Last year I wrote, what I thought to be candid (read: fair) assessment of State Bank of Pakistan’s newly released license application for becoming a Payment Service Operator (PSO) or a Payment Service Provider (PSP).
The two articles can be read here:
- How State Bank of Pakistan just killed the Payments & Fintech Startup Industry of Pakistan.
- Murder on Chundrigar Road: How SBP killed the payments/fintech startup industry.
The reaction from SBP, in particular from the Payment System’s Department was disappointing: I am essentially now a persona non grata at SBP.
Doesn’t surprise me one bit.
With the nincompoops at the helm of affairs at PSD, one really cannot expect them not to get fidgety and resort to all sort of nefarious attempts to discredit or silence me.
I will just let the facts represented here speak for themselves.
Authorized Delegate Program
A cornerstone of any solid payment systems program is to have an authorized delegate program installed.
The Authorized Delegate program provides legal coverage to a licensed institution for it to branch out its Sales network, by partnering up with 3rd parties, who would then be provided umbrella coverage by the principal licensee.
Before we delve into the mechanics of an Authorized Delegate Program it is important to know the origins of the program.
When traditional banks started doing credit card issuance, market outreach was a problem. The internal sales teams within banks were limited. Typically one person to a branch (if at all). Going out and signing up people for credit cards was just not feasible.
A whole new idea was born, taking cue from the real-estate sector. Banks asked what if we have agents who would do all the necessary paperwork and pre-screening on our behalf, so that we (the bank) don’t have to invest in a sales team and we get business. For each successful sign-up, the bank would pay commission to its agents.
Literally over night, 10,000s of people signed up as sales agents for their local banks and started having friends and family sign up for credit cards, so that they could make an extra buck.
The same analogy was applied when it came to the merchant acquiring side of things. Independent Agents, who had gone a bit of training, worked on their dime and solicited to businesses who could benefit from signing up as a merchant (to accept credit cards).
This program was officially labeled by VISA & MasterCard as an ISO: Independent Sales (or Selling) Organization. It was later revised as ISO / MSP, where MSP stood for Member Service Provider.
The ISO/MSP program generated a continual income program for all merchant sign-ups, i.e. the ISO/MSP Agent was guaranteed income as long as the business they signed up remained an acquiring merchant for the bank. ISO/MSPs revenue was based on a small fraction of the interchange fees.
The ISO could best be thought of as an extended workforce, and the MSP as a partner workforce, but still operating under the rules and umbrella of the bank. The ISO/MSP could only sell what the banks were selling, i.e. an ISO/MSP could not sell their own products.
As with the evolution of time, the businesses came up with innovative ideas that they thought had a market. The problem was, the banks were not selling these products &/or services that businesses had thought up. Because of financial regulations (read: money handling), only banks were licensed to hold on to consumer’s money, etc.
There was no legal coverage for a business to handle money, on behalf of a bank, even though, the bank would still be the custodian of the money. The existing regulation forbid any non-licensed entity from getting into the money services or money transmission business.
This is where within the banking community, the Authorized Delegate program came out.
The Authorized Delegate program has three basic covenants:
- The transaction on-boarded by an authorized delegate will always be on behalf of the principal licensee, i.e. the owner of the transaction will always be the principal licensee i.e. the bank.
- The flow of funds should be as such, that they must touch the bank account of the principal licensee at all times, i.e. as an authorized delegate, you make accept money on behalf of the bank, but the custodianship will always be of the bank and hence it needs to receive the money into its account.
- The authorized delegate must essentially, be selling the same products/services as the principal licensee, a mismatch of products/services would strongly indicate license rental.
Why is the Authorized Delegate program so important? Especially more so in Pakistan where the recent PSP / PSO licensing mechanism completely is void of any mention of an Agent/Authorized Delegate Program, nor does the Payments Act of 2007 cover it.
Let me cite three simple examples, which highlight the important of an Authorized Delegate program in Pakistan:
- A fintech startup decides to make a novel application that will allow a neat person to person payment app, think along the lines of say Venmo or Dwolla. Well for such an app to see the light of day, the startup would need to have a license. Because of the deliberate barrier to entry, the startup would need a minimum of US$ 2 Million before it can even think about doing business here in Pakistan. But what if the startup could work with a bank? As an authorized delegate which would allow them to brand the app in their own name and market it, using a licensed entity in the background? Turns out, there is no legal cover for this, i.e. the rules for a startup to partner up with a bank and launch a product &/or a service as an authorized delegate, just doesn’t exist.
