SVF Licensing Regime in Hong Kong and Current Landscape
Stored Value Facilities (SVF), as defined in the Payment Systems and Stored Value Facilities Ordinance of Hong Kong (PSSVFO), are any facilities that can be used for storing the value of an amount of money that is paid into the facility from time to time. A SVF should also be able to act as a means of payment for goods or services, or to another person. For example, a prepaid card is a SVF while Apple Pay is not since no value is stored inside the Apple pay account. SVF can be further classified into 4 categories:
1.) Single purpose SVF – SVF that can only be used to purchase goods and services provided by the issuer.
2.) Multiple purpose SVF – SVF that can be used to purchase a wide range of goods and services, or to make a payment to another person.
3.) Network based SVF – Value is stored in the issuer’s payment system.
4.) Non-Network based SVF – Value is physically stored in the SVF.
The following graph shows examples of each type of SVF:
Since 2007, SVFs in the form of internet/mobile payment and prepaid cards have been developing steadily in Hong Kong. In order to ensure both the safety of the SVF operation in Hong Kong and adequate protection of the float, HKMA commenced operation of the PSSVFO on 13 November 2015 with a 1 year transitional period. Starting from 13 November 2016, most SVFs are subject to a mandatory licensing regime, making it illegal to operate without a license. This article will describe the current SVF landscape, the licensing regime and the key challenges to obtaining a SVF license in Hong Kong.
Current SVF Landscape
On 25 August 2016, HKMA granted the first batch of SVF licenses to 5 companies: Alipay, Money Data Limited, TNG, HKT Payment Limited and Octopus. In November 2016, HKMA granted the second batch of SVF licenses to entities including 33 Financial Services Limited, Autotoll, ePaylinks Technology, K & R International, Optal Asia, PayPal, Transforex and Unicard. To date, HKMA has granted 16 licenses, including those to licensed banks (regarded as SVF licensees). As of Q4 2016, there are more than 40 million SVF accounts in use with a total SVF float and deposit of HKD 6,784 million.
Registration Requirement and Maximum Stored Value
For the 5 SVF licenses under the first batch, we have analyzed minimum registration requirements for opening an account with a stored value at or below HKD 3000. If a person would like to store more than HKD 3000, ID and proof of address is required on top of the minimum registration requirement. The following table illustrates the registration and stored value requirements of the products:
Each of the 5 products also have different functionalities. While all of them can be used for online payment, only 3 of them can be used in physical stores, and only 2 offer physical cards. The below table is shows a comparison of their functionalities.
The SVF Licensing Regime
Which type of SVF is exempted?
The licensing regime covers all types of SVF with the following exemptions:
1.) SVF issued by authorized institutes
2.) Single-purpose SVF
3.) SVF used for certain cash reward schemes
4.) SVF used for purchasing certain digital products
5.) SVF used for certain bonus point schemes
6.) SVF used within a limited group of goods or service providers
7.) SVF used within certain premises
8.) SVF where the risks posed to the user/potential user or payment/financial system of Hong Kong are immaterial.
HKMA will grant the SVF license to an applicant only if HKMA is satisfied that all the minimum criteria applicable are fulfilled and the applicant will continue to meet the minimum criteria after the license is granted. The following table shows the 10 minimum criteria set out by HKMA:
While the processing time can vary case by case, our experience suggests it usually takes 9 months to 1 year to complete the end-to-end process. Below are the 5 steps to obtaining a SVF license:
Application for the SVF license is a massive exercise which takes a long time. During the process, an applicant may face the following challenges:
The whole license application process might take a longer time than expected if it is improperly managed. It is not uncommon that the applicant has everything ready to launch SVF operations except the license. This will create additional costs and potentially missed market opportunities or potential customers.
Internal and external collaboration
License application requires cooperation and participation from various business units (i.e. legal and compliance, IT, operations, finance etc.) and senior management. It is important for all involved parties to understand the importance of this exercise and prioritize the works appropriately. Additionally, applicants would also need to work with various external stakeholders (i.e. the MA, custodian bank, auditor, independent assessor, system vendor etc.) in a consistent, timely and professional manner.
Large scope footprint
Given the wide spread impact of this exercise across various business functions, the company would need to ensure it has sufficient expertise to engage the necessary business units and stakeholders.
One of the main criteria HKMA will review under the SVF licensing regime is protection of the float. Although specific requirements may vary based on different business models, HKMA will generally require:
1.) A robust system to be in place to safeguard and manage the float;
2.) A separation of float from its working capital;
3.) A trust arrangement with licensed banks;
4.) Bank guarantee and custodian account;
5.) An independent legal opinion validating the arrangement.
Financial technologies (FinTech) aiming to reform the financial industry have become a hot topic as of late. The market for FinTech is huge and adoption of SVF, being part of the Fintech umbrella, has especially great business potential in Hong Kong. As the city is an international financial centre, it could serve as a regional base in APAC for SVF companies to operate and expand in the region.
SVFs make payments easier, faster and more efficient. At the same time, new risks arise in terms of operational risk (e.g. protection of the float, business exit etc.) and IT security risks (e.g. payment security, data security etc.). This is why regulation is needed in order to strike a balance between its benefits and risks. SVF licensing is not an easy process, and companies which would like to have a share in the SVF market need to prepare themselves to face the challenges ahead.