Murder on Chundrigar Road: How SBP killed the payments/fintech startup industry.

For those who don’t know, I.I. Chundrigar Road is the road on which the Central Bank of Pakistan, i.e. State Bank of Pakistan is located.

Last week they released their Rules for Payment System Operators & Payment Service Providers, which essentially killed the Payments & Fintech startup industry of Pakistan.

Murder on Chundrigar Road is aptly justified.

In the events following the public release of the Rules and my article (linked above) on the given subject I’ve been fielding a lot many calls from individuals, businesses, startups, banks, etc. who are all deeply concerned with SBP’s announcement.

I’ll try to summarize some of the points I’ve been repeatedly citing on the phone:

Payment Service Provider

A lot of people are asking, if one has made an e-commerce software (as a Payment Service Provider) or more specifically as a marketplace (to be the merchant on record) do these new rules apply to them. Evidently, the answer is Yes.

If you are an aggregator, and even if you have your PF (Payment Facilitator) status approved by the Card Schemes (VISA, MasterCard, American Express, et. al.) you would need to get a PSP license from SBP.

It is no small wonder that regulators who are known for their strictness (like New York and California) both provide an exemption to the status of registering and getting licensed in their state if you are a PSP.

Even the European PI (Payments Institution) license, makes such an exemption. What makes Pakistan such a unique case that a marketplace holder would need to be licensed?

Consumer Disclosures and Protection

A major element missing in the Rules is regulatory framework pertaining to consumer disclosures and consumer protection guidelines. In almost every conceivable market that does license, these guidelines are very clearly published as far as consumers are concerned. The US counter example is the Regulation E from the Consumer Financial Protection Bureau, specifically they Consumer Protection Act.

It seems, in haste, SBP has not paid any attention to these rules/guidelines nor have influenced them in the application process in any manner.

Authorized Agent

Then there is the whole missing scenario of an Agent. An Agent, also referred to as a Sub-Licensee or an Authorized Delegate, is completely missing from the Rules.

An Agent in the greater context of licensing is someone to whom the following three rules would apply:

  1. They are authorized to on-board a transaction on behalf of the Principal Licensee.
  2. The flow of funds flows through them, and in return through the Principal Licensee.
  3. They are an extension of your organization’s marketing, i.e. they are only allowed to promote and/or extend the reach of the Principal Licensee’s core product &/or service.

It would appear from the Rules that if an organization were to obtain such a license for a PSP or a PSO, they cannot delegate further. The Rules don’t mention it. The ability to classify specialists (as Agents) who would be able to pick up transactions on your behalf is not provisioned for.

The Original Draft Rules

Then, lets look at the original draft rules that were posted on SBP’s website:

Both these documents were put up on the SBP website in summer of 2013. The documents are amalgamated excerpts from license applications put in by three multi-national conglomerates. I am sure a couple of more applications might be in play, but I am not privy to those.

So much so, that the diagrams are literally extracted from the Euronet applications. In short. The start was all wrong.

What SBP should have done (and this is just a suggestion, they literally had 100s of options available to them), was to take an existing rule set for money transmission services and then modify those mature rules for our market. In particular paying special attention to what should be licensed and how.

The bundling of a PSP and a PSO in one, is just not the way other regulators play. It is wrong on so many fronts.

In the case of Superintendent Ben Lawsky, who is the head of NY’s Department of Financial Services, the approach to the Rules/Regulations governing BitLicense are being handled as follows:

  1. Draft Rules are posted for Comments/Questions.
  2. 120 Days period is provided for these Comments/Questions
  3. The Question/Comments that are submitted are open for all to see and who submitted them.
  4. The DFS then takes 30-60 days to incorporate the Comments/Questions and releases the Draft for RFC (Request for Comments). This basically means that the Draft is open for comments, and if you don’t agree with a particular clause, you have to provide your comments and an amendment to the clause (i.e. a solution).
  5. The RFC period is open for 120 days.
  6. After 120 days, the received RFC comments would be shared publicly, and then the finalized version of the Rules would be put up after 60-90 days.

