime (Money Laundering) (Threshold Amount) Order 2022 (SI 2022/1355) was made. This Order increases the threshold set in section 339A of the Proceeds of Crime Act 2002 (PoCA) from £250 to £1,000 and the change came into force on 5 January 2023.
The section 339A PoCA threshold sets the value below which a bank, deposit-taking firm, electronic money institution, or payment institution can carry out transactions without the risk of committing a money laundering offence under sections 327, 328 or 329 PoCA. The threshold exemption only applies to an act carried out whilst "operating an account", and does not apply to other types of action, such as returning funds or property when terminating a relationship with a customer.
This change is motivated by a desire to free up law enforcement resources to focus on larger-scale money laundering and the costs imposed on regulated firms. In an explanatory memorandum to the Order, the UK government states that it believes raising the threshold to £1,000 would reduce the volume of reports firms have to make without having a material effect on the quality of intelligence received by the government.
Payment Market Developments
Europe: epay integrates UnionPay QR code payments
On 12 December 2022, epay announced that it had become the first payment provider to roll out UnionPay's QR code payment method in Europe. This is targeted at making it easier for the millions of UnionPay customers, particularly Chinese tourists, to use their preferred payment method in European retailers.
This partnership reinforces epay's position as an important player in the European payments space, and provides UnionPay's first entry into European markets.
Europe: Adyen and Autocanteen partner to provide an AI-supported dining payment solution
On 5 January 2023, Adyen announced that it had partnered with Autocanteen to provide an AI-supported self-checkout solution for the hospitality industry. Autocanteen's AI systems recognise 98% of items on a plate and can take payment in as little as ten seconds. This partnership gives Autocanteen access to Adyen's local card acquiring capabilities, enabling Autocanteen to provide a reliable and frictionless payment system and give customers a wide range of digital payment options.
United Arab Emirates: Abu Dhabi Islamic Bank launches tokenised payment-enabled wearable technology
On 29 December 2022, Abu Dhabi Islamic Bank announced the launch of ADIB Pay, the first tokenised wearable payment method in the region, developed in partnership with Visa and Tappy Technologies. By using a ring or a clasp (which can be attached to other items such as bracelets), users can make contactless payments without needing to carry a physical card.
United Kingdom: Starling Bank launches virtual cards
On 7 December 2022, Starling Bank announced the introduction of a feature granting customers access to up to five virtual cards held within their Starling Bank app. These cards help customers with budgeting as each virtual card is topped up individually, and not linked to the customer's main balance. Therefore, when the balance on a virtual card has been exhausted, the card will be declined, rather than use funds from the main balance. Customers can assign virtual cards to specific types of spending to track their spending on those products more easily.
Global: Klarna introduces sustainability information for tech purchases
On 19 December 2022, Clarity AI issued a press release announcing it had partnered with Klarna to provide sustainability metrics on technology purchases made by Klarna's 2 million daily customers. This comes as part of Klarna's efforts to inform customers on the environmental impact of their consumption more broadly – it has previously incorporated a feature providing information about the environmental impact of fashion purchases.
Clarity AI will provide information on the producer's emissions and proportion of energy derived from renewable sources relative to similar producers, whether the producer has climate change policies in place, and whether it is transparent in reporting climate-related information.
Global: Worldline launches BNPL service for travel payments
On 19 December 2022, Worldline issued a press release stating that it had launched a new buy-now pay-later (BNPL) service for customers purchasing travel services. This service is being offered to merchants using Worldline's payment solution, TravelHub, and is being offered by travel payment provider Fly Now Pay Later. Worldline is seeking to take advantage of the trend of consumer travel recovering after the pandemic. However, the global economic situation means consumers have less disposable income to spend on travel, so the option of spreading payments makes Worldline's services affordable to more consumers.
Japan: Smartpay launches a BNPL service
On 13 December 2022, Smartpay announced that it had rolled out the first service in Japan to carry out online buy-now pay-later (BNPL) through regular payments directly from the customer's bank account. Payment can be completed in less than a minute, and Smartpay is compatible with 67 financial institutions.
Latin America: AirTM shuts down cryptocurrency trading
On 9 January 2023, it was reported that Latin American cryptocurrency exchange AirTM had ceased offering cryptocurrency services from 4 January 2023. No new deposits can be made, and existing crypto funds have been converted into Airusd, a dollar-pegged stablecoin.
AirTM has said that this action is in response to the change in services offered by an unidentified provider, thought to be Wyre, who has recently stated it is scaling back its cryptocurrency operations.
China: Alipay integrates with payment network to offer digital yuan
On 13 December 2022, it was reported that the Alipay digital wallet had launched an express payment feature for the Chinese central bank digital currency, the digital yuan, which is currently undergoing a pilot in 23 cities. Alipay plans to continue to expand the payment options that customers have using the digital currency.
Global: Orange Money to provide the first metaverse mobile wallet
On 28 December 2022, it was reported that Orange Money had signed a memorandum of understanding with the first Arabian metaverse platform, LivaatVerse. Under this agreement, Orange Money would create a metaverse-ready version of its mobile wallet and become the exclusive mobile wallet for Jordanians in the LivaatVerse. As part of the agreement, Orange Money will assist LivaatVerse in developing the infrastructure for making and processing mobile payments in the metaverse safely and securely.
Surveys and Reports
Europe: Study on payments attitudes of euro area consumers
On 20 December 2022, the European Central Bank published the 2022 edition of its study on the payment attitudes of consumers in the euro area (SPACE). SPACE seeks to identify trends in consumer payments in the euro area. Key insights include:
- Cash remained the most frequently used payment method at the point of sale (POS), being used for 59% of transactions. However, it has decreased significantly since 2019 when it made up 72% of POS transactions. Cards were used for 34% of POS transactions, up from 25% in 2019.
- Cards accounted for a higher share of the total value of payments than cash – 46% to 42%. Cards were used more frequently than cash for payments in excess of 50 euros.
- Contactless payments increased from 41% of card payments in 2019 to 62% of card payments in 2022.
- 55% of customers surveyed expressed a preference for using cashless payments in a face-to-face transaction. Despite this, a majority said they considered having cash payment options important or very important.
- Cash was accepted at 95% of physical payment locations in 2022, down from 98% in 2019. 81% of locations facilitated non-cash payments.
- The main advantage of cards is convenience; the main advantages of cash are anonymity and greater awareness of spending.
Latin America: Alternative payments continue to increase in popularity
On 23 December 2022, EBANX published its Beyond Borders 2022/23 survey into the use of alternative payment methods across Latin America. Notable findings are:
- Alternative payment methods made up 39% of total digital commerce transactions, continuing the trend of year-on-year growth since 2018.
- 73.5% of adults across Latin America have an account through which they can use alternative payment methods. This is highest in Chile (87.1%) and Brazil (84%), and lowest in El Salvador (35.9%) and Guatemala (44.1%).
- Two account-based payment providers stood out as the most significant alternative payment methods. Purchases using Pix made up 20% of all online purchases in Brazil, while PSE made up 35% of all online purchases in Colombia.
Buy-now pay-later (BNPL) continues to have a relatively low penetration rate in Latin American markets. However, the volume of BNPL transactions grew by 80% in Brazil and 82% in Mexico, the two largest economies in Latin America, during 2022.