China's Online Payment Firms Edgy Over Regulation

By Ma Jingying & Wang Shanshan
Caixin Online
Thursday, May 13, 2010

http://english.caing.com/2010-05-12/100143296.html

BEIJING -- China's third-party payment industry has been around for more than a decade, but nearly half of that period has been shadowed by unfinished plans to regulate the sector.

Most of today's more than 300 players are private enterprises, and collectively, they deal with tens of millions businesses and individuals every year. Last year, more than 580 billion yuan ($84.9 billion) in transfers were recorded. These companies also provide payment mediation and settlement services.

Despite the sector's size and growth, however, the government has delayed finalizing formal regulations. Until now, the central bank has done little more than request public comments on draft payment and settlement regulations, as well as electronic payment guidelines, released way back in 2005.

The page may turn soon, but that hasn't settled concern that smaller companies may lose out to industry giants. A source close to central bank authorities told Caixin that final regulations may be released before July. Caixin also learned a central bank payment system linking many of the nation's big commercial banks -- but perhaps not third-party payment firms -- will come online in August.

Meanwhile, payment companies across the country are waiting to see how the changes may affect their bottom lines.

Major participants such as Alipay hope the measures formally validate their profitable businesses. But smaller competitors worry about being locked out by high entry barriers, and finding their huge investments going to waste.

Successful business model

Third-party payment companies have grown quickly to satisfy the cash-flow needs of the e-commerce industry. They generally function as money gateways and "transfer stations" between merchants and banks.

The model's earliest domestic practitioner was the semi-official PayEase, formally called the Capital E-commerce Project. It was jointly launched in November 1998 by the Beijing Municipal Government, Bank of China, the State Internal Trade Bureau and central ministries, including the Ministry of Information Industry.

An independent third-party payment company called Central iPS was launched two years later in Shanghai. That was followed by a March 2002 agreement by the State Council, with central bank approval, to create Union Pay and its ChinaPay Services Ltd.

PayEase, iPS and ChinaPay followed the same basic business model by charging merchants for access to online money transfers. But the model was shaken when basically no-fee payment companies led by Alipay and Tenpay -- a service of online-game and messaging provider Tencent -- joined the race.

By doing business with platforms such as Tencent and online-shopping giant Taobao, payment companies evolved into "credit intermediaries." Going through a third party effectively resolved trust issues inherent in online transactions. And due to their interdependence, the online-shopping and third-party payment businesses developed in tandem.

Transaction levels started to swell five years ago, doubling in a year to more to 16.3 billion yuan in total market value in 2005 and building to an astounding 581 billion yuan last year. Analysys International forecasts online payment will continue to soar, reaching 886 billion yuan this year, 1.25 trillion yuan in 2011 and 1.67 trillion yuan in 2012.

Regulation delays

But the industry is practically operating in a regulatory vacuum. The government rewrote its 2005 regulatory proposal in 2007, and sources told Caixin that proposal was revised last year. The latest version includes rules for market access and risk control.

"The current copy of the regulation is completely different compared to the 2005 draft," said a senior industry source. "Because the industry is so new and growing quickly, regulators have to keep up."

Companies have long been anxious about these government delays, especially when it comes to issues surrounding business licenses. Some companies thought the central bank was rolling with a licensing process a year ago, when it started collecting records from third-party payment companies and convened a National Association for Payment Clearance meeting.

But one source said only 130 of the nation's more than 300 payment firms submitted records for the process, which reflected "the central bank's effort to collect basic information from these third-party payment companies in terms of capital, business methods and profits." And that's as far as the process went.

"In our communication process with the central bank, we expressed our hope for clarification on a few points: What can't be done, what can be done better, and what has been done wrong in the past and needs to be corrected," said Alipay Chief Executive Officer Peng Lei. "On these points, we hope for regulatory guidance."

The impending arrival of the central bank's so-called Super Online Bank has thrown another variable into the mix. The "bank" is actually an Internet application system connecting online banks to the central bank's China National Advanced Payment System.

"This is the equivalent of adding a safety valve," said a banking source. "Online banking services offered by various commercial banks will no longer individually connect to the central bank's core payment settlement system, but will instead connect through the Super Online Bank unified access point."