Around the world, the popularity of online payments continues to grow each year, and this is especially the case in China. In the third quarter of 2015 alone, Chinese third-party mobile payment transaction volumes exceeded $370 billion, representing an increase of 5 percent over the same quarter in 2014 and 64 percent compared to the previous quarter. For the first three quarters of 2015, the total value of mobile payment transactions was just over $1 trillion. The clear industry leaders in this space are Alipay and Tenpay, with 70 percent and 19 percent of China’s total market share.
Will this growth continue to soar or hit a plateau, or worse, experience a drop? At the end of December 2015, the People’s Bank of China (PBOC), the central bank and national financial regulator, issued new rules governing online payments for non-banks. Citing concerns about risks due to fraud and money laundering, the PBOC has introduced much stricter rules that have caused concern from some industry experts who claim it will negatively impact payment innovation.
What are the key changes as a result of the new rules?
Stricter Know Your Customer (KYC) Requirements
Real-name registration will be required for all non-bank payment accounts, with the level of scrutiny dependent on the type of account. Three types of accounts have been introduced.
This account type is the most basic of the three, with transaction limits for outgoing transfers set to only just over a total of $150, which includes transfers to the user’s own bank account. However, only an online identity check is needed in order to satisfy the KYC requirements for this account. Once the limit has been exceeded, the customer must undergo additional identity checks to continue using the account. Due to the relatively quick onboarding process needed for this type of account, it is likely that it was included to provide a lower barrier to avoid discouraging new customers from signing up.
For a Type II account, the KYC requirements are more stringent. An in-person identity verification or three external identity database checks are required to open this type of account. With this higher level of security in place, there is also a higher limit for outgoing transactions, at just over $15,000 annually. Additionally, this limit does not apply to transfers to the user’s own bank account. This allows eCommerce merchants to use this type of account to receive and withdraw funds with no restrictions.
With a limit set to just over $30,000 per year, the Type III account would be suitable for investments as well as for making purchases. Because of the higher limit, the KYC requirements are, by far, the strictest. Either an in-person identity check or five external identity database checks are needed to open a Type III account. Like Type II accounts, transfers to a user’s own bank account do not apply to the annual transaction limit.
Focus on Providing Smaller Transactions
The PBOC has made it clear that there need to be strict daily transaction limits placed on third-party payment service accounts, given that their original intent was for facilitating eCommerce, which typically involves smaller amounts per transaction. Based on the method used to verify transactions, payment service providers can set different daily limits.
The greatest latitude is provided when customer transactions are verified using a browser plugin combined with one of the following methods: one-time password, digital certificate, or biometric ID (e.g., fingerprint). In this case, the daily transaction limit can be set to an amount agreed upon between the payment service provider and their customer. If transactions are verified using two-step verification without browser plugins, the daily limit is set a little under $800. When only one method of verification is used, the limit is set to the lowest threshold at just over $150. Clearly, the PBOC wants to provide greater incentive for payment service providers to implement tougher security measures on their platforms, since it would also potentially reduce the amount of suspicious transactions.
Tiered Regulatory Regime
Perhaps the most intriguing idea introduced as a result of the new rules is the concept of tiered regulation for payment platforms. The premise of this concept is that the PBOC will rate each payment platform based on their own analysis and categorization scheme. Platforms with higher ratings will have fewer restrictions, whereas platforms with lower ratings will face extra scrutiny from regulators.
Take, for example, a platform that received an A rating and has over 95 percent of its customers that have completed their Type II and III account KYC checks. In this case, the payment service provider could have the latitude to use alternative methods to verify identities, subject to approval from the PBOC. Another big advantage for platforms with higher ratings is that daily limits for users could be increased by up to double the standard limit as defined in the regulations. Annual limits remain unchanged by the tiered system.
The new rules for online payments in China will come into force on July 1, 2016, giving payment service providers barely more than half a year to prepare. Some industry observers have expressed concerns that these tough regulations will be a stumbling block for innovation in the country, but the need to address the problem of exposure to money laundering and fraud cannot be overlooked.
Do you think that the new rules will stifle or drive payment innovation in China?