By: Lamiaa Youssef

The new banking law 194/2020 was issued and published on 15 September 2020 (“New Banking Law”). This new law is set to achieve several key goals, in particular, to ensure that Egypt’s banking system keeps pace with international standards of best practice and to ensure that the required legal framework is in place so as to allow for and facilitate the development and modernisation of the payments system. This is an essential pillar in achieving the Government’ s economic expansion plan driven by increased financial inclusion and digital transformation. In this alert, we concentrate on the implications of the New Banking Law on the evolving and growing sector of payments processing in a country where cash is still king. Stay tuned for our next alerts in this series on the New Banking Law: Alert#2: Projects & Finance – The Collateral Regime, Digital Banking and Repatriation of Funds under the New Banking Law. Alert#3: Banking M&As– The Implications of the New Banking Law on M&A Transactions.

1. The payments industry in Egypt

Egypt’s payments industry is on a trajectory for growth. There are immense opportunities for players in the payments sphere, with many untapped tools, technologies, and market segments.

As of 2017, (i) only 32.8% of Egyptian adults had a bank account (up from 9.7% in 2011) and (ii) only 5.9% of adults used mobile money, a debit or credit card, or a mobile phone to make a payment,  used the internet to pay bills or to buy something online (World Bank Database).

These low penetration rates, in addition to a fast-growing population, leave much room for growth in an underserved sector, promising a high success rate and return to entrants into this sector.  Fawry, Egypt’s leading homegrown digital payments provider IPOed on the Egyptian Stock Exchange almost a year ago, and quadrupled in value, despite launching in the midst of Covid-19 (Bloomberg).

These exciting and socially necessary opportunities come with an underdeveloped legal and technological infrastructure, which allowed non-bank digital entrants to encroach on the turf of traditional banks and reshape the financial services landscape. This competition reversed the balance of power, leaving banks striving to catch up and to partner with non-banking institutions. The Central Bank of Egypt (“CBE”) issued a circular in August 2020 allowing licensed banks to fully own companies providing payment services without abiding with capital thresholds.

The New Banking Law is issued as an additional milestone in the government’s journey of prioritization of financial inclusion and cashless payments.

2. Payment processing is now a licensed activity

Pursuant to the New Banking Law, the regulation of the payment eco-system has been completely reshuffled. and  the supervision of the CBE has been extended to regulate various players in the digital payments sphere and impose direct licensing duties on them.

Previously, the CBE exercised “indirect” supervision over the payments industry through its supervision of banks. It only imposed licensing and approval requirements on banks partnering with payment service providers. Other players in the payments sphere had to operate under the umbrella of a licensed Egyptian bank to gain access to the payment systems infrastructure.

The New Banking Law explicitly extends CBE supervision to “Payment Systems” and “Payment Services” and treats both activities in the same way as banking activities. Both activities will require a license. Accordingly, Payment System Operators (“PSOs”) and Payment Service Providers (“PSPs”) will have to comply with various requirements set out in the New Banking Law.

“CBE is now a regulator for non-bank payment system operators and payment services providers. PSOs and PSPs are now required to obtain a license.”

3. Deadline for compliance

The New Banking Law provides a grace period of one year from 16 September 2020 for entities to comply.

“Existing entities must correct their status before 16 September 2021.”

4. What does it mean to be regulated?

In addition to being subject to the audit and inspection of the CBE, a PSO and PSP must:

• obtain a license from the CBE to operate.
• deposit a bond in favour of the CBE to guarantee performance of contractual obligations.
• comply with rules regarding electronic retention of documents to be determined by the CBE.
• obtain CBE approval on the appointment of executive managers.
• notify, or obtain approval from, the CBE before changing the company’s shareholding structure above certain thresholds.
• obtain CBE approval before changing its articles of incorporation.

“Appointing executives, change in shareholdings and amendment of statutes require CBE approval.”

5. Executive regulations and the CBE’s authority

The New Banking Law explicitly authorizes the CBE to issue regulations governing the licensing requirements and processes of PSOs and PSPs. Once issued, these regulations should add more clarity and detail to the general obligations set out by the New Banking Law.

This does not necessarily mean that the application of the New Banking Law will be delayed until the issuance of the regulations. While the regulation of the payments sector is in a state of flux, the CBE does have existing regulations governing some payment services. Examples include the CBE regulations on:

• payments via mobile phones;
• payment facilitators and aggregators;
• electronic banking and payment methods for e-money;
• payment via prepaid cards;
• contactless payment tools; and
• payment using QR Codes.

While the existing regulations were primarily addressed to banks and are not exhaustive, they include many details regarding operations and technical requirements.

We do not foresee that the CBE will completely discard the existing regulations and issue entirely new ones. It is more likely that the CBE will continue to apply existing regulations whilst l extending their scope to non-banking institutions.

However, even if the existing regulations are merely updated or substituted by new ones, it is likely that – because the regulated activities are highly technical – the CBE regulations will remain high level and the CBE will continue to fill the gaps in the regulations with its uncodified practice.  Potential players will need to reach out to the CBE, on a case by case basis, to fully understand the details and conditions of licensing applicable on their particular payment tools and its business models.

“Existing CBE regulations on payments remain relevant and the forthcoming regulations are likely to be shaped along the same lines.”

“CBE is delegated to issue licensing requirements and procedures and will likely continue to exercise a lot of influence in filling gaps in the regulations.”

6. Electronic evidence

A cornerstone for providers of payment services – and for any business operating online – is the ability to use electronic means as evidence for agreements, transactions, and consent. Law 15/2004 regulating electronic signature and establishing the Information Technology Industry Development Agency (the “E-signature Law”) fell short of providing the necessary impetus for digitization of agreements and transactions, slowing down progress in e-commerce and e-banking in Egypt.

While the New Banking Law did not exclude the banking and payments sectors from the application of the E-signature Law, it effectively ignored it. The New Banking Law addresses electronic evidence for banks, and other licensed entities governed by it, and delegates to the CBE the issuance of regulations on electronic confirmation, terms and conditions, and electronic payment orders.

According to the New Banking Law, these electronic means will have validity as evidence as original documents, if they are stored pursuant to rules to be issued by the CBE in this regard.

In addition, according to the New Banking Law, licensed entities must retain electronic copies of all records, contracts, correspondence, commercial papers and deeds relating to the accounts or payment orders for the periods required in relation to their wet ink originals.  Again, these copies will have validity as evidence as their originals, if they are stored pursuant to rules to be issued by the CBE in this regard.

Stay tuned for our next alerts in this series on the New Banking Law:

• Alert#2: Projects & Finance – The Collateral Regime, Digital Banking and Repatriation of Funds under the New Banking Law.
• Alert#3: Banking M&As– The Implications of the New Banking Law on M&A Transactions.

We are here to help. Feel free to reach out to our Fintech & Payments team if you have any questions or need assistance in navigating these difficult times.

To download the full article, click here.

We are here to help. Feel free to reach out to our Fintech & Payments team if you have any questions or need assistance in navigating these difficult times.

To download the full article, click here.