On November 13, 2015, the Hong Kong Monetary Authority passed a new regulation concerning Stored Value Facilities (SVF).
During the one-year transitional period, issuers of SVFs must apply for a licence, which would cost HK$100,000 (US$12,903) a year. After that, it will be “illegal for any issuers, unless being exempt, to issue or operate any stored value facilities without a licence.”
Key terms involving Stored Value Facilities
SVFs have the function of storing a sum of money paid into it and can be used as a means of payment for goods. In short, SVFs are a payment tool.
There are few categories that SVFs that can be broken down into: Multi-purpose SVF (MPSVF), single-purpose SVF (SPSVF), device-based and non-device based SVFs.
- In Hong Kong, the Octopus card is the best example of a device-based multi-purpose SVF. You use the card to pay for goods and services from third parties. That includes hopping on the MTR, buying your coffee and picking up a snack at the convenience store.
- The single-purpose SVF can only be used to purchase goods and services offered by the issuer. An example would be the Starbucks card that you use to collect loyalty points and purchase coffee.
- Device-based SVFs are stored on physical items like the Octopus card.
- Non-device based SVFs have their value stored on a network — computer or mobile — and not a physical device.
- Retail payment system (RPS) refers to a payment system that handles the transfer of transactions. So, think credit cards, debit cards, etc. (From a startups point of view, this would be less relevant.)
- Float is the amount that has been charged but hasn’t been paid to the merchant.
Current landscape for SVFs
At present, only device-based MPSVFs are regulated in Hong Kong. Octopus Cards are licensed under the Banking Ordinance as a deposit-taking company.
With the passage of this ordinance, both device-based and non-device based MPSVFs will require licensing.
Implications for Hong Kong’s fintech scene
Fintech, or financial technology. The ubiquitous yet mysterious word usually references startups that are using technology to provide alternative or “disruptive” financial solutions.
Fintech has been a buzzword as of late, rising as one of the most compelling sectors in Hong Kong’s startup scene. Attend any startup event or conferences touting creativity and you’ll hear something along the lines of how Hong Kong is well positioned to rise as a fintech hub akin to Singapore and Australia.
This would be exciting as fintech can ease payment processes and money transfers, generally moving a traditional industry forward.
Hong Kong has already seen an increase in fintech-centric accelerators: There’s the FinTech Innovation Lab by Accenture; the DBS Accelerator powered by NEST and FintechHK’s SuperCharger Accelerator at Tuspark, supported by HKEx.
FintechHK currently lists 54 fintech startups in its directory, a figure that has doubled over the past few months.
But Hong Kong’s new regulation might create a barrier for startups that need to deal with SVFs. Neighbouring China has been openly experimental with systems like Alibaba’s Alipay and Tencent’s WeChat Wallet. Singapore does not have a mandatory licensing system for SVFs either.
“The people that might be most impacted are startups that are doing something that might stray into this area. If what you’re doing has clever technology attached to it but you’re not a huge business, suddenly you’re faced with this licensing requirement, which introduces a substantial increase in regulatory procedures,” says Mark Parsons, Partner at Hogan Lovells.
“Regulators want to make sure that these payment systems aren’t being used to do money laundering. The other concern is that consumers aren’t being misled or losing their deposits. So [regulators] are trying to strike a balance between encouraging innovation and enforcing the law,” continues Parsons.
In any case, many still see Hong Kong positioned to become a competitive fintech center, with its standing as a huge financial center with both human and capital resources.
Not all fintech startups might necessarily be affected either. One example is TofuPay, a fintech startup in Hong Kong that wants to alleviate problems in the online transaction process such as customer service, ease when setting up merchant accounts and provide an affordable, transparent fee structure.
“For now we don’t plan to create a ‘TofuPay wallet’ so the new legislation won’t really impact us. I guess it’s just another hurdle to work around for early-stage startups and an annoying admin issue for later-stage ones,” TofuPay Co-founder Anthony Fitoussi told e27.
Whether or not new companies wish to dabble into wallet schemes, some find the flat fee and license not aligned with the best interests of startups.
“In Hong Kong, no matter your volume or business, you need to have HK$25 million (US$3.2 million) in equity [to get a license]. But other places, like Europe have more progressive schemes. This is especially helpful if you consider the hardship of raising funds,” said Aurélien Menan, Co-Founder and C.E.O,” at Gatecoin, a regulated digital currency exchange based in Hong Kong.
Menant adds that he doesn’t see good online wallet solutions in Hong Kong. “There is room for players to disrupt the market, but this regulation might prevent competition from launching,” he says.
To develop Hong Kong’s fintech industry, government support and clear regulations that spur growth are needed.
What are the benefits of this new regulation?
1. Regulations define activities that have already been going on
As Joseph Wang, CSO of Bitquant, a Hong Kong-based financial technology laboratory that works with digital currency, says:
“Usually, the Hong Kong government works like a referee, which is why Hong Kong is a bit slower on adapting things, say, compared to Singapore.”
This regulation makes HKMA an authoritative voice in defining what is already happening.
2. It provides a road map for companies like Alipay to move into Hong Kong.
“With big players like AliPay entering, there is now a need [for regulation]. It’s a structure by which a large company could come to Hong Kong and be regulated by something that’s not a complete bank,” says Wang. Current players like PayPal have been operating on a non-device based payment system, and until this new law came out, they didn’t need a licence to operate.
How might the regulation negatively affect fintech startups?
1. Higher immediate costs, as well as further regulations in the future.
Again, the license costs HK$100,000 (US$12,903) a year, a hefty price tag.
“If you’re a large bank or large company, you already have a mechanism to communicate with regulators,” says Will Ross, formerly of HSBC and now Partner at Nest. “For startups, this could be trickier.” It also becomes a criminal offence if companies don’t follow these regulations.
2. Regulating a field that is still in the process of developing might stifle it
As Wang notes, it’s also difficult to make a case for companies that might not even exist yet. “There could be a company that may be impacted by the regulation, but it’s hard for them to give their input if they don’t even exist yet. The moment something is a law, it becomes hard to reverse,” he says.
Technology moves faster than laws do, and setting an ordinance like this has an impact on innovation.
3. Regulations confuse small companies.
“You can’t give a small startup 200 pages of rules and tell them to go figure it out.If you’re a college student [who] is fresh out of college, you really don’t know,” says Wang.
TL;DR: I’m a fintech startup, how does this apply to me?
You won’t be affected if:
- You’re using SPSVF (i.e., online clothing retailers who want to do e-payments with their own card, or a shop distributing cards for loyalty points or cash).
You will be affected if:
- You are doing MPSVF, both device-based and non device-based. (i.e. Meaning, you are taking and storing money into your account. But this does not mean that you are using an app that connects someone with a merchant. If you do the latter, you’re not handling any money.)
What are my options?
- Go through the list of exemptions and see if you qualify. Use resources, such as the guide that Parsons has written.
- If you do need a licence, under the current regulation, your company must have HK$25 million (US$3.2 million) in capital. You must also meet “fit and proper” requirements. (i.e. passing criminal and bankruptcy records tests and having suitable qualifications to carry on the specific business or role.) If you don’t meet the minimal capital requirements, you need to raise capital.