China Headlines: New regulation on third-party payments stirs controversy

A new security regulation on third-party payments has stirred massive controversy in China, with critics saying it compromises convenience for the interest of state-backed banks.

In a draft regulation released last Friday, the central bank proposed limiting the amount shoppers could pay through third-party online payment accounts to between 1,000 yuan (163.5 U.S. dollars) and 5,000 yuan per day, depending on the system's security checks.

Accounts that have both digital certification and signature qualification checks will be exempt from restrictions.

The news was a bombshell for Chinese web-users, who have become increasingly reliant on convenient payment services such as Alibaba's Alipay and Tencent's Tenpay.

In a survey conducted by news portal Sina, around 60 percent of the 6,000 interviewees believed their online shopping experience would be affected by the new rules. Some complained that the 5,000-yuan cap would restrict them from buying an iPhone 6 online.

Following the heated debate, the central bank released a second statement explaining that consumers would be transferred to banking payment platforms if they need to spend beyond the limit, making the impact on their spending cap minimal.

At first glance, the new policy is likely to create the impression that the central bank is trying to protect the interests of the banking industry as it is increasingly under the attack of the booming Internet finance firms, but analysts point out that transaction security is the major concern.

The real aim of the policy is to avoid large sums of money depositing in the third-party payment accounts, which are beyond the protection of bank deposit insurance and will leave consumers vulnerable to possible risks, according to Ma Tao, an analyst with research consultancy Analysys International.

By upgrading the verification system to include digital certification and signature qualification checks, third-party payment firms can proceed unharmed by the clause, analysts said.

In addition to limiting the size of transactions, the new regulation also bans payment institutions from opening accounts for firms engaged in financial businesses such as credit, financing, wealth management and guarantees.

This is in line with an earlier guideline on Internet finance that stipulated Internet finance firms must park all client funds at established banks, effectively closing the door for third-party agencies to be trusted with the funds.

Since the creation of Alipay, China's third-party payment industry has expanded rapidly. Statistics from iResearch showed China has around 270 agencies owning payment licenses, with a transaction value surpassing 8 trillion yuan in 2014.

With the exception of Alipay and Tenpay, who have made good money selling wealth management products, most third-party agencies have struggled to find good profit models, with some starting to explore services such as parking money for commodity trading, peer-to-peer lending and crowdfunding platforms.

But a string of fraud cases last year underscored hefty risks in the sector, prompting the latest regulation.

"The draft regulation is to bring non-bank payment institutions back to their original track, and authorities hope they do not blindly expand to other services," said Huang Zhen, a finance professor with the Central University of Finance and Economics.

But Huang also noted that some areas in the new policy, including the scope of their businesses, are too tight, adding the payment institutions should be allowed more room for development.

Tang Bin, chief executive officer with YeePay, said payment services make minimal profit, so the new policy will enable big payment firms to apply for various licenses to diversify services for future development, while smaller ones may either be purchased or pressured out of the market.

"The new regulation should be a phased policy, China needs to seek a new balance between risks and innovation to leave room for financial innovation as the industry matures," he reckons.

The public consultation on the new regulation closes on Aug. 28. Endi