The virtual debit card is fast becoming a reality for many consumers around the world who do not have access to online shopping sites that require payment by a credit card or who are simply afraid to use their credit card details while shopping online. Payment systems are constantly being developed around the world to combat this problem by offering prepaid virtual debit cards which are neither debit cards, credit cards nor a physical card. These systems provide consumers with an online payment method in the form of an account that provides the consumer with a 16 digit card number, an expiry date and a three digit security number which is displayed on their screen. The consumer can load funds onto their virtual debit card using their personal debit or credit card, which funds they can then use to make online purchases. These payment methods go beyond the well-known “prepaid” card by giving the consumer the option to withdraw funds from their virtual debit card and deposit it back into their personal bank account.
It allows online shoppers to limit exposure of their bank accounts to fraud. This global trend is appearing in the South African market but legally it can only be provided by a bank or by a company in partnership with a bank. The deposit by a consumer from their personal bank account into their virtual debit card coupled with the ability to claim repayment of the deposit on demand constitutes a deposit in terms of the Banks Act. Any non-bank who contravenes the prohibition is guilty of an offence.
In 2009, the South African Reserve Bank (SARB) issued a position paper on e-money. The position paper defines e-money as the monetary value represented by a claim on the issuer. It is generally accepted as a means of payment by third parties and is redeemable for physical cash or a deposit into a bank account on demand. The position paper specifically provides that according to SARB’s approach only registered South African banks are allowed to issue e-money in South Africa.
Using a virtual debit card to shop online anywhere in the world implies that it is a generally accepted means of payment by persons other than the issuer. The money is effectively stored electronically on the virtual debit card and balances can be re-deposited into the cardholder’s bank account. Accordingly, the funds held in a virtual debit card constitute e-money as defined in the position paper.
So how do non-banks enter into the virtual debit card market in South Africa? Non-banks are required to enter into arrangements with a bank to allow them to offer payment-related services in conjunction with the bank. However, approval of the Registrar of Banks is required. South African gamblers, who are prohibited from using their personal credit cards for online gambling, are now acquiring virtual debit cards offered by foreign, non-bank institutions in order to place their bets. This is illegal in terms of the exchange control regulations and South African consumers are cautioned against using virtual debit cards to circumvent the law.