The Banking Supervision Department is publishing drafts of a policy update for the licensing of merchant acquirers and an update of the criteria for seeking a permit to control or hold the means of control of a merchant acquirer. These policy updates will make it possible to increase competition in the merchant acquiring field, and will create an environment that will encourage the entry of new entities as owners of credit card companies.
Supervisor of Banks Dr. Hedva Ber said, “The Banking Supervision Department is taking steps to increase competition in the area of payment cards and in the area of credit. This process will make it possible for additional parties from Israel and abroad to enter the merchant acquiring and credit cards market, benefiting households and small and medium businesses. In addition, the changes we are publishing today, and those that are planned, will lead to the creation of a new supervisory “tier” within the Banking Supervision Department, which will supervise financial entities that do not receive deposits but have systemic importance to the stability of the financial system and the entire economy, and will be a more lenient supervisory regime than over the banks.”
The Banking Supervision Department at the Bank of Israel today published a draft update easing the policy of licensing merchant acquirers and a draft update of the criteria and general conditions for seeking a permit to control and hold the means of control of a merchant acquirer. This step is intended to encourage the entry of additional participants into merchant acquiring activity and to support competition in the credit cards field. After taking effect, the new policy will serve to examine the granting of a license to new merchant acquirers and the granting of a control permit to new merchant acquirers that are not credit card companies. The committee for increasing competition in common banking and financial services is looking into separating the credit card companies from the banks. The criteria that have been set will be used in the examination and approval of investors who express an interest in purchasing the credit card companies, should any decision be made and anchored in legislation to require their separation from the banks. The new policy was discussed by the licensing committee that advises the Governor and the Supervisor of Banks, and received its support.
Section 36j of the Banking (Licensing) Law, 5741–1981, sets out the licensing obligation for merchant acquirers. In addition, Section 36k1 of the law establishes that anyone wishing to control and hold the means of control of a merchant acquirer requires a permit from the Governor of the Bank of Israel. The updated policy documents, as noted, will constitute guidelines for the Banking Supervision Department and for the Governor in examining requests for new merchant acquirer licenses and in examining requests for a permit to control and hold the means of control of a merchant acquirer or credit card company.
The supervisory policy was updated against the background of experience accumulated in the licensing and supervisory processes, as well as a re-examination of the risks to which merchant acquirers are exposed. The basis for the changes and easements is that acquirer activity creates lower risks than those of full banking activity, in view of the fact that the merchant acquirer is not permitted to receive deposits from the public.
The drafts published today include policy changes that streamline the licensing process and significantly ease the requirements of an entity requesting an acquirer license. In particular,
1. In order to ease the entry of new merchant acquirers:
· A party requesting a license will be able to receive a “comfort letter” from the Bank of Israel prior to the granting of the license, so that the party will be able to advance the processes of obtaining the required certifications vis-à-vis the international card organizations, and will be able to connect to the domestic card system, in parallel with completing the licensing process.
· A process has been carried out to remove technological barriers in connecting to the domestic card system. Thus, a new acquirer will be given the possibility, after obtaining a license from the Bank of Israel, of connecting to the card system on the basis of an agreement that will be signed with an existing acquirer, who will host the new acquirer on its infrastructure (in an aggregator format). The hosting will be provided for a limited time (for instance, until the required certifications are obtained from the international card organizations for the independent clearing of their brands, until the transition of a significant part of clearing activity in Israel to the new payment card system (“Ashrait EMV”), and so forth).
2. Regarding the ownership structure of a merchant acquirer or credit card company, the new policy sets out that:
· The size of the controlling core and the capital interest shall be significantly less than the policy that was in place until now. As such, the minimum required size of the controlling core is lowered from 50.1 percent to 20 percent (of the means of control of the merchant acquirer) for a large acquirer, and 25 percent for another acquirer;
· The “financial resilience” requirement of the controlling owner of a merchant acquirer shall be eased such that the required financial resilience of a controlling owner in terms of the capital interest declines from 250 percent to 150 percent.
· It will be possible to hold the means of control of a merchant acquirer, directly or indirectly, through certain corporations that in the past were prohibited from participating in the “chain of control”. For example, a nonfinancial or “investment funds” company may comprise the controlling core of a merchant acquirer. However, the updated policy clarifies that an institutional investor that is a significant financial entity (as defined in the Promotion of Competition and Reduction of Concentration Law, 5774–2013) cannot control a merchant acquirer that has been defined as a significant financial entity, including credit card companies. In addition, a significant nonfinancial company cannot also control the existing credit card companies, which have been defined as significant financial entities. Beyond that, any proposed holding will be examined on its own merits, in accordance with the criteria set out.
The Banking Supervision Department intends to make it possible to decentralize the controlling core of a merchant acquirer. Thus, the ownership of a merchant acquirer or credit card company may be completely decentralized, or held by a controlling core. For this purpose, amendments to legislation are required, which will apply similar arrangements to those that apply in relation to a banking corporation with no controlling core.
In addition to these easing steps, the Banking Supervision Department intends to make adjustments in 2016 to the applicability of Proper Conduct of Banking Business Directives, easing the regulatory burden on merchant acquirers in view of the uniqueness of these entities and the lower risks in their activities than those to which the banks are exposed. The adjustment will be made in relation to new directives and also in relation to the currently existing directives. Among other things, the Banking Supervision Department is examining easing the capital requirements for merchant acquirers.
The draft can be found on the Bank of Israel’s website. Entities operating in the field and the broad public are invited to submit comments until December 15, 2015, as detailed in the drafts.