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  • 1. Prepaid Financial Instruments Analysis Singapore example
  • 2. December 2000
      • “ Electronic money will be made legal tender in Singapore by the year 2008 and every merchant on the island republic will be required to accept it from customers”
      • In Singapore, the monetary authorities plan to issue electronic money themselves rather than just certifying it.
  • 3. Central Bank Role in E-money
      • If a central bank wants to play a leadership role in the local development of electronic money, it obviously has a range of options: it can issue e-money itself (Finland), it can participate in an operator (South Korea and perhaps Kyrgyzstan), it can impose standards for private initiatives (India), it can play a coordinative and supportive role in an industry-led standardization process (South Korea again), etc.
  • 4. Electronic money
    • Electronic money more commonly known as "stored value cards/facility" (facility- indicates device neutrality-card, virtual card, mobile or other technology) in Singapore can be categorised into single purpose stored value (SPSVFs) and multipurpose stored value facilities (MPSVFs).
    • SPSVFs can only be used to pay for goods and services offered by the issuer (eg prepaid phone cards). In contrast, a MPSVF also allows cardholders to pay for goods and services offered by other merchants or organisations.
  • 5. Stored value facility - Definition
    • “ Stored value facility " means —
    • (a) a facility (other than cash), whether in physical or electronic form, which is purchased or otherwise acquired by a person (user) to be used as a means of making payment for goods or services up to the amount of the stored value that is available for use under the terms and conditions applying to the facility , and payment for the goods or services is made by the holder of the stored value in respect of the facility (rather than by the user); or
    • (b) all the facilities referred to in paragraph ( a ) provided under the same terms and conditions;
  • 6. Multiple payment SVF – Who can issue?
    • Section 77A of the Banking Act states that only banks authorised by MAS can issue stored value instruments that have multiple payment capabilities.
    • Under the new regime, - Payment Systems (Oversight) Act - which took effect on 23 June 2006, multi-purpose SVFs with stored values below S$30 million and single-purpose SVFs may be issued by any entity. Such SVFs do not require the approval of MAS.
  • 7. Approved Widely Accepted SVFs
    • As of June 2008, only two WA(widely accepted) SVFs have been approved by MAS.  They are the "CashCard", introduced by Network for Electronic Transfers ( Singapore ) Pte Ltd (NETS) in November 1996, and the "ez-link Card" introduced by EZ-Link Pte Ltd in April 2002.
    • Consumers can choose to pay later (credit cards), pay now (debit cards), or pay before while/prior to making a purchase (SVF). Some banks issue multi-function cards with more than one function.
  • 8. Usage statistics
  • 9. Usage statistics
  • 10. Justification for liberalisation
    • Multi-purpose SVF when operated on a small scale present low risk in terms of potential loss of stored value to their users. The old regulatory regime was therefore considered unnecessarily restrictive. It was decided to give the market more flexibility to meet consumers' needs, and encourage competition and innovation among different providers.
  • 11. Justification
    • The framework provides a consistent basis for MAS to oversee payment systems and SVF in Singapore. It also liberalises the SVF market to encourage competition and innovation, and to better meet consumers' needs. This risk-based regulatory framework addresses the need for safety and efficiency in payment systems, and provides some protection for consumers using large-scale SVF, while avoiding unnecessary or excessive regulation of market players.
  • 12. Regulatory Issues
    • Is stored value bank deposit?
    • Should it be insured?
    • Redemption – payment/disposal of unclaimed balance
    • Expiry period
    • Consumer protection & disclosures
    • Regulatory compliance costs
  • 13. Singapore e-money principles
    • Principle 1: Holders should provide for a timely redemption of stored value in the SVFs
    • Principle 2: Holders should ensure that their SVFs operate in a secure and reliable manner
    • Principle 3: Holders should ensure that the rights and responsibilities of all stakeholders of the SVFs are fair and clearly defined.
    • Principle 4: Holders should provide adequate disclosure of users’ rights and obligations
    • Principle 5: Holders should implement adequate measures to prevent the use of SVFs for money laundering and terrorist financing.
