About 200 third-party payment firms — led by Alibaba Group-affiliated Alipay and Tencent Holdings Tenpay, have provided the core of Chinas dynamic online retail and financial market. But theyve also been accused of sidestepping necessary regulatory supervision, caixin.com reports. The market has been expecting major infrastructure changes since late July 2016, when the Peoples Bank of China approved a plan to create a new platform to clear all transactions from online payment gateways using standard protocols and rules.
The Payment & Clearing Association of China (PCAC), an industry group whose members include banks and payment-service providers, is leading efforts to develop the clearinghouse and will also be an investor. The association will flesh out the plan approved by the central bank with details on where the clearinghouse will be based and how it will be managed. The principal is to make sure that the online clearinghouse will be under the central banks control, the source informs citing various sources.
The decision followed the release of a set of rules on online payment services over the past few months, including stricter requirements for payment providers to verify the identity of their clients. The rules reflect regulators concerns that some payment providers have served as a shield for financial fraud, money laundering and other illegal transactions.
Offline payments, such as those made at point-of-sale machines in shopping malls, are mostly handled by a clearing system provided by the state-backed bankcard association China UnionPay. But the majority of payments made online through so-called third-party payment providers are processed separately according to different terms in the payment firms own agreement with banks. This makes it hard for banks to maintain consistent standards and control risks.
Also, before transactions are cleared, the funds that will be transferred to the receiver sit in the bank account of the payment service provider, raising concerns that they could be used for unintended purposes. Data from PCAC showed that in 2015, third-party payment providers handled online transactions worth CNY 24.2 trillion, up 42% from 2015.
The complex capital flows of third-party payment firms have worried the central bank for their opacity and inadequate risk control. If a liquidity crisis breaks out, it will easily expand through the internet to a systematic crisis, and no single payment firm can afford the risks, said a central bank official who spoke on condition of anonymity, the source cites.
The proposed clearing platform is expected to address these concerns as it will cut the direct link between third-party payment firms and banks, and set a clear boundary between payment and clearing services for risk control, the central bank official said. Instead, payment firms will connect with the new platform and clear their transactions through the platform, which will be linked with the central banks clearing system, a PCAC source said. Also, the creation of the platform will be a step toward putting customers funds under centralised management and supervision, central bank officials said.
But building the new nexus for online transactions will involve massive work when it comes to business and technical issues. It will bring profound changes to Chinas online payment market, reshuffling relationships between payment firms, banks and UnionPay, the only existing interbank payment clearinghouse. The precondition is to make sure the platform is secure and neutral, the central bank official said, adding it will not change how customers use online payment services, the source cites.
According to internet business data provider iResearch, Alipay handled over 40% of third-party payments by the end of March 2016, while Tenpay held about 20%. The rest were conducted by more than 200 firms that held a license to provide online payment services. Many third-party payment providers are worried that the dominance of Alipay and Tenpay may allow the pair to influence or control the operation of the new clearinghouse.
Chen Zhong, a financial professor at Peking University, said the clearinghouse can learn from the shareholding structure of UnionPay, which was set up in 2002 with investments from over 100 banks but with none of the shareholders having more than a 5% stake.
A draft plan for the clearinghouse released in April 2016 by PACA showed that the new entity may have an initial capital investment of 50 million yuan from up to 50 investors. Shareholders will include only third-party payment companies, rather than any investment from banks or UnionPay.
But banks have shown caution about the proposed platform. People with knowledge of the matter told Caixin that big banks such as Industrial and Commercial Bank of China and the Agricultural Bank of China, as well as a number of smaller banks, have opposed the plan due to concerns that their respective businesses may be affected.
A staffer at a state banks online banking department said the clearinghouse plan placed banks in an unfair position. Third-party payment firms can still use banks gateways to make payments through the clearing platform without giving banks any details about the transactions, which makes it hard for banks to verify the money transfers. But a central bank official said that compared with current operations, the clearinghouse will make the information of payers and receivers more transparent., the source cites.
Every day we send out a free e-mail with the most important headlines of the last 24 hours.
Subscribe now