Mobile, Internet-based and

Electronic Payments –

Initiatives and Regulations

mCMO Conference 11 October 2013

Mr. Esmond Lee Executive Director

Financial Infrastructure Department

Hong Kong Monetary Authority

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Contribution of retail payment systems to the economy

• Enhance consumers’ convenience when spending on

goods and services.

• Facilitate merchants to collect payments effectively.

• Contribute to economic growth as transaction costs can be

reduced.

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HKMA’s role in retail payment initiatives

• As a regulator – preparing the Clearing and Settlement Systems

Amendment Bill (CSSAB) to include retail payment systems into

the designation regime and devise a licensing regime for stored

value facilities.

• As a facilitator

E bill presentment and payment platform : HKMA develop

the platform for bill presentation by merchants through the

banks

E cheque : HKMA develop the platform for e-cheque

issuance and presentment, and the clearing and settlement

use the existing platform for conventional cheques

NFC Mobile payment : HKMA promulgates a set of

guidelines and standards

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Proposed legislative approach

Policy objectives

• Strengthen the safety and soundness of the operation of Stored Value Facilities

(SVF) and RPS in Hong Kong

• Protect the float of SVF

• Foster innovation and development of retail payment products and services by

providing clarity in the laws and an effective regulatory regime

Proposed legislative approach -- amend the CSSO in order to:

• Establish a licensing regime for SVF

• Empower the HKMA to designate certain RPS to be subject to its supervision

• Empower the HKMA to perform on-going supervisory and enforcement functions

Legislative timeline

• Planned to introduce amendment Bill to LegCo in H2 2014 for scrutiny

• Expect enactment of new legislation in 2014-2015 legislative year

Note: The multi-purpose stored value card regime under the BO will be incorporated into the amended CSSO

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Multi-purpose stored value card regime under the BO

CSSO

Proposed Legislative Approach (cont’d)

SVF

Payment

Systems

Existing regulatory regime Proposed regulatory regime

Licensing Regime

Designation Regime

Amend the CSSO to cover the regulatory regime for SVF and RPS

Device-based SVF

Non-device based SVF

RPS

Large-value payment systems

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Licensing Regime for SVF

Mandatory licensing regime

• It is an offence to issue SVF without a SVF licence in Hong Kong

Licensing criteria

• Physical presence: The company must be incorporated under the laws in Hong

Kong, with a local registered office

• Principal business: Principal business must be the issuance of multi-purpose SVF

• Adequate financial resources: On-going minimum (paid up) capital requirement of

HK$25 million

• Other licensing conditions: e.g. fit and proper requirements on management and

ownership, prudential and risk management requirements, anti-money laundering

and counter-terrorist financing requirements, purpose and soundness of scheme,

etc

• Licensing conditions may be attached: e.g. restrictions on business, higher capital

requirements, etc

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Licensing Regime for SVF (cont’d)

In line with current practices of the Banking Ordinance

• Licensed banks deemed to be licensed

• Single-purpose SVF not required to be licensed

• Exemption of certain SVF from licensing if it poses minimal risk to the users or the payment and financial systems of Hong Kong

Management of the float:

• Float must be segregated from the SVF issuer’s own funds and at least 100% protected by safeguarding measures, e.g.:

• Guarantee from a licensed bank in Hong Kong; or

• Establish a trust account with a licensed bank in Hong Kong

• To discuss investment of float with the HKMA in advance

Maximum amount to be stored on a SVF:

• The HKMA may impose a limit on the maximum value that can be stored on a SVF on a case-by-case basis by attaching a licensing condition

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Designation Regime for RPS Eligible systems:

• Operates and provides retail payment services in Hong Kong; or process Hong Kong dollar

or other prescribed currencies (e.g. RMB/USD)

Designation criteria:

• A RPS may be designated if any disruptions to the RPS have implications to the monetary

or financial stability of Hong Kong; public confidence in payment systems or the financial

system of Hong Kong; or day-to-day commercial activities in Hong Kong

Potential coverage:

