To Jee Soo Lee, China’s cashless payments are life-changing. The 22-year-old Korean student has seen every aspect of her daily life tied to her smartphone after a summer internship in Shanghai. “I only worry whether I have enough battery in China,” says Lee. “One mobile phone is sufficient for everyday expenses, from hailing a taxi to ordering food.”
With mobile payments, 40% of China’s population get around carrying less than 100 RMB cash ($15) , according to a report produced by Tencent, Renmin University of China, and research company Ipsos.
Unlike in the U.S., where bank-issued credit cards are behind most cashless transactions, mobile payment services in China are dominated by Internet behemoths, like Tencent and Alibaba-backed Ant Financial, taking respectively 40% and 54% of the third-party mobile payment market, based on data by iResearch. To tackle this unprecedented industry, financial regulators are scrambling to catch up.
Bigger Market, Stronger Regulations
The Payment and Clearing Association of China reveals that the transaction volume of non-banking payments grew to almost RMB 100 trillion ($15 trillion) in 2016, increasing twofold from 2015. The number of third-party mobile payment users increased to 469 million in 2016, which is about 70% of China’s mobile user base.
The staggering rise warrants increasing oversight. “The regulation for non-banking payments was relatively loose in the previous years in order to support the innovative industry,” says analyst Wang Pengbo at research firm Analysys. “As it is growing much bigger, the central bank is taking more control.”
Recent Controversies & Central Bank’s Reaction
China’s dwindling use of cash also causes unforeseen issues, particularly for visitors. Lee recalls that, upon arriving in Shanghai, she couldn’t use cash to buy a public transportation card in two metro stations, which accepted only mobile payments or Chinese bank cards. “Foreigners staying for a short while may be frustrated by the problem,” says the 22-year-old.
It is also an obstacle for those who aren’t accustomed to fast-moving technology, like the elderly. In early August, the top two players in the field, Ant Financial (which owns Alipay) and Tencent (owner of Tenpay), promoted the idea of cashless society and distributed large rewards to customers and shops using their platforms. During the marketing campaigns, some merchants rejected cash as payment, arousing complaints from customers.
The central bank soon deemed the refusal of RMB illegal. Amid the controversy, Ant Financial and Tencent quietly removed the word “cashless” from their promotion materials.
Centralizing Clearance by June 2018
On August 4th, the People’s Bank of China (PBoC) mandated that mobile payment groups must channel payments through a new clearing house by next June. Central bank-affiliated institutions are the largest shareholder (35%) of this newly established China Nets Union Clearing Corporation. Alipay and Tenpay account for 10% each, according to Chinese news media Caixin.
Until recently, information about capital flow was tightly guarded by third-party payment companies and was only used for targeted marketing and credit scoring, which bypassed the regulator. “The central bank aims at placing the non-banking transactions under supervision to avoid potential money laundering and other illegal practices.” says Wang.
This order is likely to reshape the industry. Not only would it reduce the operating costs and repetitive investment on infrastructure, but also it would require Tenpay and Alipay to disclose valuable data to the government and competitors, both benefiting smaller payment providers.
Handing in Reserve Funds
Beginning in April, third-party payment groups are required to allocate on average 20% of their total reserve funds under centralized management of the PBoC, which pay no interest. This percentage will gradually increase to 100% over time.
Reserve funds are prepaid sums from buyers that are held temporarily by payment companies during a 3 to 7-day clearing period, with which payment providers can charge interest and grow their business. The total amount of reserve funds reached nearly RMB 500 billion ($75 billion) by end of 2016, according to market research firm TrendForce.
Previously the PBoC had no direct visibility into the funds, and thus payment firms could potentially misuse their clients’ money. “This move will help the central bank to understand how much capital these giant companies possess and to reduce risks of financial fraud,” says Wang.
Meanwhile, China has also permitted traditional banks to use quick response (QR) code scanning to process mobile payments, which allows the established banks to seize part of this expanding market.
Competition in this field is likely to increase, as the central bank acts to counter a growing oligopoly. Although this might curtail the big names’ revenue in the short run, a more “transparent and well-regulated” industry is expected, according to analyst Jia Mo at research firm Canalys.
“The keynote of regulation is still tolerant and supportive of the mobile payment industry,” Analysys’ Wang says. “There is no reason for the government to reject, as mobile payments are fundamentally changing the infrastructure of commerce and are supporting the growth of GDP.”