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In a big reform to card acquiring and sub-acquiring rules, Chile proposes new measures to help sub-acquirers meet regulatory requirements when they grow big enough.
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 would update existing rules adopted in 2017 and 2018, which provide a regulatory framework for payment service providers (PSPs) and the four-party card-acquiring model.
It would also update subsequent capital and liquidity requirement rules that were adopted in 2020.
“We are proposing this new adaptation and update of the regulatory framework with the view to making it consistent with new business models that emerged since our last review,” the central bank said in an explanatory note.
As one of the proposed changes, the BCCh would establish a transitional phase for those sub-acquirers that have grown large enough to become acquirers.
The transitional requirements would apply to sub-acquirers that settle between 0.5 and 1 percent of market transactions per month.
These firms are currently exempt from regulatory requirements. However, once they cross the exemption threshold, they struggle to meet the high regulatory requirements.
Measures aimed to help expand the acquiring market
As VIXIO reported, Chile has a relatively unique acquiring market whereby Transbank, a card acquirer set up by the country’s large banks, had a full monopoly over acquiring for almost three decades.
That monopoly was eventually broken up in 2016 when Transbank’s first competitor, Multicaja, entered the market. New market players, however, could not gain a sizable market share until very recently.
In 2017 and 2018, Chile carried out a structural reform of its regulatory framework for card payment regulations, bringing in the four-party model for card acquiring and creating rules for payment service providers (PSP).
Sub-acquirers are a part of the larger group of PSPs that provide acquiring services to merchants, although they do not have an acquiring licence for the card brands nor for a processing network.
These companies, which include Flow and historically MercadoPago, must contract with an acquirer, typically Transbank, to be able to offer their services. It is then the acquirer that bears the responsibility for the transaction.
Under Chile’s current regulations, sub-acquirers are generally exempt from most of the requirements that apply to PSPs and card acquirers.
They do not have to incorporate as a special corporation, register with Chile’s Financial Market Commission (CMF), be subject to its supervision or comply with capital and liquidity requirements.
Sub-acquirers are exempt as long as they do not settle more than 1 percent of total payments made in the market, which is currently about 2.4m Chilean unit of account (UF) ($105m) per month.
This exemption has been in place since the PSP regulatory framework was adopted in 2017 with the intention to help expand the acquiring network.
According to the central bank, that goal has now been achieved.
There are 23 sub-acquirers in the country that enable over 1.2m individuals and businesses to accept card payments. Many have now reached the size that they are no longer exempt and must establish themselves as an acquirer under the law.
In the document, the BCCh recognises that sub-acquirers face significant challenges to adapt to the regulation of acquirers and is now proposing a new transitional phase for these firms.
The transitional requirements would apply to PSPs that settle between 0.5 and 1 percent of market transactions.
They would be required to register with the CMF and meet a reduced capital requirement of UF1,000 ($43,600). From that point, sub-acquirers will be considered acquirers in all the other aspects of the existing legal and regulatory framework.
Once they pass the 1 percent threshold, they must comply with the general capital requirements of acquirers and PSPs, which currently is UF10,000 ($436,000) plus liquidity of 20 percent of the average amount they process in a day.
Payments settled per month
< 0.5 percent ($52m)
0.5 percent to 1 percent ($52m-$105m)
> 1 percent ($105m)
- Sub-acquirer exempt.
- Sub-acquirer must establish contractual relationship with an acquirer; contract places responsibility for the transaction on acquirer.
- Capital requirement of UF1,000 ($43,600).
- Register with CMF and meet regular reporting requirements.
- Implement risk management policies.
- Sub-acquirer is considered an acquirer in all the other legal and regulatory aspects.
- Sub-acquirer must comply with general capital requirement of an acquirer: UF10,000 ($436,000) plus liquidity of 20 percent of daily average payments.
Source: BCCh proposal and VIXIO research
Greater transparency in sub-acquiring
The growth of PSPs has created several controversies in Chile, some of which have received the attention of the country’s competition watchdog, the Tribunal for the Defense of Free Competition (TDLC).
The debates have centred around issues including fees that sub-acquirers had to pay to acquirers, the availability of information concerning merchants and their affiliated entities to whom the payments are made, contractual conditions and cross-border acquiring.
Eventually, last August, the TDLC issued General Instructions (ICG) No. 5/2022, establishing new obligations for issuers, acquirers and card brands aimed at increasing competition in credit, debit and prepaid card markets.
Among others, the competition authority prohibited several rules by Visa and Mastercard, including the no acquiring without issuance rule, the no surcharge rule and the honour all cards rule.
It also injected more transparency in card fees by requiring the card brands to publish their interchange fees, broken down by various aspects and ordering acquirers and sub-acquirers to allow their affiliated merchants to request a detailed breakdown of the merchant discount rate.
At the same time, the TDLC made a series of recommendations for the government to improve the card acquiring market, which have been considered and fed into the BCCh proposal.
Specifically, the BCCh would change the regulations to allow issuers and acquirers to see the final beneficiary of a payment that goes through a sub-acquirer.
This will prevent sub-acquirers from onboarding businesses that facilitate money laundering and other illicit activities, improve fraud prevention efforts and enable consumers to get better information about their card payments, the central bank said.
Another measure, which prohibits sub-acquirers from partnering with other sub-acquirers, is also intended to improve the traceability of the transactions and the identification of the final beneficiaries, which would otherwise be more difficult if the payment went through a net of several sub-acquirers.
Finally, in line with the spirit of the TDLC recommendations, the proposal explicitly states that sub-acquirers are allowed to offer cross-border card acquiring services, with an increased capital requirement.
The proposals also establish cross-border card acquiring as a legitimate business model and change the reserve calculation rules for closed and semi-closed loop payment schemes. This will be discussed in a separate VIXIO insight.