• Credit card schemes

• Debit card schemes

• Merchant acquirers

• Payment gateways

• Mobile payment infrastructures

RPS outside HK

• Exemption of designated RPS established outside Hong Kong from certain requirements if

it is already subject to adequate supervision by the home regulator

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Consultation Exercises

• Soft consultation

• Conducted in H2 2012 to sound out major industry players on regulatory

proposals

• Industry consultation

• Conducted between December 2012 and January 2013

• Over 40 industry stakeholders including the consumer council consulted,

feedbacks generally supportive

• Comments incorporated in public consultation paper where appropriate

• Public consultation

• Conducted between 22 May and 22 Aug 2013

• Feedbacks from both industry players and general public indicated general

support

• Comments being analysed and processed, consultation results to be published

in due course

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Legislative Timeline

• Preparatory work for legislative amendments in progress taking into

account comments received from public consultation

• Planned to introduce amendment Bill to LegCo in H2 2014 for scrutiny

• Expect enactment of new legislation in 2014-2015 legislative year

• Transitional period of 12 months for existing SVF issuers to apply for

SVF licenses and adapt to new regulatory framework

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NFC mobile payment

a new lifestyle

(Mobile phone as a communication ID card)

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NFC technology in daily lives

NFC devices &

Infrastructure

Store e-boarding pass for

automatic flight boarding

Access to buildings

Pay for goods with a tap on the Point of Sale

(POS) by deducting value from e-purse

Exchange business cards

Read smart posters

to get the latest

promotion

Collect and store

e-coupons

Pair up devices for

file transfer

Possibilities for using NFC technology in our daily lives are numerous

Collect transit tickets

on the phone

PaymentsTransit ticketing

Identity

authentication/

Access controlData exchange

Marketing &

PromotionCheck-in hotel online with

electronic room key

provisioned over the mobile

network to the phone

Purchase items by

tapping on the NFC

tags or smart posters

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NFC Mobile Payment Overview

Hong Kong possesses good market conditions for NFC mobile payment

• High acceptance of contactless payments – 85% of non-cash

transactions are already contactless

• High smartphone penetration rate – 90% of mobile phones shipped to

Hong Kong in 2013 will be smartphones

• Increasing availability of NFC-enabled phones – over 40% of

smartphones shipped to Hong Kong in 2013 are expected to be NFC-

enabled

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HKMA facilitates the development of innovative

services

NFC study commenced

Aroused interest of the

market and the public in

NFC mobile payment

services

Planning of isolated NFC

projects in progress

Study in progress

Certain stakeholders

considered building their

own NFC infrastructures

Increasing demand for a

shared infrastructure

platform

Announcements of two NFC

mobile payment services

Study completed

Growing number of NFC

mobile payment services

under development

Planning of building shared

NFC infrastructure by the

market participants

Public anticipation of the

advent of different NFC

payment services

Q3 2012 Q4 2012 Q1 2013

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Going forward: our approach

• The HKMA supports a market-driven approach for shared infrastructure

development as it suits the Hong Kong market:

• Services can be launched more quickly

• More receptive to stakeholders

• The HKMA is working with the Hong Kong Association of Banks to develop a

set of standards and guidelines for the industry to follow. They include:

• Technical standards: to ensure interoperability

• Operation guidelines: to enhance user experience

• Security requirements: to protect users

• To be promulgated in November 2013

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Development objectives

The HKMA promulgates four development objectives to enable the public

to benefit from the innovative services and at the same time to enjoy

safety and security:

• Ability to download multiple payment services onto a single NFC-

enabled phone

• Payment service continuity despite switching from one mobile network

operator to another operator

• Payment service continuity despite changing one’s NFC-enabled phone

• High level of security in line with international standards and relevant

regulatory requirements

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Latest NFC Market Update

Issuance side

• Two major banks have launched the NFC mobile payment services. A few

more are planning to launch the services by end of 2013

• Apart from credit cards on mobile phones, stored value cards on mobile

phones will also be available

Acceptance side

• Different card schemes are promoting NFC mobile payment. Contactless

card readers, supporting multiple card schemes, are being installed in

merchant shops

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How does NFC fits into the new legislative

approach?

NFC is a communication devise – it all depends on what type of

payment systems NFC is serving:

• Debit card facilities – subject to designation regime

• Credit card facilities – subject to designation regime

• Stored value facilities – subject to licensing regime

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Thank you!