LegCo Paper No. CB(1) 2089/95-96(01)
Paper for the Bills Committee on the Banking (Amendment) Bill 1996
Proposed framework for the authorization and exemption of stored value cards
1. This paper briefs Members on the proposed framework for the authorization and exemption of stored value cards based on the provisions of the Banking (Amendment) Bill 1996.
The underlying principles
1. In developing the proposed framework, the HKMA considers that the following principles should be followed -
- it is important to maintain the stability of the payment system (and thus of the financial system as a whole). We should be careful therefore about extending access to the payment system beyond fully licensed banks to whom it is confined at present;
- at the same time we should not stifle innovation and should allow flexibility for service providers to improve the efficiency of their services to the public;
- these two considerations would argue that there should be some scope for non-bank issuers to issue multi-purpose cards, but that these should be more limited in scope than those issued by licensed banks. Only the latter cards should have the characteristic of "generally accepted purchasing power" which would make them more direct substitutes for paper currency or current accounts;
- it is important to ensure that the payment obligations of card issuers can be honoured;parties which have claims on the card issuers (e.g. the participating merchants);
- the main concern of the legislation should be with multi-purpose cards because of their analogy to cash and deposits. However, single-purpose cards also raise considerations of consumer protection which need to be addressed (though not necessarily in the Banking Ordinance).
Issue of multi-purpose cards by banks
1. In keeping with the principles set out above, only licensed banks would be able to issue multi-purpose cards which are unrestricted in terms of the goods and services which they may purchase. The usage of such "general purpose" multi-purpose cards would be limited only by the number of merchant outlets which are prepared to receive them. They thus have the characteristics of money, such as bank notes or current accounts. The justification for confining the issue of such cards to banks is that at present only they can issue bank notes or offer current accounts.
2. The proposed legislation in the BAB 1996 provides that banks will be deemed to be approved to issue multi-purpose cards. This acknowledges that they are already approved to carry on "banking business", including the payment and collection of cheques. It is important to note however that banks will not be exempt from the supervisory and statutory regime for multi-purpose cards.
3. In practice, the HKMA will wish to discuss with individual banks which wish to issue cards the policies and procedures which they will adopt to ensure that the scheme is properly managed. This will cover such aspects as chip security, card issuance procedures and controls, the linkage of a card to a particular account, safeguards against money laundering, float management and scheme close-down. In addition to any requirements of the HKMA, issuers will also be subject to the rules which will apply generally to all members of particular card schemes (e.g. Visa or Mondex).
4. The supervision of the HKMA will be backed up by the proposed legislation which will allow the HKMA to impose statutory conditions on the issue of cards and on the management of the float. In addition, the HKMA can impose a requirement on a bank to cease to issue multi-purpose cards.
5. We are satisfied therefore that the legislation gives the HKMA sufficient powers to ensure that the issue of multi-purpose cards is prudently managed by banks.
Issues of multi-purpose cards by non-banks
1. The legislation presently provides that non-bank companies should be able to apply for approval either as a deposit-taking company (dtc) or as a restricted licence bank (rlb) for the principal purpose of issuing or facilitating the issue of multi-purpose cards. In the light of comments by Members at previous meetings, it is proposed that this should be amended to provide for authorization only as a dtc.
2. The actual entity to be authorized would have to be a special purpose vehicle whose principal business is the issue of multi-purpose cards (or facilitating such issue). This is necessary to provide an identifiable balance sheet to which the capital adequacy and other provisions of the Ordinance can be applied. It will also help to segregate the assets backing the issue of the cards and reduce the possibility that other creditors will have a claim on such assets.
3. The normal supervisory and statutory provisions which apply to dtcs will apply to such special purpose vehicles except that, in respect of money which is taken in return for storing its value on a multi-purpose card, they will not be subject to the restrictions on the minimum size and maturity of deposits which apply to dtcs. It will be a condition of authorization that the special purpose vehicles will not engage in other types of deposit-taking or lending business. The normal (non-statutory rule) that a dtc must be at least 50% owned by a bank will not apply. However, the HKMA will as usual require the controllers of the special purpose vehicles to be fit and proper.
