On 29 December 2015, China’s central bank, the People’s Bank of China (“PBOC”), demonstrated that it was tightening its grip on online payment firms by releasing details of a new regulation covering online payment services by non-bank institutions.
In recent years, China has seen a substantial increase in the range of financial services provided over the internet as well as in the corresponding uptake by consumers. Until recently, this sector has remained subject to little (if any) legislation; this new regulation forms part of the corresponding initiative taken by the Chinese authorities to update legislation and to bring it in line with those services.
What does the regulation say?
The regulation establishes a number of specific requirements relating to the security of the online payments business, including daily and annual payment and transfer limits as well as stringent client identity verification measures.
In particular, the regulation sets out three types of non-bank payment accounts which are differentiated by the level of security attached to them and which then dictate the type and size of transactions that can be made by the account holder. The most comprehensive type of account is available to customers who have provided at least five methods of verification or who are verified face-to-face. These customers are able to make maximum yearly (online or mobile) payments through the platform of as much as 200,000 Yuan per account (approximately 30,425 USD). At the other end of the scale, customers with the most basic type of account will only be able to make maximum yearly payments of up to 1,000 Yuan through their account (approximately 155 USD).
The draft regulation was originally published in July 2015 with a one-month consultation period for interested parties to provide their feedback. The regulation is now in final form and will take effect on 1 July 2016.
Practical implications for online payment transactions
This new regulation comes as part of a wider initiative by the PBOC aimed at reducing the risk of financial fraud and money laundering currently posed by non-bank financial institutions operating in the payments sector. This initiative is evident in other action taken by the PBOC; indeed, on 7 January 2016 the PBOC announced on its website that it had revoked the licence of a prepaid card provider, Shanghai Chang Gou Enterprise Services, after finding that the company had misappropriated clients’ money, concealed capital flows and refused inspections.
Increased regulation will make the online payment process increasingly complex for consumers. Some have argued that it creates unfair barriers to innovation in favour of China’s banks.
In any event, online payments businesses operating in China will need to determine whether any strategic or structural changes are required before ultimately implementing the new compliance procedures into their business models through changes to their systems, processes and documentation.