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August 10, 2015

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Internet finance braces for regulatory controls

New draft rules regulating third-party online payment systems have stirred heated public discussion, with detractors fearing they will throw a monkey wrench into the booming Internet finance industry.

The People’s Bank of China released its proposals on July 31, inviting public comment until August 28.

The rules would set daily limits on third-party payment account spending, based on the level of security provided by the payment platform. They would also set annual limits, and restrict use of fictitious names in setting up accounts.

The central bank said the rules are meant to curtail money-laundering activities, provide greater security for personal accounts, and ensure that third-party payment platforms are addressing risk factors. The fear is that the industry, if unchecked, could spiral out of control and threaten the whole financial sector.

Indeed, a lot of money goes through third-party payment systems like Alibaba’s Alipay or similar services offered by Tencent’s WeChat and QQ social networks. Third-party payments in 2014 rose 50 percent from a year earlier to 8 trillion yuan (US$1.3 trillion), according to domestic consultancy iResearch Inc. The market size is expected to reach 22.9 trillion yuan by 2018, thanks to the popularity of smartphones accessing the accounts for online purchases.

There were as many as 2.2 billion third-party online payment accounts at the end of 2014, and only about 43 percent used real names, according to the official website of the Payment and Clearing Association of China.

Last year, the number of online payment transactions nearly doubled to 37.4 billion, with an average transaction size of about 660 yuan.

“The new rules aim at preventing third-party payment firms from establishing de-facto ‘bank account systems’ on their own,” said Guosen Securities analyst Wang Xueheng. “The central bank worries that it will lose track of money flows and sees that as a potential risk to the entire financial system.”

The rules propose a daily limit of 1,000 yuan on each third-party account with a basic level of security checks.

The major concern for individual users lies in the possible inconvenience of having to transfer between third-party payment accounts. But ordinary online shoppers shouldn’t find the rule too restrictive.

“The proposal aims to strike a balance between convenience and the necessary means to protect the security of user assets,” said Huang Zhen, professor of law at the Central University of Finance and Economics.

For payment accounts connected to advanced levels of security check, such as security tokens and electronic signatures, the daily limit would be 5,000 yuan.

Consumers would be required to use the proprietary online payment platforms of commercial banks to pay amounts beyond the daily limits.

Payments from bank accounts, such as debit cards and credit cards, through third-party payment platforms would not be subject to the new restrictions.

The rules also propose to tighten control over new accounts on third-party payment platforms, requiring account holders to have at least five external sources to verify personal identity, unless the payment firms adopt a face-to-face identity authentication process.

The central bank said government data, commercial bank account data and other commercial data bases would be eligible as external sources.

Guosen’s Wang said the new rules would limit transfers between third-party payment accounts, giving authorities tighter control over capital flows outside of the mainstream banking system.

“It also shows regulatory efforts to force third-party payment firms to address potential risks,” Wang said.

Those with five or more external sources to verify identities would be allowed to open “comprehensive” accounts and would be able to pay for online shopping as well as transfer to other third-party payment accounts, but there’s a limit of 200,000 yuan per year.

Those with less means to verity identities will be saddled with an annual limit of 100,000 yuan, and cash flows would be strictly restricted to the bank accounts under their own names.

For one-off payments larger than 200 yuan, payment firms would be required to hand over security and identity checks to online banking systems. The exceptions are payments for utility bills or taxes.

For payments fewer than 200 yuan, identity and security and identity check procedures would be waived.

China International Capital Corp researcher Mao Junhua wrote in a research report on August 3 that the advanced level of security checks required for large-sum payments may squeeze out smaller payment firms, leaving big players to dominate the market.

Zhejiang Ant Small & Micro Financial Services Group, an Alibaba financial services unit, declined to comment on the possible effects of the new rules on its business.

“We’re focused on innovation on a firm, stable basis, and we have always been open to new regulatory supervision,” the company said in an email statement.

Alipay’s popular cash management tool Yu’e Bao is not mentioned in the central bank’s draft rule.

Tencent, which offers payment services through its popular social applications WeChat and QQ, said in a statement that it is studying the draft rules and will submit “constructive” advice to the central bank.

Wu Xiaoqiu, director of the Institute of Economic Research at Renmin University of China, said third-party payments serve an important role in Internet finance, and such an efficient tool should not be slapped with so many restrictions.

He said the draft rules fly in the face of financial reform aimed at increasing efficiency and encouraging innovation in the Internet finance sector.

The central bank, citing a survey of users at major online payment firms, said as many as 98 percent of annual user payment volume was less than 200,000 yuan and 80 percent was less than 5,000 yuan.

Still, many consumers chafe at the idea of their online payment habits being subjected to rules, arguing they should have their own say over how much they pay via third-party payment services.

“The online banking system is inconvenient, and I felt safe putting my money in Alipay’s account,” said Shanghai user Daisy Hu. “That gives me free access to pay for online bills or wealth management products whenever I desire to do so.”

In an online survey by covering more than 9,000 people, about 82 percent of respondents said the new rules would make their daily life inconvenient and 57 percent said they would crimp their online shopping habits.

Chen Yu, partner of domestic investment firm Harmonia Capital, said the rules will have only limited impact on Alipay’s services, given that Ant Small & Micro Financial Services has launched its own online banking service with MY Bank.

“Implementing these new rules in haste would be like slamming the brakes on a speeding train,” Chen said. “Some of the measures are not very feasible. What we need is a step-by-step approach to addressing potential risk in Internet finance.”


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