However, in the case of SBP:

  1. Where are all the comments that were submitted? The two links above do not suggest any email address or person to whom the comments will be pushed out to.
  2. Who are the people who responded to these comments?
  3. Where is a list of all of these comments?
  4. Which comments were incorporated and which were not?
  5. What was the rationale behind it all?

A lot of these questions remain unanswered. What is the possible avenue for re-addressal of these issues, especially the paid-up Capital requirement? How does Rs. 200 Million come into play?

Number of Licenses to be Awarded – is there a hard limit?

SBP has also not clarified if there would be a limit to the number of licenses that would be awarded or if the licenses under these rules have a window for applying.

National Payment Gateway

The national payment gateway is a big question mark.

  • Who would be operating this?
  • Under what guidelines?
  • Under what license?
  • Who are the sponsors?
  • What does it entail?
  • What will be the transaction set?
  • What about price points (price floors)?
  • Who will run it?
  • Why is there a need for a national payment gateway?
  • Does it directly compete with those to whom license is being offered?
  • Does it violate any aspect of the rules laid out by the CCP (Competition Commission of Pakistan)?

The Banking License and Transaction Owner

Banks are always the custodians of deposits and transactions. In all the cases above, the money is being channeled via the banks. Today’s financial institutions have very comprehensive risk mitigation controls and they view each transaction partner with a magnifying glass to see if all is within compliance.

When a PSP sets up a business, their entire model hinges on the banks being the recipients of the transaction. The funds are never touched by the PSP per se. If they are, then it is in an account, where commingling is not allowed. Like a true marketplace, the commissions/fees are extracted into their account, everything else is in temporary escrow accounts pending settlements.

If someone wants to launch a PayPal wallet, as per SBP’s new Rules, the licensing will not do anything radically different. The Licensing prerequisite only makes the entity that is the owner of the wallet, a licensed entity, it still does not give them permission to launch their own wallet, etc. For this they still have to work with a licensed bank that has the necessary branchless banking license. So then why the need to add layers of unnecessary licensing?

The guidelines are already in place. Why complicate the ecosystem?

Quite a few companies reached out to me – companies who were working on their own homegrown payment products for months (if not years). With one broad stroke, SBP has alienated the entire fintech and payments startup industry. The inclusion criteria being, if you’re not rich enough, you can’t party with us.

What happens to the 1000s of people who were eyeing some piece of the fintech pie? Their dreams have been shattered and for all practical purposes, their businesses have been shuttered down.

Rectifying the Situation

The comments & feedback from telco companies, lawyers, individuals, banks, NBFIs, and many other entities that have contacted me has been harsh. From “in collusion” to “incompetent” to “people who just don’t get it!” – I would disagree with this. I think SBP is a very capable organization (as can be seen from the stellar growth). I am of the opinion that ever since the Head of PSD, left the department, PSD has been running around like a headless chicken.

They can still remedy and rectify the situation if they follow a planned roadmap to onboarding rules, one in which industry representatives have been invited to hearings (without any discrimination), where opinions, comments, and suggestions are recorded and circulated and draft rules are set out again. The PSO and PSP need to be unbundled from each other.

Remittances section needs to be exited from the Rules altogether. SBP’s EPD or more specifically PRI has not issued Money Exchange licenses in years (another hot and controversial topic). If transparency is amiss from the existing licensing selection and award process, prerequisite rules are governed by existing players and favoritism is in play — then the end result will be commercial entities proceeding to the courts to seek stay orders and hence start a lengthy process of legal infighting, which in turn will hurt the economy.

By reversing the Rules, SBP would have to swallow its pride. A lot of Joint Directors, Directors, Head of Departments, and possibly even the Executive Director had to sign off on these rules. Reversing them is indicative of SBP being wrong. Clearly, SBP is wrong.

There is a storm coming. For sure. This time around, those affected by these new rules/licensing guidelines will not just stand at the sidelines. They will be confronting SBP on it. I just hope pride and ego doesn’t get the better of SBP and the end result is not a bitter pill to swallow.

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