The direct connection between banks and payment companies has been the core reason for transactions shifting away from China Union Pay (CUP) over the past few years as Alipay and WeChat pay have developed their own payment infrastructure that completely avoids the banks. To start with, it saves transaction costs by cutting CUP’s fees which is a substantial savings, but the more critical element is the transaction data, which is what the Chinese government is likely looking to control.
To remove the direct “bank - payment company” connection that does not run on China UnionPay, Wang’lian is designed as a substitute system, effectively an “Internet payment clearing platform for non-bank payment institutions.” Its function is similar to CUP as a platform between payment companies and banks, but for internet payment instead. It is expected that, after the launch of Wang’lian, the government will give all banks one year time to adjust and transfer their business to Wang’lian.
Controlling the Custodian
To cut direct connection between payment companies and banks, it is not enough to only create a substitute, so the government is looking to control how custodial funds are managed, which is insurance that the payment companies will stop using their own direct connections and join Wang’lian.
The custodial funds consist of the money that belongs to consumers or merchants (or an unused part of a pre-paid card). During the transaction process, the payment company holds custodial funds for certain periods of time (wealth management products do not count) as the transaction is being completed or when a user has their money in a digital wallet. It is a huge amount of money. PBOC data shows that custodial funds on all 267 Chinese payment platforms has reached RMB461 billion (USD66.8 billion).
In January 2017, the PBOC required payment companies to deposit a certain amount (20%) of custodial funds into a specific account in the appointed bank by April 17th. There, the custodial funds will gain no interest. Eventually, we expect the 20% will increase to 100% which will force the end of the direct connection between banks and payment companies.
In 2016, Real ID requirements, Categories of Accounts control, and setting up limits on payment amount and times, pushed the payment industry to focus on small payments and inclusive finance. This year, the launch of Wang’lian and control on custodial funds will bring an end to the direct “bank – payment company” connection. More importantly, the payment companies will have to share their data with the government.
With so much of the Chinese tech giant's business models reliant on using and leveraging big data, the implications of Wang'lian could be quite large for companies like Ant Financial and Tencent. How they adapt and move forward will be telling as the banking regulators and the industry itself look to take back what was originally theirs: payments.