Will the PBOC’s Draft Guidelines hurt third party payments in China?

Written by Fiona Zhao || March 25 2014

After the PBOC’s suspension of QR code payments and virtual credit cards, they have begun soliciting comment on draft guidelines on “Payment Institutions Network Payment Business Management Approach” (provisional).

The provision is targeted at 3rd party payment companies. The most important elements of the draft regulations are: 1) payment institutions are not allowed to set up payment account for financial institutions and other institutions that are involved in capital-raising, financing, guarantees and the currency exchange business; 2) payment institutions should manage money on the platform separately; money can only be used for consumption and transferring and are not allowed to use to withdraw from banks; 3) for the individual account, the amount of a single transfer should not exceed RMB 1000. For the same client, money transfer via payment accounts should not exceed RMB 10,000 a year. For an individual account, single spend amounts should not be more than RMB 5,000. For the same client, the cumulative consumption per month should not be over RMB 10,000. If exceeding the limits, clients should use their bank account.

Although the original purpose of the PBOC is to supervise funds flow from the third party payment companies and mitigate potential risks, if the draft guidelines are implemented, we think that it will be tough for third party payments as supervision and will limit future development. For example, provision 1 will prevent P2P companies, financing corporations from using online payment via the third party payment companies. Provision 2 largely limits the usage of capital in the third payment party accounts. If the money on the platform cannot come from banks directly, users may not be likely to deposit money in the third party payments’ accounts. Provision 3 will severely limit the use of 3rd party payments. However, it should be noted that this provision will also have a significant impact on Yuebao. As known, Yuebao is mainly funded through Alipay. Market data shows that the average amount held by a user for Yuebao is over RMB 1000.  On March 18th, Alipay Tenpay announced officially that as the provision is still a draft, these two payment parties are operating completely legitimate. Yuebao based on Alipay and financial products based on WeChat are not influenced by the draft.

The PBOC has held meeting with internet finance giant such as Baidu, Alibaba, Tencent etc, and scholars. Although the provisions are only draft rather than an official regulation on third party payments in China, to a certain extent, it reflects PBOC’s attitude towards the third party payment companies. Here we think that in recent years, especially in 2013, the surge of internet finance has trigged the interests of banks. Although there is constant commentary calling for splitting up the monopolistic nature of the main banks, it doesn’t seem easy to "marketize". In face of the challenge from internet finance, it seems that banks have to reform to adapt to the constantly changing environment. However, once it earns support from PBOC, things will be different. China is a policy oriented country. If the provision is effective, the third party payment companies will have no choice but to obey the rules. The future of the third party payment companies is not positive. Obviously banks will be the largest beneficiaries of the regulations on third party payments in China. It seems that the interests of banks are still hard to touch. Whenever their interests are trigged, regulators will come to the rescue. The third party payment companies are the current target, who will be the next one?