Best Practice in the Regulation of Payment Services

Abstract

Payment services are, at their simplest, services for moving money around the economy. These services carry risks for the provider and the customer, from credit and insolvency risk, through to fraud and ‘mere’ errors. Different societies deal with, manage and allocate these risks differently. There are a number of similarities in how these services are regulated, and the careful observer can identify patterns and themes.

As the economy continues to be heavily reliant on payment services for its efficient operation, commentators and governments have taken a keen interest in these services. This paper examines the six key regulatory risks for payment services: credit risk, efficiency risk, product mismatch, product failure, transactional failure and privacy.

Previous articles have considered recent industry and technological developments in the payments industry, many of which post-date the existing regulatory regime in most jurisdictions. This paper draws conclusions about how a best practice regime might address recent innovations such as mobile payments, online payment services and ‘stored value’ cards. While there is significant commonality between regulatory regimes, there is not yet a common approach to many payment services issues. The goal of this project (and this paper) is to develop a better or best practice framework for the regulation of payment services, drawing on the strengths and weaknesses of the existing regimes.

A best practice regime is identified – including both the elements or building blocks, and how and when they should be applied. The elements, based on analysis of key national regimes, are fair play rules, systemic stability, an active supervisor, broad scope, licensing, disclosure, obligations of the parties, liability, dispute resolution and privacy. The paper also explains how these elements can be combined to construct a coherent overall regime.

The result is a recommended best practice model involving licensing, disclosure, conduct and redress standards in a three-tiered structure (thus providing a lighter-touch regime for low value products and a more intensive regime for more substantial banking-style products).

Keywords: payment service, financial service, payment system, banking law, regulation, law and economics, best practice, risk, PhD thesis