New Reform of the Act Governing Electronic Payment Institutions – the Game Changer for Fin-Tech?

Author: Jamie C. Yang

In a transaction, a third party payment service provider acts as an intermediary between the buyer and the seller. In its most basic form, a third party payment service provider verifies the identity of the parties and keeps the buyer’s payment amount in custody until the buyer receives and confirms the goods or services. Owing to this transaction framework, buyers and sellers are willing to enter into transactions that are not face-to-face, and this is one of the cornerstones of modern e-commerce. PayPal, which was established in 1998, became the most well-known internet-based third party payment service provider in the world when it became E-Bay’s payment partner.

Photo Courtesy Tech in Asia CC BY 2.0

E-commerce has always been common place in Taiwan. According the MasterCard Online Shopping Survey in 2015, 94.6 percent of the population has shopped online at least once in the past three months, placing Taiwan number three in the Asia Pacific region. By contrast, Taiwan was slow to adopt third party payment service. This is mainly for two main reasons: First, widespread use of credit cards and convenience of online credit card payment have satisfied consumer demand to a large extent and there is less demand for an alternative payment system; Secondly, perhaps consequentially, the financial regulations in Taiwan had been tailored for banks and provided little room and high legal risks for third party payment service innovators.

Before 2015, there was no specific regulation for third party payment service in Taiwan. There was, however, the Act Governing Issuance of Electronic Stored Value Cards (“E-Card Act”) which was designed to regulate stored value cards such as EasyCard and iPass. The E-Card Act defines e-cards as “multipurpose payment ICs, cards or other types of medium which stores monetary value.”

ADDCN Technology Co., Ltd., has setup 8591.com to allow computer and mobile online gamers to trade their avatars and objects. The transaction platform was booming. Because these are C2C transactions, credit card payment was unfeasible. To overcome the inconvenience of other types of payments facilitate trading, ADDCN allowed its users to pre-deposit money on their accounts. Once the Taiwan banking regulator, Financial Supervisory Committee (“FSC”) became aware of 8591.com, it immediately alerted the Taipei District Prosecutor’s Office for criminal investigation. The FSC accused 8591.com for violation of the E-Card Act, because it had allowed users to deposit monies on their accounts created on the platform, which arguably fell under the “other types of medium” which stores monetary value as defined by the Act. The prosecutors formally accused the chairman and other managers of ADDCN. The penalty for violation was more than seven years in prison under the E-Card Act. This case which took place before there was third party payment regulation in Taiwan may still have a chilling effect on new fin-tech services.

The first third party payment legislation in Taiwan, the Electronic Payment Processing Institutions Act was promulgated as late as May 2015. The entry barrier is very high and it is not the regulation that many fin-tech innovators had hoped for. The minimum paid in capital is set at 500 million NTD (15.6 million USD, compared to 25,000 USD in the U.S.). Moreover, while banks, the Post Office and metro companies are allowed to provide third party payment service as a side business, all other third party payment service providers must solely operate as third party payment service. In effect, they cannot tally up the paid-in capital of their other services to meet this threshold.

Because the entry barrier is set arbitrarily set to a high level, third party payment service providers that are not banks took a long time to apply and obtain licenses under the Electronic Payment Processing Institutions Act. Once they obtained licenses, business restrictions in the Act prevented these companies from starting business operation even one year after its promulgation.

To encourage non-bank third party payment service providers, the FSC under the new Cabinet decided that the identity verification regulation may be revised so that users may apply for third party payment service with cell phone numbers only and no personal identity verification is required. However, this lowering of regulatory threshold only applies to collection and payment transfer service (no depository service) where the aggregate amount is no more than 10,000 NTD (312 USD) per month. The legislative decision to set an extremely high market entry barrier and provide exceptions for incumbents has shown the regulator’s strong preference for stability over innovation.

From the point of view of fin-tech startups, the recent reform is only piecemeal, and anything short of modifying the ground rules in the Electronic Payment Processing Institutions Act will not be a game-changer.