A Fine Balance: Regulation & Greater Economic Opportunity in the Case of Payment Gateways for Merchants

The global spread of COVID-19 is having a significant impact on every aspect of life, including how consumers shop. Many are moving towards online commerce due to social distancing measures put in place by governments, highlighting the importance of gateways to increase payment acceptance for merchants.

Five billion people now have a mobile phone. Over half the world’s population is now connected to the internet, with 360 million people coming online for the first time last year. E-commerce sales have nearly doubled in just five years, powering the growth of e-commerce titans, such as Amazon, Alibaba, eBay, Mercado Libre and Flipkart.

North America, Western Europe and Asia-Pacific have been the major engines of that growth, with a combined share of 91% of e-commerce sales last year. However, various estimates suggest the power of e-commerce in Latin America is yet to be fully unleashed.

Worldpay’s 2017 Global Payments Report forecasts e-commerce to grow at an average rate of 11% annually over the next five years, with Latin America taking the lead with a 19% expected growth rate. Colombia, Nigeria and Argentina are expected to lead the pack, with annual average e-commerce growth of 31%, 30% and 24% respectively until 2021.

Clearly, the opportunities for businesses to reach new consumers are vast. At the same time, the risks associated with this rapid growth deserve equal attention. Regulators are trying to strike the right balance.

Gateways Help Create a Level Playing Field for Small and Medium Enterprises

The digital revolution, and particularly the ability to transact digitally, has enabled new business and delivery models, as well as much greater convenience and choice for consumers. As the digital revolution continues to gather pace, extending these digital transaction capabilities to more small businesses and merchants is a vital source of new economic growth and financial inclusion.

Small and Medium Enterprises (SMEs) play an especially important role in emerging economies, providing up to 60% of total employment and 40% of national income (GDP). No surprises then that payment gateways for small businesses and online merchants have enjoyed robust growth over the past few years, particularly in middle income countries. However, merchants and small businesses still too often lack the resources, know-how and technical connections to introduce multiple payment schemes, or to manage contractual relations with several schemes or acquirers directly.

Payment gateways, like PayU, Stripe or CyberSource, among many others, which operate in several markets across regions, help fill this gap. They enable secure digital payments by encrypting sensitive information and payment details such as credit card numbers. “Independent Gateways” can facilitate merchant acceptance of multiple payment schemes through a single technical connection. “Integrated Gateways” provide the technical connection along with the contractual relationship for different payment schemes. These gateways extend the reach of payment schemes, such as cards and digital wallets, as well as financial institution transfers, to segments of the market that have proved previously very hard to reach.

Payment Gateways Promote Financial Inclusion and Financial Deepening

Research commissioned by the Better Than Cash Alliance shows that payment gateways have a positive impact on financial inclusion by:

• Simplifying payment acceptance for smaller merchants.
• Supporting a point of entry for many new or alternative payment services that can reach nontraditional consumers.
• Offering services to merchants who previously didn’t have access to digital financial services.
• Extending the reach of financial services to merchants in rural areas.
• Offering an attractive business model which responds to small merchants’ needs and is simple, convenient and inexpensive.

By bundling services to small merchants, gateways can also lower the costs of payment acceptance, supporting financial deepening, which increases the provision of financial services in terms of wider choice and better access. For instance, gateway organizations can aggregate merchants, transactions volumes or values, to avoid or lower the fees that may otherwise be applied by a traditional acquirer.

New Business Models, New Risks

New business models often bring new risks. The Better Than Cash Alliance conducted a global landscaping on payment gateways and their regulatory trends. Regulators seem to have two main operational concerns in relation to payment gateways:

1. Secure processing of transactions – Meeting minimum requirements that ensure that ensure digital payments are encrypted and started and routed in a secure way.
   
2. Appropriate handling of client data – Ensuring client information is not stored, and if it is stored, that it is done in compliance with personal data protection regulations.
   

Further concerns have been identified in the specific case of ‘integrated gateways’, as these play a role in the movement of money:

1. Anti-money laundering and fraud-prevention – integrated gateways don’t always disaggregate and report transactions at the merchant level. This is a challenge in Colombia, for instance, where some global gateways only report aggregated data for online commerce, raising Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) concerns in the view of regulators.
2. Management of merchant funds – Several gateways disburse the payments upto a month after the transaction has taken place, deducting applicable fees. In the meantime, the funds are held in the gateways’ acquiring account, in the acquiring bank. For regulators, this raises question of what happens if the gateway went bankrupt before the funds are disbursed.

The Collaborative Government Imperative

There is a wide and growing range of services and activities performed by payment gateways at the interface of technology and payments. These rarely fall under the oversight of a single regulator. Financial regulators, data and consumer protection, commerce, competition and Information and Communications Technology (ICT) authorities are all responsible for some aspect of gateway activities.

Gateway operations take place in different markets and contexts, with varying degrees of infrastructure and ecosystem development, adding an extra layer of complexity. As a result, there is no one-size-fits-all policy solution to the challenges gateways present. It is important for regulators and policy-makers to learn lessons from other markets, while tailoring their own responses to conditions and broader policy imperatives in their own markets.

Given this complexity, as well as the very diverse groups of stakeholders usually involved in payment gateways, policy-makers face a difficult task in balancing innovation and supervision. The jury is still out on how to best respond to these questions. However, all things considered, what is certain is that oversight of payment gateways will demand more collaborative approaches, bringing together all relevant regulators and proactively consulting with external stakeholders. Policy-makers and regulators will be well served by fostering partnerships within the public sector, and working together with gateways, payment schemes and other relevant stakeholders. In fact, it’s increasingly apparent such collaboration is vital to harnessing the power of gateways to bring small merchants into the digital economy and increase financial inclusion.