  • 14. Section 18:Royal Decree Thailand
    • In the consideration of the application for the registration in this Royal Decree, the service provider shall be required to submit the application in accordance with the rules, conditions and procedures as prescribed by the Bank of Thailand in which at least consists of the following lists:
    • (1) a policy or plan for undertaking payment service business;
    • (2) an operation plan for undertaking payment service business;
    • (3) an administration and risk management system;
    • (4) an internal control system;
    • (5) a policy and security standard of information technology system;
    • (6) the possibility study and the risk assessment for providing service including an contingency plan.
  • 15. Economics - Making prepaid work
    • [Richard Allen] Why would anyone use a prepaid card? I've been doing a survey of some U.K. products in that space. Typically, it costs £10 to get a card, a pound or so just to load some value, 50p minimum to buy something with it, a couple of quid to draw money out of an ATM, 3% currency charges for overseas use, and so on. Many of them charge a monthly fee of around £5 in return for lower charges, but they’re still expensive one way or another. Yet the market is still growing. Some of that growth is explained by the growth in online gaming, but I wonder if remittances might also be a strong growth driver.
  • 16. Gift card – US revenue estimates
    • Sale of $ 50 Gift card
      • $ 5 profit on card use for purchase
      • $ 1.50 inducing customer to spend more than card value.
      • $ 0.20 float income
    • Less expenses on card issue & processing $ 2
      • Net earning $ 4.70
      • Branded card in comparison earn about $1
  • 17. Branded card economics - US
    • Purchase fee $ 3.95
    • Merchant Interchange fee $ 0.70
    • Monthly fee $ 2.50
    • Other fee $ 0.50
    • Float $ 0.20
    • Expenses
      • Processing & Plastic $ 3.0
      • Customer Service $2.35
      • Marketing $ 1.0
      • Fraud $ 0.50
  • 18. PayPal and stored value facilities
      • – Majority of payments are funded in real-time
      • – Stored values earn no interest
      • Net total payment value for 2007 was US$47 billion
      • – Increase of 33% y-o-y
      • Revenues for Q42007 was US$563 million
      • – Increase of 35% y-o-y
      • – International business contributed 44% of Q42007 revenue
      • Transacted about US$1,806 in payment volume every second in Q42007
  • 19. PayPal in Singapore
    • PayPal™ payment service is regarded as a stored value facility under Singapore law.
    • Cash cannot be directly placed into the PayPal System, nor withdrawn
    • Primary products
    • – Stored value facilities for online purchases
    • – Payment processing for online vendors, auction sites and corporate users
    • – Quasi-Cash P2P transfer
    • Other services* (Only available in the United States)‏
    • – PayPal Money Market fund
    • – PayPal credit and debit cards
    • – Invoicing services
    • PayPal Pte. Ltd., the Holder of the PayPal™ stored value facility, does not require the approval of the Monetary Authority of Singapore.
  • 20. PayPal – Regulatory compliance
    • United States
    • – Regulated as a Money Service Business (i.e. Money Transmitter) in 29 U.S. jurisdictions
    • – Compliance to U.S. Patriot Act and Banking Secrecy Act
    • European Union/United Kingdom
    • – Licensed as an electronic money issuer under the FSA in the U.K.
    • – Regulated as a bank by Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg
    • – Compliance to the EU Anti-Money Laundering Directives Australia
    • – Granted Australian Financial Services license to operate as a non-cash payment facility
    • – Compliance to AUSTRAC AML/CFT Act and Rules
  • 21. Interoperability
    • In June 2006, the new Singapore Standard for Contactless ePurse Application, SS 518 CEPAS, was launched. Available for industry use, the SS CEPAS is a world's first nationwide interoperable micro-payment platform that bridges multiple sectors - in particular the transit and retail e-payment space.
    • The aim is to reduce the number of paper-based transactions and double the transaction value of card-based payments, e-money schemes and mobile payments from S$25 billion to S$50 billion by 2010.
  • 22. Critical success factors
    • Cost containment
    • Scale – millions of merchants, billions of transactions
    • Universality of acceptance
    • Seamless movement of funds one channel to another
    • Seamless access across devices/technologies
    • Collaborate to compete
  • 23. Lessons learnt
    • 1. Always start with the customer: what are you trying to solve for him or her?
