Is Payments Association launching a clearing platform to streamline the payments industry or to compete with Alipay?

Written by Denis Suslov || 21 Apr 2016

There's a clearing platform in development that might change the playing field of the payments industry in China. The Payment and Clearing Association of China had a member congress in April and has approved a proposal to build an Internet payment clearing platform for non-bank payment institutions.

The proposed platform is called "WangLian" in Chinese, which is similar to "YinLian" (China UnionPay). The similarity is not coincidental - WangLian will perform a function comparable to CUP's, only not for bank cards, but for Internet payments.

WangLian will become a central networking point between banks and payment service providers (PSPs), so that each of these players does not have to maintain numerous connections themselves, but have a single link with WangLian. Currently banks have to maintain relationships with a number of payment companies: Alipay, Tenpay/WeChat which represent approximately 70% of all transactions, and the long tail of the smaller companies. PSPs have the same problem, though for them it probably is even more acute: there are at least 20 large banks in China, and many more smaller ones. For small PSPs it can be too expensive to onboard all these banks.

Fees are not cheap either. QuickPay, the currently offered service that connects PSPs and banks is designed in a way that banks charge PSPs a fee every time they want to access consumer bank accounts. Banks apply the fee rate based on scale, with discounts for high volume, thus for some smaller firms the rate can make their business unprofitable.

The proposal states that the new platform will lower fees and let smaller firms stay profitable. Also, proponents of the WangLian claim that it will unify standards, increase efficiency and help fight illegal payment companies.

The new platform will also serve as a custodian for reserve funds - user funds that have to be kept in a safe account and can not be used by a PSP. With a centralised system, reserve fund status will be more transparent than it is currently, as now firms keep reserve funds where it is convenient for them which is harder for regulators to supervise. There have also been cases of misused user funds which then were not paid back when users wanted to withdraw their funds.

At the same time, it is easy to be skeptical about the proposed clearing platform - the existing payments market, where giants like Alipay in effect conduct clearing, works well, without any significant security issues reported over the years of operation. It might seem that the PBOC-backed and State Council-approved Association would like to take some market share away from the currently dominant privately-owned businesses.

To better understand the government's thinking it is valuable to see an official comment: Mr. Yang Ke, Director of Minsheng Bank's Credit Card Center, was among of those who proposed building the system early in 2014. Mr. Yang said that "as PSPs directly connect to bank accounts, they in fact do inter-bank clearing. This is efficient, but has to be regulated", thus "there is a need for inter-bank non-card clearing". The last sentence likely means that the regulators would like to see a state-operated clearing for online payments, and the free reign of Alibaba and Tencent in the space might be over.

According to the proposal, the PCAC-driven platform will have no more than 50 shareholders, with each investment no more than RMB 50 million. WangLian is currently going through the PBOC approval process, and might be launched as early in 1H2016, that is rather optimistic timing - the platform was under discussion since 2014, but there was no agreement reached, likely because balancing all of the different interests can be challenging. 

In addition, a number of important issues have to be clarified before it is possible to make a better estimate of the impact WangLian will have on the industry: Will it be mandatory for all PSPs to join? Will the price be higher than it is now? Does it mean this will kill profit margins for the already strained small payments companies? One thing is clear - if this platform is launched, it will change the existing landscape of the payments industry in China.

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