Foreign ownership limit in payment intermediaries requires immediate action

23-Aug-2019 Intellasia | InfoMoney | 6:02 AM Print This Post

The picture of Vietnam’s intermediary payment market has recently markedly changed. To date, there have been 29 licensed intermediaries and the number has not stopped there. Many giants have joined the market such as VinID (Vingroup), FoxPay (FPT), GIC, Warburg Pincus and Grab.

In fact, it reaffirms the attractiveness of Vietnam’s payment intermediary market, which has always been considered a fertile land for large financial institutions thanks to the large population, high rate of smartphone access and openness of the government to new technology waves. However, it also makes the legal corridors to protect the market, ensuring that its healthy and sustainable development becomes more urgent than ever.

How to make the market competitive while ensuring the safety of the national financial system, monetary security and economic autonomy is the problem that is posing for the State Bank of Vietnam (SBV), ministries and related industries, so that Vietnam’s financial and intermediary market is not gradually dominated by foreign giants

The scenario of “gradual dominance” has been applied by foreign giants, with their full experience and understanding of gaps in the legal corridors of markets.

Most recently, GIC (National Investment Fund of Singapore government) has completed the purchase of shares of Vietnam Payment Solution Joint Stock Company (VNPay) with a rumoured price of more than $50 million. Previously, VNPay was acquired 45.18 percent stake by SEA Group (formerly Garena) in August 2017.

Earlier, in early 2019, Momo announced the information of receiving “huge” capital unprecedented in the financial technology community (fintech) in Vietnam, coming from the investor Warburg Pincus. According to Crunchbase, the latest investment into Momo was worth $100 million.

Vietnam’s 1Pay e-wallet also sold 90 percent of its shares to Ascend Money, a Thai financial company with up to 30 percent of the shares owned by Alibaba Group (China). After being acquired, 1Pay started integrating its platform with TrueMoney’s e-wallet platform and supplying to Vietnam market.

Besides, the market also witnessed a remarkable deal between GrabPay, the e-wallet platform of Grab super application with Moca, a licensed internal e-wallet. The deal was unpublished and Grab said he only owned more than three percent of the shares, and claimed to be its big partner.

In Vietnam, foreign giants who want to penetrate into Vietnam market have passed the path of M&A, acquiring shares of licensed intermediary businesses as it is the conditional industry in Vietnam. And by acquiring shares and signing strategic cooperation contracts, they can operate in Vietnam.

With the current regulations, the ratio of foreign capital ownership is only regulated in some key traditional financial sectors such as joint stock commercial banks. Foreign-owned threshold in the payment intermediary sector is still floating, though this is a conditional business.

In addition to unregulated foreign ownership, there are no mechanisms for monitoring, warning or sanctions for the intermediaries that have been acquired or controlled by foreign investors.

The scenario of the intermediary payment market is dominated by the foreign enterprises with many potential risks and consequences, such as threatening monetary security. The 2018 conference of the International Monetary Fund (IMF) and the World Bank (WB) warned that the world was about to enter a new financial crisis, similar to the 1997 Southeast Asian financial crisis, when Foreign Direct Investment reduced by 30 percent, the dissoluted enterprises increased by 162 percent.

If this bad scenario occurs, foreign businesses can massively withdraw money from the market, causing the domestic market to collapse by domino effect. The money flowing massively across the border has made the macro economy wobble, not to mention that foreign-owned e-wallets that account for more than 50 percent may not be able to pay users because the investment capital has been fully withdrawn.

In addition, the circulation of cash flows in foreign-owned e-wallets is difficult to control, especially with cross-border and across asian institutions. The corollary is that the recognition of revenue for tax calculation will face many difficulties, causing tax losses for the state budget and forcing businesses and people in the country to vigorously share tax pressure. The lack of a cross-border cash flow monitoring mechanism can also assist virtual crime lines such as Rikvip online gambling, money laundering and fraud.

In the macro picture, many of the majority of foreign-invested intermediaries are developing extremely fast, tending to use financial potential as well as technological and policy advantages to out stand the domestic e-wallets, even defeat, proceeding to acquire or erase smaller e-wallets.

