Risk Involved in Payment Services: A “Next Risk” Scale
The Israeli Securities Authority (ISA) has proposed new regulations for payment companies, aimed at safeguarding customers’ funds and protecting them from financial harm. The proposal includes a range of measures to mitigate risk, which we can categorize on a “next risk” scale.
Categorizing Payment Services by Risk Level
The ISA proposes a tiered approach to regulating payment services based on their level of risk.
Lowest Degree of Risk: Money Remittance Service
- Minimum initial capital requirement: ILS 80,000
- No additional capital requirements for companies with limited volumes of activity
Moderate Degree of Risk: Payment Initiation Services
- Minimum initial capital requirement: ILS 200,000 (basic) or ILS 500,000 (advanced)
- Additional capital requirements for companies with limited volumes of activity
- Professional liability insurance or deposit required as supplementary means to initial capital
Higher Degree of Risk: Issuing Means of Payment and Acquiring Payment Transactions
- Minimum initial capital requirement: ILS 500,000
- Additional capital requirements for companies with limited volumes of activity
- Requirements for segregation of customers’ funds from company assets
Highest Degree of Risk: Payment Account Management
- Minimum initial capital requirement: ILS 1,400,000
- Additional capital requirements for companies with limited volumes of activity
- Requirements for segregation of customers’ funds from company assets and corporate governance arrangements to reduce risk of financial harm
Measures to Mitigate Risk
The ISA has also proposed a range of measures to mitigate risk, including:
- Custodianship requirements: entities retaining customers’ funds must maintain custodial accounts in a reputable institution.
- Anti-money laundering and terrorist financing regulations: payment service licensees and applicants must comply with anti-money laundering and terrorist financing regulations.
- Fees regulations: payment service licensees and applicants must comply with fees regulations to ensure transparency and fairness.
- Foreign corporations’ access to financial systems: foreign corporations seeking to operate in Israel’s financial system must meet specific requirements.
- Honesty and integrity requirements: supervised entities must demonstrate honesty and integrity in their operations.
The proposed regulations aim to strike a balance between facilitating innovation in the payment services sector while ensuring the safety and soundness of the financial system. The “next risk” scale provides a framework for understanding the varying degrees of risk involved in different types of payment services, allowing regulators and stakeholders to better assess and mitigate potential risks.