Asia as a catalyst for the dramatic growth in the sector. The rapid uptake in the Kenyan mobile money transfer service, M-Pesa (operated by Vodafone affiliate, Safaricom), which attracted 2.37 million subscribers in a year, is seen as evidence of how a favourable regulatory regime can encourage the market, offering banking to the unbanked.
However, questions have been raised about whether schemes such as M-Pesa are regulated tightly enough and whether, despite their success, they are sufficiently robust.
Some argue that a more flexible approach is needed in Europe to encourage entrants into the m-payment market by lowering the compliance burden and hence the investment risk. By the European Commission’s own admission, the current European m-payments regime, the Electronic Money Directive (EMD), suffers from inherent weaknesses which have held back innovation and expansion in the market.
Part of the difficulty has been that significant legal uncertainty arose from how the core terms ‘electronic money’ and ‘electronic money institution’ were defined in the EMD. Faced with uncertainty as to whether their services would fall within these definitions and trigger the restrictive authorisation requirements, many mobile operators and other potential market entrants chose to sit on the sidelines.
Similarly, the EMD’s prudential regulation was disproportionate. It required m-payment operators to have at least 1million euro in initial capital in order to enter the market as well as maintaining high quality assets during operation. The m-payment regime was closely linked to regulation of credit institutions and failed to recognise the differing risk profiles between these type of offerings.
As a result many m-payments operators’ only viable option was to shelter under the umbrella of an established financial institution, which discouraged them from offering a more extensive range of services.
The way forward?
Recognising these challenges, and the forecast potential to increase the circulation of electronic money in Europe ten fold by 2012, the European Commission and Parliament have approved proposals for the replacement of the EMD. The proposals are due to be implemented by member states by 2011 and will tie the regime more closely to the EU Payment Services Directive.
The new framework should be welcomed by those already operating in the m-payments market and by prospective new m-payments operators as they go some way to accommodating the concerns that have hampered the industry.
In particular, they reduce the initial capital requirement from 1million euro to 350,000 euro, but introduce a requirement to hold at least 2% of the e-money in issue as ongoing capital. Importantly, they also simplify the definitions of ‘electronic money’ and ‘electronic money institution’. In doing so, the proposals should remove some of the legal uncertainty about the application of the rules.
It is also particularly helpful that telecom service providers will fall outside the Directive where they do not act only as an intermediary between the end customer and the supplier of goods and services. In other words, if they add value to the transaction (such as by search or access), and collect the payment themselves, they will not be subject to the new framework. Previous guidance from the UK Treasury has indicated that “As most mobile operators in the UK add value to the payment services they currently offer the customers …. the majority are expected to fall outside the scope of [this directive].”
In addition, the new proposals will for the first time allow e-money institutions to carry on other business activities (as well as issuing e-money) so long as they safeguard funds from payment service users.
The proposals for a new streamlined EMD offer greater legal certainty and a more proportionate regulatory regime, recognising the more limited risk associated with mobile payments and e-money more generally. So this is welcome news for m-payments.
The challenge will be to see how far all member states implement the new regime consistently. And for those already in the m-payments business, there will be questions about how to prepare for the changes and the anticipated new competitors.
Denton Wilde Sapte is an international law firm with over 600 lawyers. To ensure it delivers the sharpest focus to its work, it has focused its business on four core client sectors: Technology, Media & Telecoms; Energy, Transport & Infrastructure; Financial Institutions; and Real Estate & Retail. john.worthy@ dentonwildesapte.com
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