The fight is completely unbalanced when domestic e-wallets are inferior in terms of capital, experience, resources, necessary support and protection mechanisms from the government. And when the market becomes a pure game of foreign giants, what is left of Vietnam on “fertile land”?

At the time of Vietnam’s signing of WTO admission, the industries such as payment intermediaries have not yet appeared in the commitment schedule. That means, Vietnam can regulate foreign ownership ceilings in payment intermediaries without violating international agreements.

Currently, in Southeast Asia, Indonesia’s most populous market is also very tight on foreign ownership limit in the payment intermediary sector. The government of this country stipulates that the ownership rate of domestic legal entities and organisations must account for at least 80 percent of equity for deposit taking, clearing, switching and final settlement organisations. That is, the foreign ownership ratio must not exceed 20 percent.

More extensively, in the field of e-wallet, the ratio of foreign capital is not allowed to exceed 49 percent. As a result, the licenses of some cross-border corporations in some markets in Asean are suspended, as a measure to protect the domestic market and facilitate domestic e-wallets to dominate the market, ensuring national monetary security.

Attracting foreign investment to expand the market, promoting the development of domestic intermediary enterprises is a trend. However, to what extent the attraction, monitoring and control mechanisms to ensure financial and national monetary security is another issue.

To solve this problem, relevant state agencies, especially SBV, need to review, amend, supplement and complete relevant legal provisions.

As expected, this year, SBV will complete the Decree replacing the Decree No. 101/2012/ ND-CP on cashless payment, including an important content related to the foreign investment limit in the field of fintech in general and payment intermediary in particular. For the first time, Vietnam will have a legal document that regulates investment forms for foreign investors (investment in the form of capital contribution, purchase of shares, capital contribution in intermediary payment service providers) and the maximum percentage of foreign investors’ capital contributions applicable to non-bank organisations that are applying for a license, as well as payment intermediary service providers licensed by SBV.

Under Article 7, Decree No. 01/2014/ND-CP on foreign investors buying shares of Vietnamese credit institutions stipulates: “The total shareholding of foreign investors does not exceed 30 percent of the charter capital of a Vietnamese commercial bank”, the ideal ownership rate for application to fintech and payment intermediary should be equivalent to 30 percent, because payment intermediary is also the subject adjustment of the Law on Credit Institutions.

Similarly, the Ministry of Planning and Investment is drafting a revised Investment Law and Enterprise Law, which is expected to be discussed in the National Assembly session on October 2019 and can be adopted at the next session. It is necessary to add specific provisions on licensing and business conditions in Vietnam of the fintech and intermediary payment industry.

At the same time, to ensure that the control of payment intermediaries does not fall into the hands of cross-border enterprises, there should be a requirement that shares of a foreign shareholder are not allowed to exceed 20 percent, nor have the relationships and the behaviours associated with other foreign shareholders to put pressure on the direction of operation of that payment intermediary.

For payment intermediaries with a foreign capital contribution ratio of 49 percent, management agencies need to provide a reasonable roadmap to reduce the rate to avoid breaking down the business, as well as affecting the ability to attract FDI. The lowering of the rate must ensure the following principles: in the subsequent transfer or increase of capital, only capital shall be received and transferred to domestic shareholders; not to mobilise additional capital from other foreign investors; not to extend the scope of operation: not to expand the geographical scope and contents of the granted licenses (based on the approved business plan in the first time of applying for permits).

In order to facilitate and create synchronisation for payment intermediaries that have foreign ownership levels of more than 30 percent, SBV should stipulate a roadmap to complete the foreign limit reduction within 10 years (calculated from the time of license) by a 10-year payment intermediary license. After this time limit, if the enterprise violates the rate of foreign investment, the license will not be extended.

Currently, some comments propose the regulatory sandbox mechanism in the financial sector, fintech. However, to ensure risk reduction, avoid threatening national financial and monetary security, allowing sandboxing with payment intermediaries should be quite careful, with participation criteria and conditions that need to be particularly detailed and transparent, especially in terms of the proportion of foreign capital contribution.


Category: Finance, Vietnam

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