Switzerland: Regulation Of Electronic Payment Service Providers In Switzerland

I. Introduction

The financial sector has undergone major developments in the past years and continues to be transformed by disruptive innovations as well as constant changes to the global regulatory framework. New business mod- els that blend together technology and financial services (FinTech) challenge the traditional concepts of financial regulation. New types of payment systems and technol- ogy-based payment services, particularly in the retail sector, are a key focus area in the growing field of Fin- Tech. The Swiss financial market regulator has taken a welcoming stance towards innovation in the financial sector, modifying its regulation to be as technology-neu- tral as possible and launching new law-making projects to lower the market entry barriers for FinTech innova- tors (see section II.6 below). A dynamic Swiss FinTech industry should contribute significantly to the quality and competitiveness of Switzerland as a financial center.¹

«Classic» payment methods such as cash, debit or cred- it cards still enjoy great popularity among consumers in Switzerland.² At the same time, electronic payment services such as Apple Pay, PayPal, Twint and Paymit (with the latter two services on the verge of a merger into a combined solution³) are rapidly gaining both practical and economic significance. In addition to being practi- cal and convenient, such services may also contribute to reducing money transfer costs and improving access to financial services

While innovation in the area of payments is in large part driven by industry-independent players from the tech- nology sector⁵, most services rely to some extent on existing payment systems, networks and infrastructure operated by banks and other traditional financial service providers⁶. The involvement of one or several additional service providers at various stages of the payment pro- cess, particularly at the interface between customers or merchants and the payment systems and networks in the technical sense (e.g. the credit card or bank payment in- frastructure), is a characteristic feature of advanced pay- ment services. These service providers operate electron- ic platforms and gateways to create a seamless payment experience for consumers or to facilitate the acceptance of various means of payment by merchants. As a result of the entry of new market participants, the competitive pressure on traditional financial service providers has increased.

The additional players and new business models in the payment space also create challenges for financial regulators as they are faced with having to categorize and potentially supervise payment service providers. So far, Switzerland has not put in place any comprehensive, specific regulation to address these challenges. It in- stead relies on the flexibility and technology-neutrality of existing financial market regulation. By contrast, the European Union («EU») has been regulating payment services, payment service providers and electronic mon- ey institutions for years under the Payment Services Directive⁷ («PSD») and under the E-Money Directive⁸ («EMD»). The revised PSD II⁹ that entered into force last year focuses inter alia on online payments and third party payment service providers.¹⁰ The very detailed directives reflect the general approach to financial regulation in the EU. It is not surprising that Switzerland has been less aggressive in regulating the payment space given its more principle-based concept of regulation.

Current Swiss regulation was designed with tradition- al financial service providers and the risks relating to their businesses in mind. It has recently been questioned whether it adequately addressed innovative financial ser- vices, including new payment services.¹¹

The present article provides an overview of the Swiss regulatory framework, general limitations for pay- ment service providers, and recent proposals to amend the regulation in view of technology-based innovation in the financial sector (see section II below). Further- more, it analyzes various electronic payment systems for use by consumers, both peer-to-peer («P2P») and per- son-to-business («P2B»), and the classification of the op- erators of these systems under applicable financial regu- lation, also touching on the challenges for cross-border services into Switzerland (see section III below). Inter- bank payment and settlement mechanisms or payment systems for use by financial institutions are not dis- cussed in this article. Various aspects of the provision of payment services that are not governed by financial regulation, such as data protection, competition, general corporate and contract law aspects, are likewise not discussed in this article.

II.Swiss Regulatory Framework

1. General Remarks

Payment systems and the service providers and auxilia- ries involved in running them operate in a highly regulat- ed space and are potentially exposed to license or registration requirements, as well as to regulatory compliance requirements in the broader sense. The impact of Swiss financial regulation on a particular business model in the area of payments depends, inter alia, on whether a service provider is domiciled in Switzerland or abroad, operates through a local physical presence or on a pure cross-border basis, and on whether it services either or both the payor and the payee or other service providers and intermediaries.

Payment systems may qualify as financial market infra- structures, which are governed by the Financial Market Infrastructure Act¹² («FMIA»). However, there is no specific, comprehensive regulation of payment service providers. Therefore, it has to be assessed in each indi- vidual case whether a payment service provider, by vir- tue of its (intended) activities, falls within the scope of Swiss financial market laws, most importantly the Bank- ing Act¹³ («BankA») and/or the Anti-Money Launder- ing Act¹⁴ («AMLA»). Moreover, the Consumer Credit Act¹⁵ («CCA») and the National Bank Act¹⁶ («NBA») may apply. Furthermore, implementing ordinances of the aforementioned laws as well as circulars and supervi- sory messages of the Swiss Financial Market Supervisory Authority FINMA («FINMA») need to be considered.

