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5 November, 2016
Hong Kong’s financial technology market is constantly evolving with the introduction of non-traditional and digital payment and settlement facilities. On 25th August 2016 the first five licences were issued by the Hong Kong Monetary Authority (“HKMA”) to Alipay Wallet, O! ePay operated by Octopus Cards, Tap & Go, run by PCCW’s HKT, TNG Wallet and Tencent’s WeChat Wallet.
Last November the Clearing and Settlement Systems Ordinance was amended and renamed as the Payment Systems and Stored Value Facilities Ordinance (“Ordinance”). The Ordinance sees the implementation of a mandatory licensing system for stored value facilities, and was subject to a one year transition period. This grace period will end on 13th November 2016, after which any stored value operator not holding a licence will have to exit the market or face heavy penalties.
The implementation of the Ordinance aligns the government’s initiative of fostering financial technology, whilst protecting its users and managing the risks associated with innovative payment methods.
What is a stored value facility (“SVF”)?
In general, a SVF involves the pre-payment to or storage of the value of money (or money’s worth) on a payment facility, which may be used for paying for goods or services or to another party. This includes smartcards, such as gift cards or top-up cards, through to wearable technology such as watches to non-device based SVFs that store the value of money on mobile and internet based accounts, such as e-wallets.
SVFs can be single-purpose or multi-purpose. Single-purpose SVFs can only be used to obtain goods or services from the merchant who issued the SFV, e.g. a pre-paid card issued by your favourite coffee house, where you simply use that card to settle each transaction. On the other hand, a multi-purpose SVF can be used to obtain goods or services from multiple merchants, e.g. your Octopus card that can be used at convenience stores, supermarkets and transportation companies.
Changes to the Ordinance
The Ordinance requires all multi-purpose SVFs to be licensed. Single-purpose SVFs do not have to adhere to the Ordinance, so you may rest assured your pre-paid coffee card will still work after 13th November.
In order to obtain a licence, multi-purpose SVFs must meet certain criteria set out by the HKMA including minimum capital, risk management criteria, data privacy, the store value limit and customer due diligence for anti-money laundering. Further details can be found in the “Explanatory Note on Licensing for Stored Value Facilities” issued by the HKMA in November 2015.
Under Schedule 8 of the Ordinance, certain multi-purpose SVFs are exempt from the licensing requirement. SVFs that are exempt are those used:
- for cash reward schemes, i.e. a loyalty scheme where retail outlets award customer loyalty with cash rewards;
- for purchasing digital products, i.e. purchase of music, videos, e-books, games and apps that can only be used on IT devices;
- for bonus point schemes, i.e. airline mileage scheme or customer loyalty schemes that provide non-cash points to customers;
- within limited group of goods or service providers, i.e. a store card that can only be used at the store’s premises; and
- within certain premises, i.e. membership cards where the cards can only be used in the shops or restaurants of a specific club or organisation.
As of 13th November 2016 SVF operators carrying on business without a licence may face a penalty of HK$1 million, as well as five years imprisonment.
The future of SVFs
The implementation of the Ordinance sees a significant shift in Hong Kong’s payment’s landscape. Norman Chan Tak-lam, HKMA’s chief executive stated “the grant of the first batch of licences for [issuers of stored-value facilities] is turning a new page in retail payment development in Hong Kong.”
Of the five operators granted licences, big plans have already been announced with Alipay Wallet launching a new Hong Kong dollar account service in October. This will allow customers to make purchases on its Taobao shopping platform without paying a handling fee. Local users would also be able to top-up Alipay Wallet accounts through local banks and convenience stores via QR codes.
Octopus Cards announced plans earlier this year to triple its maximum value amount, going from HK$1,000 to HK$3,000. This will provide healthy competition with Alipay Wallet, as according to Rita Li, Octopus’ sales and marketing director, hundreds of thousands of Hong Kong users have used Octopus cards to carry out purchases on Taobao since it started offering the service in 2014. Taobao accounts for roughly half of the e-commerce market in Hong Kong. Octopus charges only 1.5% on transactions compared with 3% for credit cards. Having a higher limit on Octopus cards will certainly change online buying behaviour, however Octopus will have to wait until November when
its licence comes into effect before any changes to their service can be made.
Tencent’s WeChat Wallet launched in February 2016 for Hong Kong consumers, six months before its main competitor Apple Pay, operated by Apple, that launched in partnership with American Express in July 2016. WeChat Wallet offers online payment as well as peer-to-peer transfers integrated into the WeChat App. Partnering with banks, WeChat Wallet requires licensing whereas Apple Pay is linked to credit cards where not value is stored and is therefore not considered a SVF.
More than 20 companies have applied to the HKMA for SVF licenses with 50% Hong Kong-domiciled companies and 68% engaged in the prepaid card business. Howard Lee, senior executive director at the HKMA, advised that the decision to include only five operators at this point did not mean the remaining applicants had been rejected. We expect to see more licences granted before or after 13th November. Hopefully this is a positive move forward in making Hong Kong competitive in the fintech and alternative payments space and that more changes will be embraced on a more rapid basis by the regulators.
For further information, please contact:
Kristi Swartz, Managing Partner, Bryan Cave
kristi.swartz@bryancave.com
