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In proposed reforms of card acquiring and sub-acquiring rules, Chile could establish cross-border card acquiring as a legitimate business model and change the reserve calculation rules for closed and semi-closed loop payment schemes.
Last week, the Central Bank of Chile (BCCh) published new proposals for updating the country’s regulations on card acquiring in response to fast-moving changes in the market.
The proposals come in response to various new business models that have appeared in Chile and that aim to make cross-border payments cheaper and more readily available for consumers.
If adopted, the proposals would create new regulatory requirements for cross-border acquiring, effectively authorising this new acquiring model that can be used to circumvent the costs of international card schemes.
One such initiative is the so-called local agent model, whereby the payment processor creates local agents in each country, which then connect foreign merchants directly with local payment systems and consumers.
Another new model is cross-border acquiring, in which the foreign merchant or business partners with a local Chilean acquirer to accept payments.
This allows Chilean cardholders to make payments to businesses abroad with their payment cards issued in Chile, and to pay in Chilean pesos for e-commerce and other platforms, such as Amazon, Netflix, Spotify, Uber or Shein.
Payment firms specialised in these services argue that they can cut many of the pain points associated with international payments using Visa and Mastercard.
For example, these payments are often too costly for merchants, involve foreign exchange risk, have a higher risk of payment rejection and serve only consumers with international cards.
However, as a relatively new activity, cross-border acquiring falls outside Chile’s existing regulatory framework, and as such has been at the centre of legal battles.
In response to the emergence of these models, Visa and Mastercard changed their scheme rules, citing concerns over the lack of regulatory oversight of these models.
Payment firms Ebanx, PayU, PPRO and DLocal fought back and took the matter to Chile’s competition watchdog, the Tribunal for the Defense of Free Competition (TDLC).
They argued that they saw a great opportunity to compete for the niche of international payment transactions with the global card brands, which they claim are abusing their dominant position to restrict competition.
Bringing cross-border acquiring under the regulatory perimeter
In March, as part of its legal battle with Ebanx, Visa submitted a document from the central bank stating that card acquirers are not authorised to carry out cross-border acquiring activities.
“Neither the regulation of the BCCh nor the rules laid down by the Financial Market Commission (CMF) authorise the cross-border acquiring and sub-acquiring activity,” Rosario Celedón, head of the Financial Policy Division at the BCCh, wrote in the document.
The statement was interpreted as an outright ban on Chilean firms offering cross-border acquiring and sub-acquiring.
Celedón added that should regulation be set out, it must involve an analysis of risks by the BCCh and the CMF, and a study of whether existing prudential regulations are fit for these models.
The central bank now aims to bring cross-border acquiring under a regulatory framework and create a set of safeguards to help this business model grow.
Under the proposed rules, acquirers would be required to submit a report or independent legal opinion to the CMF showing that there are no legal or regulatory obstacles preventing the company from carrying out cross-border acquiring activity.
The CMF may decide to restrict this in certain jurisdictions, the proposal adds.
Changes for sub-acquirers
Sub-acquirers, a group of payment service providers (PSPs) that provide acquiring services via a contract with an acquirer, must also comply with an increased capital requirement if they wish to offer cross-border acquiring services.
Sub-acquirers are generally exempt from Chile’s PSP regulations as long as they settle less than 1 percent of total payments made in the market, or about 2.4m Chilean units of account (UF) ($105m) per month.
The BCCh has proposed to end that exemption for sub-acquirers that offer cross-border sub-acquiring, require them to hold a minimum capital of UF2,000 ($87,000) and comply with all the requirements that apply to other PSPs.
The rules would also restrict acquirers and sub-acquirers to only processing cards issued in Chile, and prohibit them from partnering with local acquirers in order to process cards issued abroad.
The BCCh said it sees value in these cross-border acquiring services as they help broader segments of the population access payments abroad and pay in Chilean pesos.
It acknowledged, however, that they may pose risks to financial stability, an imbalance in foreign currency liabilities and money laundering. They also have little experience in regulating this space.
Clarifications regarding closed and semi-closed payment models
These new proposals for cross-border acquiring are part of a package of new payments regulator updates.
On Monday, VIXIO covered proposed measures to help sub-acquirers meet regulatory requirements when they cross the regulatory exemption threshold.
The third and last part of the proposals includes clarifications on new and emerging closed and semi-closed payment models, which became authorised and regulated in Chile in January this year with the adoption of the Fintech Law.
The central bank notes that prepaid cards are increasingly moving from the traditional model of building merchant networks towards closed or semi-closed models, whereby payments are made between cardholders of the same issuer.
Examples of such schemes are WeChat and Alipay in China, but several Chilean companies have indicated to the BCCh that they are considering building similar services.
This has brought to light concerns that this emerging model, under existing regulations, would allow these firms to set up without a requirement to hold reserves.
Currently, payment firms must keep in reserve an amount equivalent to their customers’ deposits minus the payments they processed.
However, as payments within these closed systems are effectively "on us", meaning they circulate within the same payment system, their reserve requirements can sometimes turn out to be negative.
The BCCh has proposed to eliminate this deduction when transfers are made between accounts opened by the same issuer.
Additionally, the central bank has proposed that non-bank prepaid card issuers must consider interconnection and interoperability mechanisms to avoid risks of fragmentation of the low-value payment system.
These sets of proposals would update the regulatory framework for PSPs and the four-party card-acquiring model adopted in 2017 and 2018, and subsequent capital and liquidity requirement rules passed in 2020.
“We are proposing this new adaptation and update of the regulatory framework with a view to making it consistent with new business models that emerged since our last review,” the central bank said in an explanatory note.