- Example # 2, another startup decides to launch an in-app payment solution, one that would allow payments to be made for purposes of e-commerce, utilizing the various payment methods at play already in Pakistan. For this to happen, the startup would need to be a PSP, which frankly is an overkill. What would have been nice is to have a authorized delegate program for the startup to enroll in, and be able to sell an aggregated payment solution under their own brand and name. At present, the law doesn’t allow it.
- If one were to make a Simple.com or Moven.com type of a bank interface, where you are essentially providing a wrapped UI/UX for the basic banking services on the back end, this would not be allowed under the current licensing guidelines.
These are just some of the examples that need revisiting. Though I do not work in Pakistan any more, I do get queries all throughout the year from both startups and Pakistani Banks on how to roll out more payment solutions without going through the loop of licensing. Unfortunately, even for banks, the authorized delegate program is not available.
This needs to change.
High Cost of License Deliberate
When queried as to why the cost of licensing is so high, SBP had responded back that it was deliberate. To concentrate only on the larger players and to deliberately filter out the smaller players (whom they view more of a nonsense value rather than being innovators).
This was perhaps the worst thing that SBP could have done.
I’ve cited this example quite a few times and will include it again.
Here is what it takes to obtain an E-money license from UK. The E-Money license is one notch above what SBP’s PSO/PSP license is all about. With an E-Money license you get the ability to do stored value of money, pretty much what we call the branchless banking license in Pakistan.
Slide Courtesy of NeoPay
In Singapore, the MAS (Monetary Authority of Singapore) has given an exemption to SVF (Stored Value Facility) from the Payment Systems (Oversight) Act when the stored value outstanding are under a certain threshold. Currently that bar is set at $30 Million. MAS approval is required for the operator when the SVF exceeds the $30 Million mark, and hence changing its status from SVF to WA-SVF (Widely Accepted Stored Value Facility).
If you’re under the limit, you are not required to get approval.
The barrier to entry as set by SBP poses a real-hurdle for fintech startups who are perhaps best poised to disrupt the financial services industry. It a well documented fact, that fintech startups are the companies that best offer pragmatic solution to the prevailing problems in banking and payments in any environment. Exclusionary tactics are counterproductive to an economy’s ecosystem, which prevents moving forward with cutting edge financial services.
Branchless Banking License
The branchless banking license in Pakistan is another anomaly in all things financial services. Because the PSD’s licensing policies did not take into consideration e-money (stored value), a separate banking license is required for portable stored money.
At US$ 10 Million (paid-up capital) required for opening a branchless banking entity, this is definitely outside the scope of many service providers. What you need to then do is to partner up with a bank that has not only a banking license, but also a branchless banking license in order to offer services that are of stored value. Any comparable wallet solution like say Paypal or Dwolla would fall under this category.
The whole branchless banking licensing regime needs to be scrapped. As a bank, they should either have the license to bank or not. Making distinctions between branched and branchless is irrelevant in this day and age. A crude analogy is going to State Bank of Pakistan and asking for an electronic money license in addition to physical currency license. How convoluted is that?
Because of these two parallels, i.e. a Branchless Banking License and a Regular Business License the dichotomy will continue to grow. It would then be too late for State Bank of Pakistan to try to bridge the rules & regulations towards a singular conversion.
Worldwide (Canada, UK, US, Australia, HK, Singapore, EU, 22 member states, etc.) now have provisions to allow stored value (e-money) to be part and parcel of the regular licensing regime as a PI – Payment Institution or as a Money Service Business. Why do we see a need to separate the two?
Again, taking cue from what is cited above, if a company does launch a wallet service, it would have to be in the name of the bank that owns the license, and it cannot be in their name/brand, even if they have a PSP/PSO license. The law simply does not allow the attachment of stored value to the PSP/PSO license (keeping in view that the Branchless Banking Licensing exists).
Even more so, the authorized delegate concept is missing from the Branchless Banking Licensing rules (no, a Branchless Banking Agent, cannot launch their own brand/product).
Payment Processor Licensing Exemption
Many countries do have a complex licensing policy, but certainly not contradictory. When it comes to complex, the US is the bastion of such a cause, with 50 State Regulators and a couple of Federal Regulators. Even then, the US does have some pretty nifty arrangements when it comes to payment service providers.
