Central bank sends mixed signals on online payments

Central bank sends mixed signals on payments as it seeks to tighten regulations over industry

PUBLISHED : Monday, 21 July, 2014, 3:18am
UPDATED : Monday, 21 July, 2014, 3:35am

A quiet tussle is playing out between AliPay, China's biggest online payment platform, and People's Bank of China, the mainland's central bank.

The game of tug-of-war, which enmeshes the 17 trillion yuan (HK$21 trillion) online payment industry, underlines the challenges the PBOC faces as it tries to bring order to the movement of money in Chinese cyberspace.

Nearly a year ago, state-owned card monopoly China UnionPay said online payments, like those processed by Alibaba Group's AliPay and Tencent's TenPay, should integrate with its clearing house by July this year.

But third party payment companies have not complied, at least not across the board. Several industry sources, including one AliPay employee who spoke on condition of anonymity, confirmed that the company routes transactions directly to banks, not through UnionPay.

AliPay declined to answer questions on how the company processed payments.

The regulators are facing technologies that they can't really control
Zennon Kapron, Kapronasia

This should make Alibaba a candidate for a crackdown from the central bank, one of China's most powerful political institutions. After all, "UnionPay is really the People's Bank. They are the largest shareholder", said Billy Feng, a technology analyst at CLSA Asia-Pacific Markets. But third-party payment processors have become such an integral part of online consumption that the regulator can do little more than watch the market expand.

"If they were to shut down one of these services, that would have a huge social impact," said Li Chao, an analyst at iResearch in Beijing.

Third-party platforms processed 17.2 trillion yuan in 2013 and that is expected to grow more than 34 per cent this year, according to data from the firm.

The huge growth in transaction volume over the past five years has given third-party payment firms strong negotiating power with mainland banks, particularly smaller ones, Li said.

Many payments at the biggest banks, where third parties have less leverage, are likely routed through UnionPay, Feng noted.

The difficulties the PBOC has faced in bringing the payment processors to heel raises questions over its ability to control money online.

"The fact is, the regulators are facing technologies that they can't really control," said Zennon Kapron, founder of Shanghai-based research firm Kapronasia.

The emergence of the digital currency bitcoin on the mainland tested the tolerance of the bank over the last year. With negligible oversight, Chinese demand drove its value to more than US$1,200 last November.

In December, the central bank banned state banks from trading the currency, but also signalled it would establish a regulatory framework for bitcoin by issuing licences for exchanges.

That never happened. Instead, it asked all exchanges to stop bitcoin transactions by April 15, demonstrating a lack of tolerance for the speculative digital investment tool.

"It was really a victim of its own success," Kapron said.

The central bank has had less luck in shutting down other new payment technologies. In April, it issued a circular calling on internet companies to shut down QR code payment services to protect consumers from potential fraud.

Not everyone complied. This month, Shanghai Securities News reported that many QR code payment services were still active. An anonymous technology analyst at a state bank confirmed the central bank had "compromised" on its hardline stance.

Political will at the central bank may seem limp but Ethan Wang, research director at Gartner, says stronger regulation could help companies.

For operations such as Alibaba, lax rules allowed the company to dominate the market.

"[Tougher regulation] might not be bad news, as clear and reasonable regulation policy is better than something uncertain," Wang said.