With the Payment Services Act taking full effect this month, payment services firms must meet new compliance regulations if they want to retain consumer trust.
Most consumers have no idea that they joined a global market valued at USD$4.4 trillion with just the touch of a button last year.
That staggering figure is the estimated value of all digital payments made worldwide in 2020. Some of the activity can be attributed to the increased use of contactless payments arising from the COVID-19 pandemic, but the trend has been steadily rising for years and shows no signs of slowing. By 2023, consumers are expected to drive the market to an astronomical USD$6.7 trillion, with more than 6.1 billion people transacting.
With so much of the globe increasingly turning to contactless payments — as well as e-wallets and digital currencies — more financial technology (FinTech) companies are entering the market as payment services providers (PSPs). Their objective is simple: to streamline and accelerate financial services.
Singapore, Capital of PSPs
Interestingly, within the PSP space, Singapore, the tiny nation-state with the giant financial reputation, has an outsized presence. Ranked as the number three FinTech “hub” in the world behind only the United States and the United Kingdom, the Asian powerhouse has seen a boom in digital payments and the number of PSPs competing for market share. This is thanks in part to its central bank and financial regulatory body, the Monetary Authority of Singapore (MAS), which has prioritized the growth of the nation’s FinTech standing.
Another driver, still nascent, is the growing adoption of digital payments in wider Southeast Asia. Along with Singapore, this regional demand, with 600 million possible users, is considered to be a “megamarket” for digital consumer finance. Forward-leaning regulators like the MAS and numerous global and regional FinTech leaders know this well, and they are seeking to serve this burgeoning market.
Payment Services Providers
Built for speed and convenience, PSPs enable customers to transact with merchants who are connected to the broader financial system where payment processing takes place.1
PayPal, Stripe, Ant, Adyen and Grab are five prominent PSP players, but there are many more of varying size, scale, and maturity.
Enter the Payment Services Act
Of course, rapid expansion can sometimes lead to trouble, especially when innovation outpaces or runs afoul of regulation. To help mitigate such risks and govern the enormous growth and reach across the consumer landscape, the MAS passed the Payment Services Act (PSA) in 2019. The aim of the act is to consolidate regulation, mitigate risk and offer greater confidence to both consumers and merchants to adopt digital payments.
It’s expected that the PSA will lead to greater regulatory scrutiny, inquiries and enforcement actions where an activity or service has a direct payments nexus and the service provider processes transactions for merchants.
Knowing the requirements of the PSA is the first step in driving organisational readiness — from both the perspective of PSPs and key PSP partners and collaborators such as incumbent banks. Establishing ‘readiness’ today will help avoid problems tomorrow by supporting smarter and sharper compliance.
What does readiness mean for PSPs and partners like incumbent banks seeking to do business with PSPs?
PSPs seeking to serve customers more rapidly and within the parameters of evolving industry and regulatory guardrails must be increasingly sensitive to compliance and operations resourcing needs, present and future. However, identifying and recruiting experienced PSP compliance professionals is difficult in such an emerging and competitive space. Therefore, PSPs must be extremely clear in the fitness and propriety, experience and competence requirements of their compliance leadership — a PSA imperative.
Experience dictates two best approaches in this regard, each with clear advantages and challenges.
- Shape existing product experts to take on the compliance role.
While these individuals are fluent in the unique features of the business and the products, they often do not bring the financial services compliance experience necessary to monitor and implement compliance capability.
- Recruit compliance experts into the PSP from traditional banks and train them on the business and product.
These individuals know the perils of failed compliance controls, but PSP culture often represents a sea change from a traditional bank’s culture and more mature compliance programmes. In addition, the business and products are often quite different from what many experienced compliance practitioners are accustomed to. Often, this results in short-lived stints in these sensitive compliance roles.
For PSP partners…
Incumbent financial services organisations such as banks and credit card companies who are generally eager to partner with PSPs should consider several readiness lessons. With one exception, regulations and guidelines are by and large fragmented and/or in a nascent state of development. In general, the industry has been largely left to its own devices to cut a path to compliance.
In this realm, business continuity planning and reputational risk exposure analysis are critical and deserving of additional discussion as well as the development of creative ways in which to ‘trust but verify’.
Fortunately, precedent established by well-worn compliance journeys in the correspondent banking, commercial and retail banking spaces provide a good foundation from which to start. Established, risk-based due diligence frameworks and emerging technologies to detect merchant fraud and customer-related risks and issues can also be leveraged.
Millions of APAC Consumers Coming Online
In addition to the effects of COVID-19, other trends driving demand in the PSP market in Singapore and beyond are well worth noting. As mentioned earlier, a rapidly expanding online economy in Southeast Asia driven largely by mobile devices is flowering. According to one report, more than 360 million online users are now online in Singapore, Malaysia, Thailand, Philippines and Indonesia, with another 22 million users joining via mobile every year.
Further opportunity arises with the expansion of digital payments made outside traditional banking, remittances and money-changing services. Indeed, this phenomenon was also an impetus for the PSA.
Companies hoping to capture the vast potential within Singapore’s PSP environment need to be ready. It’s all about knowing the rules and complying when billions of dollars are at stake.
1: In addition to merchant transactions, payments cover e-wallets, e-money, cryptocurrencies, domestic and cross-border money transfer services.
2: The PSA came into effect on 28 January 2020. However, MAS granted an exemption from holding a license under the PSA until 28 January 2021.