New rules will ‘wipe out’ Chinese online payment agents
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New regulations proposed by the Chinese government will deliver an immediate boost to state-ownedChina UnionPay, potentially forcing its smaller Chinese online payment agents out of business.
The ‘Method of Network Payment Service Management for Third-Party Payment Agents’, proposed in August 2015, is set to restrict consumers’ daily and annual spending on online purchases through private third-party payment agents such as Alipay and Tenpay. But the new law exempts China UnionPay, giving it a clear market advantage.
According to Timetric, the new law will present serious challenges for small private third-party agents trying to get a foothold in the online retail market.
Under the draft law, the transaction amount made through third-party payment agents will be determined on the level of security measures incorporated within the online platform. Furthermore, all private third-party payment agents will be forbidden from offering financial services such as deposits, loans, financing or currency exchange services to consumers.
Chinese regulators say the law aims to protect consumer interest and privacy and clamp down on counterfeit products and poor customer service offered by online private third-party payment agents.
But in practice it appears on the surface to be a tool to protect UnionPay’s market dominance in the short term and protect the government’s interests, rather than those of consumers.
“If implemented, the new legislation is anticipated to wipe out smaller private third-party agents, due to the increased operational costs of implementing multiple security measures”, said Kartik Challa, an analyst at Timetric.
“According to Timetric, the new law will present serious challenges for small private third-party agents trying to get a foothold in the online retail market.”
In China, UnionPay (CUP) is the sole scheme provider of payment cards. According to central bank regulations, all banks and card issuers operating in the country are required to route their Yuan-based transactions through CUP’s electronic payment network. However, following a complaint filed by the US against China via the WTO with regards to discriminating against foreign companies in 2012, the WTO directed the Chinese government to open up its payment cards market to foreign operators. Consequently in October 2014, the Chinese government announced its decision to allow foreign companies to set up their own payment card clearing businesses, effective from June 1, 2015.
Ultimately, says Challa, the move will open the way to stronger competition for CUP – but not in the short term.
“This move by the Chinese government is anticipated to intensify competition in the Chinese payment cards market, and end CUP dominance as the country’s only authorised card clearing organisation. However, Visa and MasterCard have a long way to go before they can make a dent in CUP’s market share, as they need to build up infrastructure from scratch”, comments Challa.
China is one of the largest and most mature eCommerce markets in the world, increasing at a CAGR of 56.99 per cent over the last four years, from US$68.7 billion in 2010 to $417.3 billion in 2014.
Factors, such as the rapid adoption of smartphones, growing internet penetration as well as availability of secure online payment mechanisms and a growing preference for online shopping – especially among the rural population– contributed to this growth.
Timetric is a provider of online data, analysis and advisory services on key financial and industry sectors. It provides integrated information services covering risk assessments, forecasts, industry analysis, market intelligence, news and commentary.a
Questions & Answers
Q.Which specific payment methods will be affected by the new regulations in China?
Which specific payment methods will be affected by the new regulations in China?
The new regulations will restrict consumers' spending on online purchases through private third-party payment agents like Alipay and Tenpay. However, state-owned China UnionPay will be exempt from these restrictions.
Q.What is the stated purpose of the new law, according to Chinese regulators?
What is the stated purpose of the new law, according to Chinese regulators?
Chinese regulators state the law aims to protect consumer interest and privacy. They also say it will clamp down on counterfeit products and poor customer service offered by online private third-party payment agents.
Q.How will the transaction amount for third-party payment agents be determined under the draft law?
How will the transaction amount for third-party payment agents be determined under the draft law?
Under the draft law, the transaction amount made through third-party payment agents will be determined based on the level of security measures incorporated within their online platform.
Q.Will foreign payment card operators immediately threaten China UnionPay's market dominance?
Will foreign payment card operators immediately threaten China UnionPay's market dominance?
No, not in the short term. Foreign operators like Visa and MasterCard need to build up their infrastructure from scratch, which will take time before they can significantly impact CUP's market share.
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