The National Payment Systems Act, 2020 ("NPS Act") was passed by parliament on 29 July 2020 but to date, has not been gazetted.
The NPS Act was prompted by an increase in the use of digital and electronic financial services by private entities in Uganda offering various electronic payment products. In addition, financial institutions were favoring electronic payments and adopting branchless banking systems and had introduced the automated clearing house for clearing cheques and high-volume electronic funds transfers.
In addition, there remained a lack of regulation and supervision of payment service providers by the Central Bank posing safety risks to customers' funds and creating uncertainty. The Financial Institutions Act, 2004 posed limitations as it applied only to deposit taking institutions The payment service providers would pick and choose how they would wish to be regulated because of the vacuum in regulation. With further technological developments in the area and increased usage by the population, the Bank of Uganda had to act swiftly to keep up with these developments.
KEY FEATURES OF THE NPS ACT
Application of the Act
The Act applies to operators of payment systems, payment service providers and issuers of payment instruments and applies to any system or technology that enables the electronic transfer of money including electronic payments and remittances, electronic funds transfers, mobile money operators, card-based payments, aggregators, payment gateways, online payment service providers and electronic payments.
Role of the Central Bank
The Act grants the Central Bank the mandate to operate, supervise, regulate and oversee the various payments systems in Uganda to ensure their safety and efficiency. Under the NPS Act, the Central Bank has the legal mandate to perform licensing of payment system providers and e-money issuers, modify licences, issue corrective actions and revoke licences where necessary. It will also provide norms and standards for providers of payment system services, to request and gather payments related information, conduct on-site and off-site examinations, appoint an external auditor, take enforcement actions and oversee insolvency proceedings in case of commencement by a payment systems provider. The Central Bank also has the power to make regulations on liquidity, fair competition, customer diligence, anti-money laundering and transaction limits.
Categorisation of payment systems
The Act classifies payment systems in Uganda into three broad areas including;
- Systems operated by the Central Bank including Real Time Gross Settlement System (RTGS), Automated Clearing House (ACH) System and Central Securities Depository ("CSD");
- Payment services provided by commercial banks such as CSD by the Uganda Securities Exchange, internet banking, e-money - bank to wallet and wallet to bank, ATMs provided by commercial banks, POS provided by commercial banks and merchants; and
- Private sector payment systems including e-money providers like mobile money telecommunication companies, single purpose stored value cards, e-commerce, aggregators/integrators and remittance companies, all of which fall under the regulation of the Central Bank.
Regulatory sandbox framework
The Act provides for a regulatory sandbox framework. Regulatory sandboxes offer a space to test new technology in the financial services sector for a limited time without having to undergo the licensing route. They encourage innovation of new products while still ensuring adequate consumer protection in a relaxed regulatory environment. The framework does not require a licence however the approval of the Central Bank must be obtained.
Restrictions on certain transactions
The Act provides for permissible and prohibited transactions. Permissible transactions under the Act include domestic payments, domestic money transfers, bulk transactions including payment of salaries benefits and pensions, cash in and cash out transactions, merchants or utility payments, cross border payments or transfers, savings and credit products in partnership with an Supervised Financial Institution (SFI) and Central Bank approval, insurance products in partnership with a licenced insurer and any other transaction approved by the Central Bank.
Whereas prohibited transactions include deposit taking by electronic money issuers other than SFIs or micro finance and deposit taking institutions (MDFIs), over-the-counter transactions unless the identification of the depositor is obtained, recorded and transmitted to the receiver, issuing airtime as electronic money and any other activity other than that which the licensee is approved to undertake.
A key provision in the Act is a requirement for a payment service provider, a financial institution or microfinance deposit taking institution, other than an entity solely established to issue electronic money, that intends issue electronic money to incorporate a subsidiary legal entity for that purpose. This requirement is going to affect the telecommunication companies which currently provide mobile money services. They will have to set up different entities to continue issuing electronic money.
The Act also provides mechanisms as to how customers money will be kept and the mechanisms by which the Central Bank will supervise and monitor the provision of these services.
The National Payment Systems Act is a welcome regulatory development in the area of digital financial services and is likely to encourage increased investment in Uganda. However, there is an urgent need for the Central Bank to pass the regulations required to operationalise the provisions of the Act once it becomes law.
It remains to be seen whether the Act will stand the test of time with further development of payment systems like frictech and naked or invisible payments. Furthermore, will there be a move towards having a regional approach to payment system regulation as countries initiate regional integration?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.