The following overview of the Swiss regulatory frame- work focuses on license, registration and other com- pliance requirements under the FMIA, the BankA, the AMLA and the CCA which may be relevant for pay- ment service providers. It also addresses cross-border operations as they can be of significant importance for payment service providers. It is typical for payment ser- vice providers to operate across jurisdictional borders in order to provide their customers with a broad scope of jurisdictions in which payments can be made or received, not least with a view to the soaring popularity of online shopping.

This section further discusses proposed new legislation that aims at easing the regulatory framework for FinTech operators in Switzerland (see section II.6 below).

2. Regulation of Financial Market Infrastructures

2.1 Scope of Application of the FMIA

The FMIA sets forth various regulatory requirements for so-called financial market infrastructures, which also include payment systems. The law rather broadly defines a payment system as an entity or undertaking that «clears and settles payment obligations based on uniform rules and procedures» (art. 81 FMIA). Based on this defini- tion, credit, debit and store card systems that enable payments,¹⁷ web- or mobile-based payment systems such as PayPal and Apple Pay as well as virtual currencies such as Bitcoin in principle qualify as payment systems within the meaning of the FMIA.¹⁸ Their operators (to the ex- tent applicable, e.g. with regard to decentralized crypto- currencies) might therefore require a license as a financial market infrastructure.

However, according to the dispatch (Botschaft) of the Swiss Federal Council regarding the FMIA, payment systems are not generally covered by the protective purpose of the FMIA.¹⁹ Payment systems that are not op- erated by a bank are therefore only subject to a license requirement and other provisions of the FMIA if necessary for the functioning of the Swiss financial market or the protection of financial market participants (art. 4 para. 1 and 2 FMIA). The necessity for a license arises in particular if a payment system (a) intends to process and clear payment transactions among financial intermediar- ies, i.e. as opposed to payments among individuals and businesses, and (b) the Swiss National Bank («SNB») determines that the payment system is systemically rel- evant.²⁰ So far, only the Swiss Interbank Clearing system SIC has been designated by the SNB as a systemically relevant payment system.²¹ A payment service provider, even if it were itself deemed a payment system, will therefore generally not be re- quired to obtain a license under the FMIA.

2.2 Cross-Border Aspects

The FMIA primarily applies to domestic financial market infrastructures, i.e. legal entities incorporated under Swiss law with registered office and main administration in Switzerland. Foreign financial market infrastructures only fall within the scope of the FMIA if specifically provided for in the law.²² There is no such specific pro- vision for payment systems. Therefore, in principle, for- eign payment systems do not require a license under the FMIA, even in case of a cross-border supply of services into the territory of Switzerland, and regardless of the importance and risks of their operations for the Swiss fi- nancial market and its participants. They may however be subject to other Swiss license or registration require- ments (see further below).

2.3 Excursus: Scope of Application of the NBA Irrespective of a license requirement under the FMIA, the SNB is, to the extent necessary for an analysis of fi- nancial market developments or for drawing up the bal- ance of payments, entitled to collect statistical data on the business activities from issuers of payment instru- ments and from operators of systems for the processing, clearing and settlement of payment transactions (art. 15 para. 2 NBA). E.g., payment systems operators settling payments that exceed CHF 100 million per financial year (excluding so-called in-house payment systems) have a monthly reporting duty. In connection with the SNB's survey regarding payment cards and other payment in- struments, the issuers and acquirers (including ATM acquirers) of credit cards and debit cards are required to provide information on a monthly basis if they set- tle payments that exceed CHF 100 million per financial year. For issuers and acquirers of e-money, the threshold is even lower at CHF 50 million.²³

Both domestic and foreign payment systems are subject to supervision by the SNB if they are classified as systemically relevant.²⁴ In order to protect the stability of the Swiss financial system, art. 19 para. 2 NBA stipu- lates that foreign systemically relevant financial market infrastructures are supervised by SNB if they conduct a substantial part of their operations or service significant participants on the Swiss market or if they clear or settle significant transaction volumes in Swiss francs. Current- ly, the SNB only classifies the foreign exchange settle- ment system Continuous Linked Settlement (CLS) as a foreign systemically relevant payment system.²⁵

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