View of a signboard showing logos of Alipay (right) and WeChat Pay (left) at a currency exchange center in Hong Kong Photo: IC
Regulators are enhancing their supervision in the third-party online payment business by imposing fines, revoking operation licenses and setting up a centralized clearing platform to build a safety net that would stem out risks in the industry. Experts say such a trend will trim the number of irresponsible service providers and further consolidate the industry.
Weaker third-party payment service providers in China are being phased out while the dominant positions of top-caliber mobile payment providers further strengthen. This comes as the country has resorted to tougher regulation and taken more active measures to control risk, Beijing-based The Economic Information Daily (EID) reported Thursday.
Currently, there are about 200 third-party payment service providers in the country with licenses issued by the People's Bank of China (PBC), the central bank.
Fan Shuangwen, deputy head of the Department of Payment and Settlement at the PBC, recently said the central bank has been striving to tighten supervision on third-party payment to prevent risks since early 2016, according to media reports.
Fiercer competition and pursuit of hefty profits have led to some payment businesses to neglect relevant regulations, causing market disorders and unfair competition, Fan was quoted as saying.
On the other hand, incessant technological advances have bettered the innovation circles of the payment business, but this has caused risks to become more complex, noted Fan.
The EID report said tougher regulation and risk prevention measures have been the main themes for the PBC's supervision of the sector over the past two years.
In May, the PBC imposed a fine of 30,000 yuan ($4,450) on both Alibaba's Alipay and Tencent's Tenpay, the nation's two leading third-party payment providers, for failing to comply strictly with relevant regulations.
Analysts perceived the fines as the central bank's rising vigilance against thrid-party payment tools.
As of the first quarter of this year, Alipay held a 53.7 percent share of China's 18.8 trillion yuan mobile payment market, while Tenpay held 39.5 percent, making them the top two players in the sector, data from Beijing-based market consultancy Analysys showed.
From 2016 to date, notable PBC fines have included a whopping fine of 52.95 million yuan which was imposed on Beijing-based payment firm YeePay.com in addition to confiscation of its illegal gains.
Another fine of 5.33 million yuan was given to Guangzhou-based epaylinks.cn for violating the "Regulations for Non-bank Payment Agencies' Mobile Payments," a rule enacted by the PBC at the end of 2015.
The regulation stresses the registration of clients' real names, which aims to control payment risks on mobile platforms.
The EID report said that many of the malpractices are related to negligence of the regulation in using deposits and the use of provisions of money held by a third-party organization that is not their property. Some firms even illegally embezzled large amounts of money.
Fan said, as of July this year, the PBC decided not to extend licenses for 10 problematic third-party payment service providers. Another 10 will have to be merged before granted license extensions. The total number of the license holders was reduced to 247 from the previous total of 271.
Amid this, the PBC has also temporarily stopped issuing new licenses altogether since March 2015.
Qi Xingang, chief operating officer at industry news site paycircle.cn, said that the central bank's hardening of regulation has caused many big firms such as Xiaomi Inc and Dalian Wanda Group to acquire business operational licenses for third-party payment business via mergers.
More than 62 acquisitions have taken place in the segment since the PBC halted issuing licenses, said Qi.
Risk prevention efforts
"What we have seen in the past three years is the regulator's tightening of supervision going hand in hand with the improvement of its services," said Dong Ximiao, a research fellow at Chongyang Institute for Financial Studies at the Renmin University of China.
On January 13, the PBC formally established a mechanism to store clients' reserve deposits in centralized custody. Service providers are now required to allocate about 20 percent of clients' reserve deposits to a designated bank account with the purpose of preventing platforms from using clients' money.
In addition, the PBC has been trialing an operation involving a clearinghouse to monitor online transactions since March 31. The move is taken to trim financial risks by disconnecting the direct clearing business from third-party payment firms and banks.
Dong said the moves demonstrate the PBC's efforts in building up a better mechanism for effective supervision.
Wang Pengbo, an analyst at Analysys, said that the direct clearing business prevented the central bank from monitoring the flow of money, posing great obstacles for anti-money-laundering efforts.
"The clearinghouse regime, which enables the regulator to monitor the market in a better way, could beef up risk prevention of illicit third-party payment platform transactions," Wang said.
But unnamed insiders were quoted by the EID report as saying that the clearinghouse is still fledging and has not yet proved its ability to process mega volumes, such as those dispersing within the Double 11 ("November 11") online shopping festival.
Fan said that the PBC will make exit mechanisms the norm in its supervision. Other efforts include increased pressure from classified rating measures and promoting mergers in an effort to reduce business range and revoke business licenses during license extension examinations.
Under the high pressure of supervision and regulation, the market of third-party payment services has shown signs of reshuffling and integration, the EID report said. Insiders said the trend will continue and the market could end up with a handful of oligarchs monopolizing the business.
Qi said the remaining 200 or so licenses may sound a lot, but high-value licenses are actually scarce.
Many of the license-holders are busy looking for a buyer, as cashing-in seems to be a better choice than actually operating, noted Qi.
Dong said this is actually the market principle that may set in, as a mature payment market does not require hundreds of license-holders.
"Payment is just a basic function, and it does not generate much revenues, with most institutions generating profit indirectly from financial data and customer traffic gained from payment channels," Dong said, predicting that the market will further consolidate and smaller payment service providers will be phased out.
Stronger platforms will continue to prosper and their ecosystems will develop and blossom, said Wang, noting that Alipay and Tenpay are already working to promote cross-border payment businesses.
"These successful scenarios will prove to be the insurmountable barrier for [weaker] competitors," he said.