A PSP is exempt from licensing, when the following four scenarios are at play:
- The entity must facilitate the purchase of goods or services, or the payment of bills for goods or services (other than money transmission itself);
- The entity must operate through clearance and settlement systems that admit only BSA‑regulated financial institutions;
- The entity must provide the service pursuant to a formal agreement; and
- The entity’s agreement must be at a minimum with the seller or creditor that provided the goods or services and receives the funds (“Payment Processor Exemption”)
Why cannot Pakistan’s payment laws have such exemptions?
Why must State Bank of Pakistan insist in making it a privileged boys club?
The answer is simple…
Payment Systems Department was not qualified and incapable of addressing these problems and they (PSD) certainly did NOT have the correct foresight to study (research) these issues and come up with laws that would have addressed such anomalies and gaps.
Narrow Band License
When licenses are issued in say Singapore, EU, UK, USA, Canada etc., the general scope of the license is broad. Quite broad. There are well thought of definitions that describe the perimeter under which one can operate.
The opposite is true when it comes to license grant by SBP. The regulator wants to have a very singular purpose license, i.e. the products &/or services being offered, the license is only granted for a very narrow band.
The elbowroom is extremely restricted.
SBP has made it quite clear to the applicants that the permission to operate cannot be carte blanche within the confines of the license, but must be restricted down to a singular product/service as per the application.
Building or extending upon the existing license grant, would require further approval from SBP. The reasons cited are risks and mitigating them. One wonders why the other regulators around the world do not follow such a regimented approach?
Poor Construction of the Licensing Laws
When queried about the lackluster performance of the department towards the construction of the licensing laws, the reply received was beyond bizarre.
SBP’s PSD claimed that they looked at the leading laws when constructing these laws. When I highlighted about US, UK, Canada, EU, Singapore the reply was
“…those are very advance markets and we are not mature enough yet to take those laws into consideration!”
WTF! Classical back-foot approach to a problem.
I was further told that SBP had to fend off other agencies like MOITT, PTA, and other Agencies (possibly intelligence agencies). This was a pure bullshit answer. It is SBP’s responsibility on making the laws. What transpires behind the scenes is not our business nor our concerns. Dragging the excuse card of other agencies shows the incompetence of the department in not being able to defend their case.
Restricted No Objection Certificate for SECP
One requirement in obtaining a license is to modify the Memorandum of Understanding and Articles of Association of a company in Pakistan. The general clauses should be those in line with the business at hand, which is financial services, payments and banking. SBP also has an issue with these. SBP literally wants to dictate how these clauses should be written, tightening them so much that doing anything slightly shoulder from the granted license is not allowed as per your incorporation, even if you obtain a license for it.
In simpler words, the clauses in your incorporation are carte blanche in nature, needless to say, any product/service you launch, you would need to take permission (and/or licensing) from the competent authorities and then launch.
This simple fact, was beyond the logical comprehension of SBP.
A particular set of clauses was submitted to SBP on which the Head of Payments cited “…whomsoever made these clauses, you should fire them!” Not knowing that the same clauses were made by a decent law firm from abroad and were used in licensing application for API (Authorised Payment Institution) in UK and for general Money Transmitter Licenses in the UK.
The clauses were good enough for the applicants in UK and US, but for SBP, they were crap. Simply goes to show the limited exposure SBP’s PSD has in this manner.
Fit & Proper Criteria
One moot point I have to mention is the Fit & Proper Test criteria for the CEO of the proposed company that would be granted a license.
In today’s day and age, SBP is slipped on a banana peel and gone back in time, where they require a seasoned person at the helm of affairs (i.e. a banker).
Have you ever read ANYWHERE (and I can challenge SBP on this to find a developed country’s payment laws) where such qualification matrices exist.
Imagine if the founders of PayPal had to be bankers? Or if the Ben Milne of Dwolla had to be a banker? Or the Co-Founders of Stripe? Or the Co-Founders of Braintree, or iZettle, or Sign2Pay, etc.
Funny enough, in a contradictory measure, the Head of PSD is a Computer Network professional and his second in command, comes from an e-commerce background (prior web development). How is that for qualifications, no wonder there is such a mess.
SBP has made some fatal errors. There is no simply way to cite it. They are fatal in nature, that promote protectionism, favoritism and are a potpourri of various ingredients that just don’t make sense.
Instead of treating my blunt articles like a thousand paper cuts, why doesn’t SBP become transparent in its approach, drop the political and inter-department infighting and actually put out something that is beneficial to the industry.
For all those that ask why isn’t Pakistan on its road to progress when it comes Banking & Payments, the answer is simple. The State Bank of Pakistan.