18 August 2019
UnionPay stands to lose from the use of virtual credit cards. Photo: Bloomberg
UnionPay stands to lose from the use of virtual credit cards. Photo: Bloomberg

The hand behind the freeze on virtual credit cards

The People’s Bank of China has suspended the use of online payment systems involving virtual credit cards and mobile barcodes, catching market players by surprise. The move came even after ranking government officials voiced support for internet-based financial products such as Yu’E Bao during the recently concluded political meetings in Beijing.

As a norm, financial products under suspension are not allowed to re-enter the market any time soon. So the move may mean a significant setback for internet firms which have been hoping to use such payment systems to bolster their e-commerce businesses. 

In explaining its decision, the central bank said the online payment methods have raised security issues, such as the personal data and financial accounts of internet users, and therefore have to be carefully reviewed to ensure the interests of consumers are protected.

But according to the Hong Kong Economic Journal’s EJ Tactics column, anyone who has knowledge about online credit cards would understand that authorities are actually trying to protect the interests of someone else.

Take Alipay, the online payment service of Alibaba Group Holding Ltd. China CITIC Bank Corp. Ltd. (00998.HK), Alibaba’s partner in issuing virtual credit cards, will assess an applicant’s credit worthiness and decide on the credit limit based on the online information the consumer provides to Alibaba along with available data from financial institutions.

Any risk from the business will be borne by CITIC Bank, not Alipay. CITIC Bank, on the other hand, buys insurance against these online credits from Zhongan Online Property and Casualty Insurance Co. Ltd.

As such, virtual credit cards are no different from the more traditional plastic money. From credit assessment to deployment of loans, every action is determined by the lender. Online platforms only take care of the internet information.

In other words, online credit cards are nothing but credit cards issued by CITIC Bank. Admittedly, it is usually faster to secure an online credit card than to apply for its physical version.

The risk in the whole process is well under control. Alipay requires users to use their real names, while CITIC Bank adheres to its own code of practice, with the participation of an insurance company.

Then what is the central bank worried about? Whose interest is it really protecting?

For many informed observers, it is China UnionPay.

Established in March 2002, UnionPay is a Shanghai-based clearing vehicle for virtually all credit card payments. According to the current practice approved by the National Development and Reform Commission, the card issuer, the provider of the point-of-sale machine (either a bank or a subsidiary of UnionPay) and UnionPay share in the commission paid by the vendor at a ratio of 7:2:1 respectively. That means UnionPay makes money for every credit card transaction.

Thus, online credit cards have the potential of knocking out this business model which benefits UnionPay as 90 percent of the transactions will not go through UnionPay.

So who is really behind the central bank’s move to freeze all online payment systems? The one who stands to lose most if such systems become widely used in the robust, fast-growing e-commerce space.

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Freelance journalist

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