4. As with multi-purpose cards issued by banks, the HKMA will want to be satisfied about such aspects as chip security, risk management and the handling of the float.
5. It is envisaged that two types of entity will apply for authorization through this route -
- service providers such as transport or telecom companies which wish to issue multi-purpose cards for the main purpose of charging for the services they provide;
- the originators of electronic value in respect of schemes such as Mondex (such originators perform much the same function as issuers of bank notes).
6. A key issue to be decided is the range of usage of multi-purpose cards issued by service providers. While such cards will generally have a "core" use (e.g. payment for transport services), the issuer may wish to add other uses to increase the attraction and convenience of the card to holders. In keeping with the principles set out in paragraph 2 above, the HKMA believes that such ancillary or incidental uses should be allowed in the interests of efficiency and innovation, but in a way which avoids undue encroachment on the payment system which, under the Banking Ordinance, is presently confined to fully licensed banks. This will be a difficult balancing act and it will necessary to some extent to evolve policy in the light of practical experience.
7. In order to ensure as much consistency as possible it is proposed that the following principles will apply -
- multi-purpose cards to be issued by non-bank issuers through special purpose vehicles should be limited in terms of the range of uses (i.e. they might properly be described as "limited-purpose" cards);
- such cards should have a core use which is related to the business of the owners of the vehicle which issues the card;
- there may however be a number of ancillary or incidental usages which are intended to increase the convenience for card-holders. Such uses will be subject to the approval of the HKMA in advance. The card may not be used for other purposes without the consent of the HKMA;
- the card issuer will be expected to present an acceptable business case for the ancillary or incidental uses of the card. In general, the HKMA would expect to see some relationship or synergy between the core use of the card and the other uses. The other uses should typically relate to "small-ticket" items;
- the ancillary or incidental uses should not overwhelm the core use. Issuers would be required to demonstrate that the other uses would not exceed the core use in terms of the aggregate value of transactions.
8. In accordance with the normal principles of administrative law, these guidelines will be applied on a case-by-case basis. extent on "case-law" as particular schemes are put to us for approval.
Exemption criteria for multi-purpose cards
1. The draft legislation presently provides that the Monetary Authority may, by notice in the Gazette, declare a stored value card, or a class of such cards, not to be a multi-purpose card for the purposes of the Ordinance. Any such notice will be subsidiary legislation and will be subject to the vetting of Legco.
2. In general, it is envisaged that exemption would be granted where the risk to the payment system and to cardholders from a particular card is considered to be slight and where to require the issuer to be authorized would amount to regulatory "overkill". In this connection, consideration would be given to whether the card in question fell technically within the definition of "multi-purpose card" but simply replaced an existing non-regulated payment instrument such as travellers' cheques.
3. In deciding whether to grant exemption the HKMA would require issuers of exempt cards to demonstrate that the card scheme itself is sound (in terms of chip security, risk management etc.). The issuers themselves should be financially sound at the time of exemption, taking into account the status of the issuer (e.g. whether it is a public sector entity or a listed company), the amount of its paid-up capital and/or net assets and its past profit performance.
4. It is further proposed that to limit the risk to cardholders the maximum amount of value that can be stored on a card should not normally exceed a figure to be specified from time-to-time (say $1000 initially).
5. As regards the range of uses of an exempt card, it is envisaged that the same principles should apply as for limited purpose cards issued by special purpose vehicles (see paragraph 14 above). However, it is possible that the HKMA may wish to stipulate that the ancillary or incidental uses of the card should be more limited and be more directly related to the core purpose of the card. The rationale for this is that the more limited the uses of the card, the less implications it has for the payment system.
