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Payment Services Act: The case for reviewing e-wallet caps

Payment Services Act: The case for reviewing e-wallet caps

Source: Business Times
Article Date: 24 Jan 2020
Author: Kristo Käärmann

The Payment Services Act is a milestone, effecting much positive change to the financial sector. But that should not stop us from imagining the best Act possible today.

Not all Singaporeans will notice when the Payment Services Act takes effect on Jan 28. That masks the momentous nature of the new law, for it will have a large, long-term impact, in an area they care deeply about - how their money is managed.

Fintech companies have discussed the law with the Monetary Authority of Singapore over the past two years. Many, including TransferWise, which I co-founded, are optimistic about its broad direction. But many also have serious concerns about specific rules, including the S$5,000 cap on what Singaporeans can hold with fintechs.

Passed last year, the Act changes fundamental thinking by introducing activity-based regulation. This progressive philosophy - adopted by more and more central banks throughout the developed world - says: companies should be regulated on what they do, not who they are.

In the old days, banks were the only companies offering financial services. Regulation evolved around this, making the opposite true too: you were only allowed to get financial services from a bank.

Regulators today recognise the integral role of nonbanks. When a company does payments, regulators must ensure the money always arrives, there's no foul play and criminals can't move dirty money. When companies hold balances, regulators want the money stored safely. If they want to lend that money out in mortgages - that's when more serious capital requirements kick in. In Europe, this last activity - lending - is the only one reserved for banks. All others can be performed by companies that meet relevant regulatory requirements.

ENCOURAGING COMPETITION

The benefits of the activity-based approach are widely acknowledged. More companies can pick a slice of the financial services pie, work to meet transparent criteria - and they're in business. This open system encourages competition, breeds innovative new products - cheaper, faster, more convenient ones - and benefits consumers. That the spread of this regulatory approach has happened alongside the rise of fintechs is no coincidence.

In Singapore, the Payment Services Act is the first comprehensive law using activity-based regulation. Under the Act, companies can operate larger e-wallets if they build robust systems to safeguard customer funds, segregating them from their own operational bank accounts.

Given the above, it was difficult for fintechs to understand the Act's limits on e-wallets for individuals - a S$5,000 cap on balances and a S$30,000 cap on annual outflows.

These limits are highly constraining and represent a step backwards from the activity-based perspective.

First, the caps do not apply to banks. In fact, the change means whereas some nonbanks could previously operate e-wallets at maximum scale, that privilege is now reserved for banks.

Second, it has been argued that existing e-wallets don't have product designs that require exceeding the cap anyway. This argument is not compelling for three reasons.

One, if they don't, then why bother having the caps?

Two, there are in fact e-wallets with such designs. The TransferWise multi-currency account is one example, partly due to its cross-border nature. It has been used to receive salaries, pay rent, fund mortgages (especially overseas ones), and hold study abroad fees. These are real use cases by TransferWise customers in Singapore who will see their use curtailed after Jan 28.

NASCENT SPACE

Three, while existing domestic-only e-wallets are less likely to reach the caps, this assumes a static view of the market. E-wallets are a nascent space, with new use cases still being explored on drawing boards at fintech startups. If Singapore wants to become a global fintech hub, it must take a forward-looking view, crafting regulation for tomorrow's market.

According to the Household Expenditure Survey, the average household spends S$60,000 a year. Those in the top quintile spend over S$90,000. With outflow limits at S$30,000, expenditure that cannot be fulfilled by e-wallets is effectively being protected for the banks - which goes against the activity-based principle.

Some argue customer funds are less safe in e-wallets vis-a-vis bank products. In response, it should be noted that e-wallet monies must be 100 per cent safeguarded in trust accounts, whereas banks lend out up to 80 per cent of deposits. While it is true bank accounts are insured up to S$75,000 under the Deposit Insurance Scheme, fintechs have not been given the option of insuring e-wallet monies so as to offer higher-limit accounts.

The Payment Services Act is a milestone, effecting much positive change to the financial sector. But that should not stop us from imagining the best Act possible today.

With the current Act, Singapore will be the only developed country with such e-wallet limits. If similar rules to those in the UK, Europe, US, Australia and Hong Kong are applied, Singaporeans will enjoy greater savings and a richer menu of products from banks and nonbanks.

  • The writer is the co-founder and CEO of global fintech company TransferWise.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.

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