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|Lawyer Pham Duy Khuong, managing director of ASL LAW|
Over the past three years, the fintech market has witnessed strong investment and development, especially in the field of payment intermediaries in Vietnam. Consumers are familiar with e-wallets of brands such as Momo, AirPay, Payoo, Zalopay, Moca, and most of these e-wallets are supported and invested in by foreign investors.
With an economy that mainly uses cash in daily payment transactions and with a young population structure, popularity of IT infrastructure, and telecommunication services, intermediary payment services – with the main function of supporting non-cash payments – are considered as a potential field for investors.
According to statistics from the State Bank of Vietnam (SBV), the agency licensing the provision of intermediary payment services, by mid-November 2019 there were 32 organisations licensed to provide intermediary payment services in the country.
In accordance with the current law, payment intermediaries are classified into two main service groups. The first is providing electronic payment infrastructure services with service groups including the Financial Switching Service, electronic clearing service, and electronic payment gateway service. The other service group is the payment service support with service sub-groups including Collection and Payment Support Services, Electronic Money Transfer Service, and Electronic Wallet Service.
Hot M&A and legal basis
Investment activities in the intermediary payment field have witnessed many merger and acquisition deals in recent years, most notably VNPAY completing a $300 million agreement. In particular, SoftBank Vision Fund committed to invest up to $200 million, while GIC has proposed funding of $100 million.
Previously, Grab invested in Moca to improve its ecosystem in Vietnam in the context that the business was sanctioned by the state bank for providing intermediary payment services without permission. According to the latest published information, Ant Financial - a fintech company from Chinese e-commerce group Alibaba has invested in the eMonkey E-wallet.
Currently, the main legal basis for providing intermediary payment services consists of two legal documents – Decree No.101/2012/ND-CP stipulating non-cash payments, and Circular No.39/2014/TT-NHNN providing guidance on intermediary payment services. Both of these documents have previously been amended and supplemented.
With the development of payment intermediaries in recent years, especially as more overseas investors want to pour money into the field, the issuance of new legal documents to update, supplement, and replace current regulations are an urgent issue for the government.
In November, the SBV announced a draft decree on non-cash payments to replace Decree 101. This can be said to be the most comprehensive and up-to-date draft of the key issues of the intermediary payment market such as regulations on cryptocurrencies, mobile money, regulations on list of customers, and regulations on foreign ownership limit of some services.
However, immediately after the draft of this decree was published, there were some fierce criticisms of the regulations on foreign ownership ratio for some intermediary payment services.
Specifically, the draft stipulates that “The maximum percentage of capital contribution of foreign investors, including direct and indirect ownership, is 49 per cent of the charter capital of payment intermediary service providers licensed by the state bank.”
This means that financial switching, electronic clearing services, e-wallet, and mobile money services (which are all regulated services that must be licensed by the SBV to provide translation) will limit the ownership of such investors. For the remaining intermediary payment services under the draft, since they are not on the list of services subject to licensing, there is no limit on the foreign investors’ ownership ratio.
It should be noted that prior to the issuance of this draft, there were no clear legal provisions to limit such ownership in Vietnamese payment intermediaries. As a result, many investors have funded in excess of 49 per cent in payment intermediary service providers, such as Online Mobile Services JSC, with overseas investors up to 63.8 per cent as of November 2018.
|Reflecting reality for foreign owner ratios (illustration photo)|
Challenge for businesses
According to the report that the SBV sent to the government in connection with the draft decree, the actual and legal basis for which the SBV sets the limit on the percentage of foreign investors’ ownership percentage is due to intermediary payment not being on the schedule of commitments with the World Trade Organization and major free trade agreements. Therefore, the SBV wants to apply the same management method as it currently applies to credit institutions in accordance with the government Decree No.01/2014/ND-CP of 2014.
Provisions on foreign investors’ purchase of shares in Vietnamese credit institutions stipulate that the shareholding ratio does not exceed 30 per cent of charter capital of a Vietnamese commercial bank. The SBV believes that the 49 per cent limit is reasonable and balanced so that it can both facilitate the attraction of foreign investment while ensuring the active role of domestic enterprises, avoiding the manipulation of international investors in this field, ensuring security and safety for banking.
In order to be able to contribute more voices of enterprises, the Vietnam Chamber of Commerce and Industry organised a seminar to collect opinions of the business community on the draft decree on non-cash payments in Hanoi in December 2019 for comments of businesses in the field. At the seminar, there were discussions on the 49 per cent limit affecting investment and business activities of enterprises in Vietnam in general and development of fintech in particular.
It was recommended that since the government has allowed enterprises with 100 per cent foreign capital in the fields of banking, finance, insurance and securities, there should be no concerns in terms of security and monetary safety in the field of intermediaries.
Another issue that needs to be addressed is that in addition to the ownership limit, the draft decree also contains a transitional provision under which “The intermediary payment service providers are licensed before the effective date of this decree with a higher percentage of foreign investors’ capital contributions than those specified in Article 29 of this decree, which are maintained until the change of such investors or upon expiry of the license to provide intermediary payment services, the provisions of this decree must be satisfied.”
If put in the perspective of international investors, when funding a business, the first goal is still to seek profits from that investment. However, the intermediary of payment intermediaries, especially e-wallet services, differs from other business lines in that it is difficult to find profits in the short term, and it requires a lot of capital.
The limit of 49 per cent and with the transitional provisions mentioned above, it is understood that the opportunity for overseas investors to recover capital is very low since none of them are willing to purchase their existing shares in Vietnamese payment intermediaries.
The sale of capital contribution to domestic investors is the only direction of non-nationals, but this option is also very less feasible when not too many domestic investors have enough potential finance to be able to repurchase capital contribution in excess of this 49 per cent while the good sale price will be under concern.
Therefore, the 49 per cent limit clearly presents a significant challenge for businesses currently providing intermediary payment services and foreign investors.
As mentioned, only financial switching services, electronic clearing services, e-wallet services, and mobile money services consist of a foreign ownership limit. In particular, it seems that e-wallet services are the most affected for limiting foreign ownership. Financial switching and electronic clearing services currently have only one service provider, NAPAS, and existing mobile money services have zero licensees.
It is interesting that the SBV and businesses can review and study more carefully based on the fact that now there are a number of businesses whose ownership rate exceeds the limit of 49 per cent.
However, the operation of these businesses still ensures full compliance with the provisions of the law on intermediary payment services and up to now, no problems or risks have arisen affecting security and monetary safety.
In addition, specifically for e-wallet services, in the context of the latest regulations of the SBV (Circular No.23/2019/TT-NHNN will take effect from January 7, 2020), the total limit of transactions via e-wallets of an individual at a service-providing organisation cannot exceed VND100 million ($4,350) a month except for individuals who have signed an application contract of accepting payments with the provider of e-wallet services.
In essence, intermediary payment services are services associated with banking operations, especially e-wallet services. Therefore, risks related to monetary security and safety may be limited or controlled through the control and compliance of co-operative banks and associated banks providing e-wallet service.
The SBV may consider and supplement their rights to temporarily suspend or stop the co-operation with payment intermediary service providers if their operation shows signs or risks causing impacts on monetary security and safety.
Currently, the draft decree is still in the stage of collecting opinions and finalising it before submitting it to the government for promulgation. The SBV certainly needs to thoroughly study issues and opinions for the project to propose the best plan to both meet the state management requirements in the field of payment intermediaries but still harmonise the interests of foreign investors and enterprises currently providing intermediary services.