New fintech legislation in Ukraine: adopting innovations

This year the Law of Ukraine on Payment Services (“LPS”) enters into force marking a new chapter in the country’s financial business environment and regulation. LPS introduces description, framework of operation and regulation of contemporary financial technologies, including electronic money, payment networks and Central Bank Digital Currency (CBDC) on the territory of Ukraine.

The new law provides for a better security and efficiency of financial services provision by aligning it with the similar laws of the European Union. Harmonization of Ukrainian legislation to the one of the EU is of a great priority for Ukraine since the country has officially been granted with the EU candidate status on 24 June 2022 confirming Ukraine’s European perspective.

The Ukrainian lawmakers have lined up the LPS with the Revised Payment Services Directive (Directive (EU) 2015/2366), also known as PSD2, that regulates payment services in the EU, as well as with the E-Money Directive (Directive 2000/46/EC), known as EMD, that regulates electronic payment systems in the EU.

According to the new law, the principal regulatory function in the payment services sphere is assigned to the National Bank of Ukraine that will issue licenses to market participants for their operation.

The range of payment service providers is expanded and their activities and allowed operations are now distinctly defined. In particular, nine types of payments service providers are prescribed by the LPS:

1)  banks;

2)  payment institutions (PI), including small payment institutions (SPI);

3)  branches of foreign payment institutions;

4)  electronic money institutions (EMI);

5)  financial institutions that have the right to provide payment services;

6)  postal operators;

7)  providers of non-financial payment services;

8)  National Bank of Ukraine;

9)  state authorities, local self-government bodies.

Non-banking payment service providers, that include PI, SPI, EMI postal operators, will be allowed to open payment accounts and issued payment cards and electronic money.

The new types of payment services that the LPS introduces are:

1)  services for crediting and debiting of cash funds to user accounts, as well as all services related to opening, maintaining and closing accounts (except electronic wallets);

2)  services for withdrawing cash from user accounts, as well as all services related to opening, maintaining and closing accounts (except for electronic wallets);

3)  services for performing payment operations with the user’s own funds from/to the user’s account (except payment operations with electronic money), including:

• execution of a credit transfer;
• execution of a debit transfer;
• performing another payment transaction, including using payment instruments;

4)  services for execution of payment operations from/to the account of the user (except for payment operations with electronic money), provided that the funds for the execution of the payment operation are provided to the user by the payment service provider on credit terms, including:

• execution of a credit transfer;
• execution of a debit transfer;
• performing of another payment transaction, including using payment instruments;

5)  services for issuing payment instruments and/or acquiring payment instruments;

6)  funds transfer services without opening an account;

7)  services for issuing electronic money and performing payment operations with it, including opening and maintenance of electronic wallets.

The LPS also provides for non-financial payment services that include:

1)  payment transaction initiation services;

2)  services for providing information on accounts.

Established minimal share capital requirements depend on the payment services provided by the company under the LPS. The requirements are as follows:

• UAH 1 million — for provision of payment transaction initiation services or funds transfer services without opening an account;
• UAH 3 million — for provision of payment transaction initiation services and funds transfer services without opening an account or one of the financial payment services provided for in clauses 1-5 above of the types of payment services that the LPS introduces;
• UAH 5 million — for provision of several financial payment services provided for in clauses 1-6 above of the types of payment services that the LPS introduces, or for a postal operator, regardless of the number and types of payment services it intends to provide;
• UAH 10 million — for payment services for issuing and executing payment transactions with electronic money.

In accordance with the LPS, the National Bank of Ukraine will create regulatory sandbox environment for testing services, technologies and tools based on innovative technologies. Following the end of the testing period, the participant of the regulatory sandbox will have the right to continue its operation after obtainment of the relevant license. In addition, the law provides for a grace-period for up to 2 years for participants of the sandbox during which the simplification or non-application of certain requirements established by legislation may be allowed. The licensing procedure for sandbox participants can be less strict too.

The LPS also establishes the system of open banking, which is a network between financial service providers allowing access to different payment accounts of a client in a single account, facilitating the management of multiple accounts.

The new legislation will create more safe, sound and up-to-date legal environment for financial technology companies in Ukraine that will improve the quality of nation’s regime for fintech by granting better opportunities for business as well as making more features of modern innovative technologies in the finance industry available to the Ukrainian clients.

The LPS will serve as an impulse for a healthy competition, better industry prices, innovation, legality and expansion of the range of financial services.