China to Accelerate Third-Party Payment Licensing

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Dec. 2 – China’s Central Bank is considering issuing the first batch of licenses for third-party payment companies in order to accelerate the pace of regulating China’s third-party payment market.

Ouyang Weimin, director of the Payment and Settlement Department at the People’s Bank of China, told media on December 1 that the PBC may license the first batch of third-party payment institutes by the end of the year. His remarks indicate the PBC is further tightening the regulations on non-financial third-party payment institutes.

China’s third-party payment business has been developing rapidly over the past few years. Data published in a 2010 China Internet Network Information Center survey on the country’s current internet use shows a 36.2 percent increase in the number of online payment users in the first half of this year. However, despite the prosperity of China’s third-party payment business, a lack of regulation has also led to a variety of problems such as the establishment of illegal foreign exchange operations, as well as monetary and security issues.

The emerging problems of the third-party payment market urge the PBC to strengthen the relevant regulations. On June 21 of this year, the PBC issued the “Non-financial Institution Payment Service Management Measures” which clarify that non-financial institutions will have to apply for the “payment service license” to become legal.

According to the measures, to qualify for the license, non-financial institutions should provide registration capital of no less than RMB100 million if they intend on being involved in the payment business within the whole country, and RMB30 million if they want to run the business within only one province, autonomous region, or municipality. They also need to have qualified anti-money-laundry measures, payment service facilities, and risk control methods. In addition, the measures confirm that the PBC has supervision over the institution’s cash reserve information and the institution’s actual average daily payment should account for no less than 10 percent of the average daily client cash reserve balance.

The measures have been in effect starting September 1, 2010, and third-party payment institutes should obtain the license within one year from the effective date to stay legal.

A recent report on China’s Hua Mei Wang believes the tightening regulations will bring about a shuffle to the third-party payment market. Currently, the two major third-party payment products with the largest market shares are PayPal by eBay and Alipay by Alibaba. Other major payment products also include Tenpay by Tencent, Yeepay, 99bill, Baifubao by Baidu and Epay163 by 163.com.

Hu Yuanyuan, a third-party payment market analyst at iResearch Consulting Group says the government’s new measures are likely to shut out many small local companies, but will not have a major impact on top 10 companies in this field. It is estimated that half of China’s current third-party payment enterprises might have to withdraw their business from the competition under the new policy.

The new cash reserve policies also worry many third-party payment companies. They are concerned over the shrinking profit margin as the result of the 10 percent cash reserve requirement. In addition, the new measures also have a higher requirement for the total amount of cash flow running in the company since the average daily actual capital payment to average daily client reserve cash balance ratio cannot go below 10 percent.

Third-party payment companies in China have always had a bittersweet relationship with the nation’s banks. Baidu Encyclopedia (Baidu Baike), a web-based encyclopedia project owned by China’s major search agent Baidu, made a comment on such relationships in the vocabulary entry of “third-party payment.” It says the third-party payment companies will become the competitors against the banks when they grow big enough, but they also play the role of “promoters” for banks to popularize the electronic payment business. Therefore, it will be in the banks’ interest to regulate them, but not totally shut them out of the market.

For the future of the third-party payment business, specialists suggest licensing is not the only key. Cao Honghui, director of the Payment and Settlement Center at the Chinese Academy of Social Sciences, said during the fourth “China Electronic Banking Summit” held on November 29 that the third-party payment institutes need to find sustainable profit-making modes for better development. If these enterprises are not innovative enough in the fierce market competition, there is no doubt they will still die out even if they obtain the proper licenses.