    • 2. Do not use technology as a starting point to develop solutions
    • 3. Payments is a ‘two sided market’: if you are not able to convince at least 80 to 90% of both sides (the payer and payee) to join, you will fail
    • 4. The offering has to be easy to understand, simple to use, available everywhere, at a reasonable price
    • 5. Start with a very small number of people to design the product from a customers’ perspective – do not compromise!
  • 24. Indian Model
    • Designate a bank to issue e-money.
    • Authorise private e-money dealers EMD's to purchase and sell e-money. Telco, Payment processors, Real/virtual card service providers amongst others can become EMD's apart from banks/Post Office & Microfinance etc.
    • Set up e-money switch to connect hosts of of EMD's. This will be owned and managed by a new Section 25 company (EMC), which manages the float accrued by issue of e-money. It will also act as e-Money Authority overseeing e-money operations & granting approval for EMD’s & monitoring their operations.
    • EMC will regulate fee for issue & redemption of e-money like TRAI.
  • 25. EMD's functioning
    • Purchase e-money from designated bank at pre-determined discount – compensation for loss of float income and carrying cost of e-money.
    • Open e-money accounts (EMA) for consumers, merchants & billers.
    • Allow access to EMA to consumers through one or more of channels - web, mobile, card (real/virtual) or any other technology.
    • Honour e-money claims received from consumers, merchants & billers received directly or through e-money Switch
    • Collect fixed fee of Re 1 per transactions from merchants & billers - free for consumers.
  • 26. E-money Merchants
    • Register with e-money company. Thailand Royal decree model for registration of e-money entities could be adopted.
    • Open bank account and e-money account with e-money designated bank.
    • Maintain liquidity of bank balance in both accounts to carryout daily operations and fund them in real-time.
    • Play a promotional role in enrollment of consumers, merchants & billers including govt. undertakings.
    • Actively contribute to transaction growth & make e-money widely accepted in the market for all goods & services
  • 27. E-money Merchants
    • Could be a small corner shop to a large transport undertaking, govt. departments, public utilities, educational institutions, hospitals & all types of businesses.
    • Multiple methods of e-money acceptance
      • web, mobile, card reader etc (one or more)‏
    • Transaction updated with EMD in real-time, EMA balance >Rs 10000 auto sweep to linked bank account. Bank responsible for KYC, AML, suspicious activity monitoring etc.
    • Purchase & sale of e-money at par value.
    • Pay transaction fee Re 1. Waived for small merchants <100 transactions per day promote e-money acceptance at small merchant locations.
  • 28. e-money Consumer
    • Anyone can open EMA.
    • Similar to having a demat account with DP – e-money account will be held by EMD who maintains and supports e-money transactions – receipts, payments. Handles transfers to linked bank account through the designated bank using NEFT or other means.
    • Temporary account – only permits payments, not reloadable. Max. Rs 10000
    • Regular account. Linked to a bank account & optionally to mobile number for mobile payments. Can receive e-money credit.
    • Once a day balance > Rs 10000 automatically transferred to bank account. Similarly inoperative balance > 1 year transferred to bank account.
    • Can be used in any e-money merchant location.
    • Balance can be redeemed by transfer to bank account.
  • 29. Advantages of model proposed
    • No controversy of bank deposit nature of e-money. (Unlike US FDIC GC 8 interpretations)
    • Enables Public, private and non-financial institutions participation. (Most countries have high entry barriers that have prevented meaningful participation thus limiting growth)
    • Minimum regulatory burden but without risking public money – no prudential norms. (see European E-money directive) Here survival depends on efficiency of operation and reach to service a large customer & merchant base.
    • Not required to be regulated like banks. Banking functions are best left to the banks; but areas where banks have no incentive to compete – handling the very small value transaction which does not fit into their cost structure routed to e-money channel with better efficiencies.
    • EMD can earn in e-money distribution & redemption. No interchange (Most debated controversy around the world with VISA & Master Card Fees)
    • No worry of unclaimed money not being restored to State (US escheat laws)