6. The HKMA may require issuers of exempt cards to provide statistical information on the number of cards issued, aggregate amount of stored value, number of transactions etc. to supplement the existing money supply statistics and to enable conditions relating to maximum stored value and usage of exempt cards to be policed. It will be important to stress publicly however that issuers of exempt cards will not be subject to ongoing supervision (in particular of their financial condition) by the HKMA in the same way as special purpose vehicles which are authorized under the Ordinance. We will require issuers of exempt cards to include a warning (eg in any promotional literature relating to the card) that the issuer is not subject to the supervision of the HKMA.
7. Under limited circumstances, the MA may consider exempting cards which merely replicate existing prepayment schemes e.g. traveller cheques. Such schemes may not meet the above requirements in their entirety but should be allowed to continue on the ground that their operation in their current form has been widely accepted for a long time.
Single purpose cards
1. As presently drafted, the Bill only applies to multi-purpose cards. Single purpose cards, defined as those where the card can be used only to purchase goods and services provided by the issuer, are outside the scope of the legislation. This is in keeping with the policy of most of the other countries we have studied which have tended to focus only on multi-purpose cards.
2. It must be admitted however that at the margin there may be a fine dividing line between single purpose cards and certain types of multi-purpose card (e.g. limited purpose cards). A single purpose card issued by a supermarket chain for example can be used to purchase a wide range of goods and services. Also, the amount which can be stored on some types of single purpose card may be much greater than on certain multi-purpose cards. The cardholder could be at risk in such cases.
3. It was for this reason that after our initial discussion with the Legco Finance Panel, we proposed to bring forward a Committee Stage Amendment which would limit the amount that could be stored on a single purpose card to not more than $1000. Any single purpose card with a higher stored value would automatically fall into the category of a multi-purpose card and would be dealt with under the regulatory regime described elsewhere in this paper, i.e. the issuer would either have to be authorized or the card be given a specific exemption by the HKMA.
4. In preparing this paper, however, we have had second thoughts about the rationale and desirability of this -
- first, it is not clear that the HKMA has a locus to regulate single purpose cards which are advance payments for particular goods and services. This appears to have little to do with the traditional banking supervisory concern of protecting the stability of the banking and payment system. Multi-purpose cards are more directly related to this function because they can be used to pay for goods and services provided by third parties, not simply the issuer of the card;
- second, and related to the first point, there are many instances of advance payments at present (e.g. in video shops) which are exempt from the Banking Ordinance. Some of these schemes may be converted to smart cards in future, when the costs of the technology come down. If so, this will result simply in a change in the medium of payment rather than in the basic concept. It is not clear that this in itself should bring such schemes within the scope of the Ordinance;
- third, if single purposes cards above a certain value are brought within the statutory framework, the HKMA will be faced with the choice of either granting or refusing authorization or granting an exemption. To authorize under the Banking Ordinance, say, the issue of a smart card by a video shop seems like over-regulation and is taking us a long way from the basic purpose of the banking legislation. However, for the HKMA to grant an exemption, may give rise to a moral hazard problem since cardholders may assume that the exempt card has been given an official seal of approval. (Admittedly, this problem also applies to exempt multi-purpose cards, but it should be on a more limited scale. Also, the fact that only multi-purpose cards below $1000 would be exempted would impose an additional safeguard.)
5. This is not to say that there may not be concerns on consumer protection grounds in relation to single purpose cards. But we have come to the view that this should be addressed in the context of advance payments in general, rather than simply one variant of such schemes.
The way forward
1. The above framework sets out the basis on which the HKMA would propose to exercise the various discretions granted to it under the BAB 1996. It would be our intention to further elaborate these guidelines in consultation with other interested parties, with a view to including them in the HKMAs published Guide to Applicants under the Banking Ordinance.
2. The HKMA would welcome the views of Committee Members.
Hong Kong Monetary Authority
Last Updated on 15 December 1998