Posted by PTL Group
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on Wednesday, 08 March 2017
in Business in China

New Regulations for Third-Party Payment Services

The past few years have shown that payment through third-party services has become more and more popular among the Chinese population, and this popularity is only set to increase. Today many shops, retailers and restaurants accept third-party mobile payments such as Ant Financials’ Alipay or Tencent Holding’s WeChat Pay. On one hand it is convenient for customers to use third-party payment, but on the other hand it has a higher risk of money laundering and there is less transparency with these companies.

The People’s Bank of China (PBOC) has discovered that over 260 third-party organizations have been storing more than 460 billion yuan ($66.7 billion) of customers’ provisions over several bank accounts. These provisions are payments by customers using third-party payment services and are temporarily stored in these companies’ bank accounts until the transaction is settled. This means customers are not entitled to the interest paid by banks on the deposit but instead it is paid to third-party payment providers. According to the central bank, the lack of controlling how third-party institutions handle these provisions has led to problems like money laundering and third-party payment companies growing by virtue of customers’ funds.

Therefore the PBOC have decided, starting from April 2017 that all third-part institutions, like Alipay and WeChat Pay, are required to deposit 12-24% of a customer’s provision into a state-run bank account, which pays no interest. In the future this ratio will be raised to 100% so that companies cannot benefit from the interest paid on customers’ funds that are temporarily stored in their bank account. The PBOC has not released a concrete statement about when this will happen, only that the initial ratio may vary among companies and will be decided on a firm’s level of risk control ability. In other words if a company is not capable of controlling risk, it has to deposit more funds in these state-run accounts.

This regulation will have a major impact on services such as Alipay, who controls over 50% of the third-party payment market in China, because it prevents them from using interest from customer funds as their main source of income. For this reason TrendForce reports that since 2015 Alibaba has already made investment deals with international third-party payment institutions to maintain their presence overseas. They have investment agreements with, for example, India’s Paytm and South Korea’s K Bank.

In the end, these new Chinese regulations lead domestically to more transparency among third-party payment services and prohibit them from using customer provisions for their own gain. Plus, internationally-speaking, third-party institutions may develop their overseas markets and earn profit in that way.

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