The dramatic alteration to the in-person product experience resulting from the global lockdown has accelerated the growth of online marketplaces. The requirement of new security procedures for retailers and health protocols for consumers continues to move shoppers towards online purchases. There are now millions of mobile apps, websites and platforms which grant consumers access to a plethora of products and services. This is evidenced through the 2021 Online Marketplaces Report illustrating that 62.5% of all global online spending occurred via digital marketplaces in the year 2020 which was an overall 29% increase in gross merchandise sales.
This evolution of online marketplaces requires the law to keep abreast with digital developments and ensure accountability of all parties involved. While the more developed legal systems have sought to keep their legislation updated, the Pakistani legal system is severely lacking in this regard. Even though the existence of prominent international players in the Pakistani e-commerce industry has benefitted the economy, it has also highlighted the problematic nature of the legislative framework. Under the existing laws of Pakistan, the concept of marketplace platforms has not been independently defined by any statute or regulation. This gap is further highlighted by the application of the law on payment systems and the considerations involved in electronic fund transfers.
The Companies Act 2017, being the primary legislation applicable to companies in Pakistan, has restricted companies from engaging in business activities unless the required licences, authorizations or approvals have been obtained. This means that any licensing requirements existing under the laws of Pakistan must be fulfilled before a company can engage in a particular activity. One such business activity concerns digital payments which fall within the ambit of an electronic fund transfer. This is a regulated activity under the Payment System & Electronic Funds Transfer (PS&EFT) Act 2007 defined as follows:
“Electronic Fund Transfer” means any transfer of funds, other than a transaction originated by cheque, or draft, which is initiated through an Electronic Terminal, telephonic instrument, or any other electronic device so as to order, instruct, or authorize to debit an Account.
“Electronic Terminal” means an electronic device, operated by a consumer, through which a consumer may initiate an Electronic Fund Transfer.
Electronic fund transfers are further governed by the Payment System Operator and Payment Service Provider (PSO/PSP) Rules 2014. Under subsection 3(4) of the PSO/PSP Rules, any entity engaged in operating and/or providing payment systems related services in Pakistan is required to obtain a PSO/PSP license from the State Bank of Pakistan (SBP). The definition of ‘payment systems’ may be classified as vague, flawed and having a wide scope of application. A simple reading reveals that any company operating or providing transfer or settlement relating to tangible (cash) or intangible (e-money) payment instruments shall be subject to the licensing requirements of the PSO/PSP Rules.
The flawed nature of the definition is specifically owed to the classification and consolidation of PSO and PSP under a single definition. Taking into consideration the literal meaning of the terms ‘payment system operator’ and ‘payment service provider’ and their recognized operational activities, a PSO and PSP appear to be undertaking distinguished functions. Therefore, both terms should be independently construed for licensing purposes by the regulator. Furthermore, the lack of jurisprudence and guidance from the State Bank on the applicability of the PSO/PSP Rules enhances the ambiguity surrounding the scope of the law.
In the absence of regulatory guidance under the laws of Pakistan, inference may be drawn from other jurisdictions. The laws of the European Union, United Kingdom, India and Bangladesh have distinctively defined payment system operators and payment system providers. This highlights the problematic nature of the definitions provided by the State Bank of Pakistan. A PSP undertakes the transfer/settlement of a payment transaction (whereby licence is necessary), while a PSO merely operates the system performing the payment related activities and does not undertake any transfer/settlement (whereby licence is not necessary). However, under Pakistani laws, any company acting as an aggregator of payment transactions or facilitator in transactions shall be subject to regulatory compliance.
When international players such as the Alibaba Group entered Pakistan, the legislators faced a dilemma concerning taxation as these players were not retailers and only made a commission on sale. Therefore, the Income Tax Ordinance (as amended through the Finance Act 2017) introduced the concept of an ‘online marketplace’ primarily for taxation purposes. It reads as follows:
“…online marketplace” means an information technology platform run by e-commerce entity over an electronic network that acts as a facilitator in transactions that occur between a buyer and a seller.
The concept of ‘e-commerce’ is defined within the PS&EFT Act as follows:
For the purpose of this section e-commerce means the activity of buying, selling or contracting for goods, services and making payments using internet or worldwide web through communication networks including of wireless networks, within or outside Pakistan.
It becomes possible to infer that a company engaged in the buying/selling of goods or services through a digital platform in Pakistan shall be classified as an ‘online marketplace’. In addition to facilitating the sale of goods or services, online marketplaces also manage payments within each transaction (i.e. the payment is received from the buyer on the platform and subsequently paid out to the seller by the platform). Even though such settlement of payments requires regulatory compliance under the PSO/PSP Rules and various online marketplaces in Pakistan operate with a similar settlement structure, the State Bank of Pakistan has not indicated any non-compliance by these existing entities. In this regard, the definition of ‘payment systems’ does not provide any exception for an online marketplace. Therefore, under the current legal framework, the settlement of transactions by online marketplaces is in violation of the PS&EFT Act and PSO/PSP Rules.
This negative impact of the PS&EFT Act on such entities has been widely criticized by various academics and practitioners. However, no clarification or guidelines have been issued by the State Bank of Pakistan to date. An analysis of the regulatory framework of other jurisdictions such as the European Union reveals that online marketplace platforms either obtain a payments licence or engage a licensed entity to perform the payment leg of the transactions (including settlement), while in India, online marketplaces are classified as intermediaries and further distinguished into ‘payment aggregators’ (PA) and ‘payment gateways’ (PG). The PA facilitates the marketplace by accepting payment from customers for completion of transaction and the PG merely provides the technological infrastructure. A company operating as a PA requires a licence while a PG does not. Therefore, online marketplaces performing PA functions are required to obtain authorization and separate their marketplace activities from the aggregator functions.
An analysis of the laws of the European Union, India and Pakistan reflects that the PS&EFT Act and PSO/PSP Rules fail to provide a provision or exemption for online marketplaces. Therefore, in the absence of any such provision or guidelines, any marketplace platform providing payment settlement services or acting as an intermediary in a payment transaction shall require a PSO/PSP licence under the provisions of the PS&EFT Act and the PSO/PSP Rules issued by the State Bank of Pakistan. However, none of the current online marketplace platforms operating in Pakistan have complied with these legal requirements. Therefore, the operations of online marketplaces in Pakistan may be deemed to be in contravention of the existing laws of the country.
The current gaps and flawed nature of the existing laws continue to be ignored in Pakistan. As a result, any company seeking to provide e-commerce software or, more specifically, establish an online marketplace shall be subject to the payment systems law and licensing requirements. Moreover, the enforceability of the PS&EFT Act and PSO/PSP Rules remains questionable as various leading players in the e-commerce and digital market of Pakistan continue to operate without licensing. In order for the legislative and regulatory framework to be potent, it is pertinent for the State Bank of Pakistan to address the perplexed nature of the payment systems law. Until this is achieved, the disparity in licensing and operations of the online marketplace sector shall remain disordered and hinder the growth of e-commerce in Pakistan. It remains to be seen whether the SBP shall take heed in this regard.
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