23 August 2019

PBoC move hints at tighter govt control of O2O business

The People’s Bank of China appears to have dealt the country’s e-commerce sector a setback after it suspended the use of virtual payment channels such as virtual credit cards and the Quick Response (QR) Code payment via mobile phones.

The suspension signals the government’s intention to have a say in the development of the online-to-offline (O2O) business model, and e-commerce firms can expect tighter regulatory supervision of their new bank-related services. 

The central bank said late last week that payments via code scanning and online credit cards are closely linked to consumers’ personal information and could affect the security of their financial accounts. As such, there is a need to review these online services. A central bank official stressed, however, that the new payment methods are being suspended but not prohibited.

The suspension came after Alibaba Group Holding and Tencent Holdings (00700.HK) launched new virtual payment services to bolster their e-commerce businesses.

Alibaba has linked up with China CITIC Bank Corporation Ltd. (00998.HK) to issue one million online credit cards with a minimum credit line of 200 yuan (US$32.37) for internet shopping.

Tencent, meanwhile, has fully opened the online payment service of its popular WeChat instant messaging app to all e-commerce vendors. The vendors need to make a deposit of 20,000 yuan on their WeChat accounts in order to conduct online transactions, with Tencent charging a service fee of 0.6 percent for each transaction.

Despite the central bank’s concerns over the security of consumer accounts, the new online credit card services present a breakthrough in e-commerce. The whole application and approval process is virtual, and completely different from the way banks handle credit card applications, which usually require identification proof and the applicant’s signature, among other things.

In the case of online credit cards, all procedures are conducted online and based on the applicants’ online transaction and personal records. That raises regulatory concerns as the assessment of applicants, including determining their credit limits, will be based on their online records. The same holds true for assessing the ability of e-commerce vendors to carry out online transactions and deliver their products and services to the buyers’ satisfaction.

As such, the suspension of the new services will give regulators time to assess the entire system and pinpoint legal responsibilities to protect all concerned parties.

There is speculation that the central bank’s action implies that the government is reluctant to allow internet companies to venture too deeply into the offline payment market as this could challenge the dominance of China UnionPay, the nation’s largest bank card operator. It is possible that the government may prefer all these virtual payment systems to be endorsed by China UnionPay, which is affiliated with the country’s four largest state-owned banks, in order to maintain its payment platform leadership in the market.

Concerns over the security of the QR Code payment service can be traced to the fact that the system makes use of the consumer’s bank account for the actual payment, which means the service is still linked with traditional bank services, although the payment is made via the QR Code rather than a physical bank card or hard cash.

This concern could be settled if the QR Code payment is made on a prepaid basis, meaning the user makes a cash deposit on the merchant’s account or even a Tencent account dedicated for shopping use, rather than linking the system to the user’s bank account. This would help protect the user’s payment account from unauthorized use and clarify legal responsibilities.

Still, the suspension indicates that the government wants to have a strong regulatory presence in the fast-growing O2O ecosystem, and possibly even influence its direction and development.

From the industry perspective, it is but a natural move for e-commerce firms like Alibaba and Tencent to step into the payment business and establish control over the money flow. It will also enable the internet firms to gather the users’ transaction data and learn from their consumption habits.

But once these new payment methods come under tight government supervision or are carried out through existing bank payment platforms, e-commerce firms may find it difficult to establish control over the money flow and collect transaction data from consumers as they wish. And this handicap could affect their market valuation.

– Contact the writer at [email protected]



EJ Insight writer

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