On 1 January 2017, the Central Bank of the United Arab Emirates issued the Regulatory Framework For Stored Values and Electronic Payment Systems (Regulations). The overarching goal of the Regulations is to help facilitate the increased adoption of secure digital payments, which it strives to accomplish by introducing a mandatory licensing and related compliance regime for certain electronic payment service providers operating in the UAE.
What is a payment service provider?
A Payment Service Provider (or PSP) is effectively any entity that provides digital payment services (including using electronic, mobile or magnetic means but excluding credit and debit card payments) within the UAE. The Regulations further define the concept of a PSP into four distinct sub-categories, each of which is subject to additional individual requirements from a licensing and compliance perspective. These sub-categories are as follows:
- Retail PSP: Authorized commercial banks and other licensed PSPs offering retail, government, and peer-to-peer digital payment services as well as money remittances;
- Micropayments PSP: PSPs offering micropayments solutions facilitating digital payments targeting the unbanked and under-banked segments in the UAE;
- Government PSP: Federal and local government statutory bodies offering government digital payment services; and
- Non-issuing PSP: Non-deposit taking and non-issuing institutions that offer retail, government, and peer-to-peer digital payment services.
The Regulations also provide additional detail with respect to the more specific types of payment services that are considered to be within their scope, as well as those services to which they are not intended to apply. In short, the Regulations apply to so-called "Stored Value Facilities", defined as a non-cash facility, whether in electronic or magnetic form, that is purchased and used by an individual or legal person to pay for goods or services. The Regulations provide that the services expressly within their ambit include:
- Cash-in services – the exchange of cash for digital money, which is placed in a payment account;
- Cash-out services – the exchange of digital money for cash, which is taken out of the payment account;
- Retail credit/debit digital payment transactions;
- Government credit/debit digital payment transactions;
- Peer-to-peer digital payment transactions; and
- Money remittances.
On the other hand, the Regulations also provide a list of services to which they do not apply (though which may be subject to other applicable laws or regulations), as follows:
- Payment transactions in cash without any involvement from an intermediary;
- Payment transactions using a credit card/debit card;
- Payment transactions using paper cheques;
- Payment instruments accepted as a means of payment only to make purchases of goods/services provided from the Issuer/any of its subsidiaries (i.e. closed loop payment instruments);
- Payment transactions within a payment/settlement system between settlement institutions, clearing houses, central banks, and PSPs;
- Payment transactions related to transfer of securities/assets ( including dividends, income, and investment services);
- Payment transactions carried out between PSPs (including their agents/branches) for their own accounts; and
- Technical Service Providers.
Of the above exclusions, the one which applies to Technical Service Providers is perhaps the least apparent at first blush. These are effectively defined in the Regulations as an entity that "facilitates the provision of payment services to PSPs", without at any time being in possession of or transferring any funds. Examples cited include data processors, authentication service providers, payment terminal maintenance companies and network providers. It is also worth noting that the Regulations expressly prohibit the use of "Virtual Currencies", defined (with certain exceptions) to include "any type of digital unit used as a medium of exchange, a unit of account, or a form of stored value". How this prohibition will be administered and enforced in practice remains to be seen, and is likely to be the subject of subsequent Central Bank clarifications.
What is the applicable PSP licensing/authorization regime?
Where a PSP wishes to operate in any of the above-noted regulated capacities in the UAE, it must apply to the Central Bank for the appropriate license. The exception to this requirement is in relation to licensed commercial banks in the UAE, for which an abbreviated PSP authorization process (as opposed to the more comprehensive licensing process) is available.
As to the licensing regime, there are certain core requirements that apply across each of the four (i.e. Retail, Micropayments, Government and Non-Issuing) PSP categories contemplated in the Regulations. By way of example, one such requirement is that the applicant must be incorporated in the UAE (mainland or free zone, but excluding any financial free zone entities). The applicant must also generally be capable of satisfying the Central Bank that it has the appropriate experience, expertise and knowledge to provide the proposed digital payment services in the manner contemplated in the license application. PSPs are also required to comply with certain prescribed minimum capital requirements, and to implement and demonstrate effective governance and compliance-related policies (for example, obligations not to commingle user-held funds with any other funds the PSP is using for wider business purposes).
The Regulations also seek to establish a further category of service provider: namely, a Payment System Operator. This is an entity that operates a fund transfer system or any other system that facilitates the circulation of digital money, and which may apply for its payment system to become a "Designated Payment System" (defined as one that is designated by the Central Bank as being "systemically important"). While further detail on these Designated Payment Systems seems to be pending by way of subsequent Central Bank instruments, the key significance of it appears to rest in the payment settlement process mandated by the Regulations. Under the Regulations, all payment transactions shall be settled via a Settlement Institution – which is in turn defined as either a Designated Payment System by the Central Bank, or a commercial bank providing settlement services.
It is also worth noting that the Regulations set out a number of additional and quite comprehensive further obligations on PSPs that are clearly motivated by the Central Bank's drive for effective consumer protection in the digital payment economy. While further more granular detail on them is outside the scope of this article, these include detailed user registration requirements, transaction and spending limits, PSP liability provisions, minimum prescribed terms for user contracts, technical security requirements, data privacy and protection controls as well as the above-mentioned requirements for effective all-around governance and compliance policies.
Enforcement and coming into force
As noted at the outset, the Regulations were issued by the Central Bank on 1 January 2017. From this date, any individual or entity providing (or representing themselves as capable of providing) digital payment services in the UAE without the appropriate license or authorization under the Regulations will be subject to administrative penalties (the scope and quantum of which are pending by way of subsequent regulatory instruments). However, there is a grace period whereby any PSP that was already providing digital payment services at the time the Regulations were issued has a period of one year to take the appropriate steps to ensure they bring their operations into compliance (or else they will be required to cease business in the UAE at the expiry of this period).
As is often the case with new legal and regulatory frameworks, the Regulations will pose a number of very interesting questions for various market participants and stakeholders (especially in the context of further detail in related regulatory instruments that are still pending). However, it is nonetheless accurate to say that the Regulations are both pertinent and necessary in the context of the increasingly digitized economy that the UAE is promoting and seeking to support. With the countdown to compliance underway, entities operating in this space in the UAE should assess and audit their activities to determine whether (and if so, to what extent) the Regulations may apply to them – and then take the necessary steps to obtain any required authorizations or licenses.