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Payments Regulation – Restriction or Growth Opportunity?

By Anna Tsyupko, CEO and co-founder of Paybase

The platform economy and cryptocurrency spaces are booming global industries. But as a result of regulatory changes, they’re not easy spaces to penetrate.

PSD2 was introduced in January 2018, dictating that non-regulated businesses who held customer funds were no longer acting compliantly. Prior to this, businesses had been able to hold funds citing the Commercial Agent Exemption but this is no longer the case. For the majority of platforms – those connecting two parties to transact – holding customer funds is integral to their business model and, as a result, they were left with three options:

  • Fit their product to traditional payments infrastructure – but this technology is rigid and poorly-suited to platform or crypto exchange business models
  • Become a regulated financial institution – a long, costly process
  • Partner with a modern payments provider and leverage regulatory changes to their advantage

Without proper risk management and a Due Diligence framework, platforms are vulnerable to (and often targets of) financial crime.

5AMLD will be introduced in January 2020. It will require cryptocurrency exchanges to adhere to the same regulations that have applied to financial institutions under 4AMLD. For the first time, cryptocurrency businesses will be held to task for their practices, the way that they ensure user safety and their approach to compliance and combatting financial crime. This includes performing Customer Due Diligence, submitting ‘suspicious activity’ reports, combatting the financing of terrorism (CFT) and money laundering. Those that don’t adhere may be met with heavy fines. Preparing for this change early will be useful for two reasons:  it will enable businesses to future-proof their offering and, in doing so, they could stand shoulders above their competition.

Safety first

Platform businesses:

Without proper risk management and a Due Diligence framework, platforms are vulnerable to (and often targets of) financial crime. The platform model – which connects two parties, often strangers, to transact – has historically lead to platforms being targeted and suffering reputational damage owing to a lack of user-accountability. But this can be mitigated by risk management. Consumer funds are furthermore placed at risk when they are held centrally, especially in the event of bankruptcy. Rigid buyer/seller protection safeguards consumers against myriad eventualities and thus also goes some way towards protecting a business’s reputation.

Cryptocurrency businesses:

Cryptocurrency-based platforms not only enter the market unknown but often also with a taboo attached. Working with an FCA-regulated payments provider enables them to stand out from their competitors by marketing their focus on security and compliance, an approach that has historically not been common in the space. Sam Blackmore, CEO of cryptocurrency exchange, Vimba, explained, “Most of our customers are new to Bitcoin and that means a large part of our job is making them feel safe with us. We want to ensure that every component of Vimba is comprised of the best possible solutions, and going down the route of working with a regulated payment provider like Paybase solidifies that trust.”

businesses cannot afford to give up time and resource on manual payments routing and adhering to regulatory requirements.

Regulate, automate, innovate

Standing out from the competition is a major hurdle in saturated markets; businesses cannot afford to give up time and resource on manual payments routing and adhering to regulatory requirements. Partnering with a regulated modern payments provider not only automates time-heavy payments routing and allows businesses to focus on innovation but can give them access to automated risk management and financial crime prevention features they would not otherwise have. 

The Paybase Risk Engine, for example, reduces the risk of businesses becoming victims of financial crime. Utilising features like automated flagging of suspicious activity, customisable Due Diligence, risk scoring based on geography, IP clusters etc. and more not only tackles financial crime but helps to prevent it from occurring in the first place. This level of protection enables businesses to both protect end-users and their platform reputation, but also focus on all-important challenges like scaling.

A level playing field

Ince Gibraltar Director, e-money specialist and Solicitor, David Borge asserted, “Another advantage of updates in payments law is that the law is applied uniformly. There won’t be any country-specific advantages to be had depending on where you’re based in Europe.” This is a huge advantage to those starting out in the space, especially those hoping to scale into new markets. “This, in turn,” David continued, “will promote some product-specific competition rather than jurisdiction-specific competition, and that’s definitely in the interest of these businesses.”  

PSD2 was put in place to protect consumers by tackling widespread poor practices. Regulated businesses, in complying with the requirements of PSD2, can further secure their products for consumers as well as adopt good practices that help prepare them for further regulatory changes. This level of future-proofing is a powerful tool and helps businesses to focus on innovation and, ultimately, to build better and more competitive products.

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