Another step to tighten the control on third party payment companies in China

Written by Felix Yang || January 16 2017

Last Friday, the People’s Bank of China (PBOC), China’s central bank, issued a new notice for the third party payment companies which will be enacted on April 17th, 2017 and will require the payment companies to deposit around 20% of the held customer fund to specified general bank accounts.

The funds to which the PBOC is referring are the funds loaded onto a customer's digital wallet. Or they might be funds held in escrow during an e-commerce transaction.  

This amount can be significant and as of Q3 2016, was over RMB460 billion (US$65.7 billion). It is a huge amount of cash which technically belongs to the consumers and, from the government point of view, may also create risks for consumers if it is mis-used. Payment companies seem to manage these customer deposits better than some of their P2P peers, but also gained a significant amount of deposit interest on the money which, according to the PBOC, amounted to 9.52% of payment companies’ income in 2016.

20% of customers’ fund is just a start, in the future, the PBOC has indicated that the deposit rate will eventually reach 100%, which means an absolute ban on using clients‘ money for anything. Although it may not initially be a problem, the new rule will require payment companies to find new sources of revenue. On the other hand, it is good news for banks because banks do not pay interest on the deposit. Also according to the new rule, this part of deposit does not have influence on banks’ required reserve so it will lower the cost of capital for the banks.

Finally, the new rule may also be related to the "Internet Union" which is designed as the clearinghouse for online transactions, essentially a China UnionPay for digital transactions. It will cut direct connections between payment companies and banks and collect all the transaction data for PBOC - all steps towards greater control of the digital payments industry.