The role of Hong Kong Monetary Authority in supporting retail payments Cartes Asia 2014 Mr. Esmond Lee Executive Director Financial Infrastructure Department Hong Kong Monetary Authority 20 March 2014

Efficient electronic retail payments stimulate the real economy “Migration to electronic retail payments spurs overall economic development, consumption and trade. Among different payment instruments, this relationship is the strongest for card payments.” Source: Working Paper Series, NO 1572 / august 2013 “Retail payments and the real economy”, European Central Bank 2

Increasing acceptance of cards in retail payments in EU 3

The HKMA’s role in retail payment Promote confidence in Hong Kong's monetary and financial systems through active participation in international financial and central banking forums Promote market development initiatives that help strengthen the international competitiveness of Hong Kong's financial services Maintain and develop Hong Kong's financial infrastructure 4

Users’ expectation on payment instruments Confidence: high level of security Convenience: easy to use Cost effectiveness: low transaction cost 5

The HKMA’s approach Laws and regulations  Provide adequate regulations on new payment instruments to protect users Standards and guidelines  Facilitate the development of secure and interoperable market solutions to enhance the user experience Infrastructure development  Develop core infrastructure for market participants to connect 6

7 Laws and regulations Regulatory framework for stored value facilities (SVF) and retail payment systems (RPS)

8 Underlying rationale for the new legislation Safety and efficiency  Protect and enhance the benefits of the users (especially the float in the case of SVF) Foster innovation and competition  Development perspective for the overall benefit of the economy

9 Legislation to meet future developments/challenges Status quoFuture development C-2-BRegulation covers only device based SVF (such as cards) Regulation to be extended to cover non-device based SVF B-2-BStored value limit is a constraint More flexible for network accounts C-2-CImplication on AMLKnow your customer for stored value larger than HK$3,000

10 Proposed legislative approach Multi-purpose stored value card regime under Banking Ordinance CSSO Existing regulatory regime Proposed regulatory regime Licensing Regime Designation Regime Amend the CSSO to cover the regulatory regime for SVF and RPS Device-based SVF Non-device based SVF RPS Large-value payment systems

11 Licensing regime for SVF Mandatory licensing regime It is an offence to issue SVF without a SVF licence in Hong Kong Licensing criteria A company incorporated under the laws of Hong Kong Principal business in the issuance of multi-purpose SVF On-going minimum (paid up) capital requirement of HK$25 million In line with current practices of Banking Ordinance Licensed banks deemed to be licensed Single-purpose SVF not required to be licensed Exemption of certain SVF from licensing

12 Designation regime for RPS Eligible systems: Operate and provide retail payment services in Hong Kong; or process Hong Kong dollar or other prescribed currencies (e.g. RMB, USD) Designation criteria: A RPS may be designated if any disruptions to the RPS have implications to the monetary or financial stability of Hong Kong; public confidence in payment systems or the financial system of Hong Kong; or day-to-day commercial activities in Hong Kong Potential coverage:  Credit card schemes  Debit card schemes  Merchant acquirers  Payment gateways

13 Standards and guidelines Best practice for NFC mobile payment

14 NFC mobile payment overview Hong Kong possesses good market conditions for NFC mobile payment High acceptance of contactless payments – 85% of non-cash transactions are already contactless High smartphone penetration rate – 90% of mobile phones shipped to Hong Kong in 2013 are smartphones Increasing availability of NFC-enabled phones – over 40% of smartphones shipped to Hong Kong in 2013 are NFC-enabled

15 Development objectives The HKMA promulgates four development objectives to enable the public to benefit from the innovative services and at the same time to enjoy safety and security:  Ability to download multiple payment services onto a single NFC-enabled phone  Payment service continuity despite switching from one mobile network operator to another operator  Payment service continuity despite changing one’s NFC-enabled phone  High level of security in line with international standards and relevant regulatory requirements

16 Our approach The HKMA supports a market-driven approach for shared infrastructure development as it suits the Hong Kong market:  Services can be launched more quickly  More receptive to stakeholders The HKMA has worked with the Hong Kong Association of Banks to develop a set of standards and guidelines for the industry to follow. They include:  Technical standards  Security requirements  Operational processes

17 Latest market update Issuance side HSBC, Hang Seng Bank, Bank of China(HK) and Citi Bank launched NFC mobile payment services in 2013 Octopus launched “Octopus SIM” (a stored value card resided on SIM card) and “Octopus Online Payment” services using NFC mobile phones Acceptance side Contactless card readers, supporting multiple card schemes (e.g. Visa payWave, MasterCard payPass) are being installed in merchant shops

18 Infrastructure development E-cheque clearing platform

19 Paper cheque Basic features and benefits As good as cash – Dishonoured cheques of over HK$50,000 will attract summary judgement from High Court in Hong Kong Right of payers and payees are protected by the Bills of Exchange Ordinance Payment can be accompanied by related transactions documents Not necessary for payees to disclose account information to payers

20 Disadvantages of paper cheque Paper based Physical delivery and presentment Not environmental-friendly Resource intensive and costly for banks to process cheques (Hong Kong banks need to spend HK$1.7 billion a year on processing cheque)

21 Key features of e-cheque Bill of exchange under the Bills of Exchange Ordinance In electronic form using pdf format Digitally signed by payer and certified by payer’s bank Support HKD, USD and RMB denominated e-cheques

22 Benefits of e-cheque e-cheque retains all basic features and benefits of paper cheque and with the following additional benefits:  remove the need for physical delivery and presentment as in the case of conventional paper based cheque  carries enhanced security features  remove the costly and cumbersome manual processing of cheque (especially valuable to those account holders who are residing outside Hong Kong or Hong Kong residents on frequent travelling)

23 Payment Services (4-party Model) Issuance AcquirerMerchantConsumerIssuer Business model: Payment services

24 Payment Services (3-party Model) Issuance Non-bank payment service provider MerchantConsumer Business model: Payment services, fund pool and information pool

To summarise: The HKMA is supporting the development of retail payments in HK 25 Users Market solutions Infrastructure development Standards and guidelines Laws and regulations HKMA

26 Thank you!