(Yicai Global) Aug. 7 -- All online payment transactions in China involving bank accounts will be processed through a centralized online payment clearing platform starting from June 30 next year, the payment and settlement department of the People’s Bank of China (PBOC) said in a recent document, entitled the “Notice Concerning the Migration of Internet-based Payment Transactions of Non-Banking Payment Institutions from the Direct Connection Model Toward the Online Clearing Platform.” The move will enable financial regulators to strengthen regulation and risk control over third-party payment businesses, and protect consumers more effectively.
The centralized platform refers to the ‘online payment clearing platform for non-banking payment institutions’ established by the Payment & Clearing Association of China, an affiliate to the PBOC. It is responsible for processing online payment transactions involving bank accounts initiated by non-banking payment organizations (‘payment institutions’).
At present, most third-party payment institutions are directly connected with banks, allowing them the possibility of misappropriating customers’ settlement reserves, which are prepaid by consumers to payment institutions for processing their authorized payment transactions. Settlement reserves include payments for online purchases made by customers before delivery.
Past few years have seen an increase in the frequency of misuses of customer settlement reserves, and these risk events have caused huge losses to consumers. Through investigations, the central bank found that a considerable proportion of customers’ payment settlement reserves were used as working capital. Many payment institutions used them to buy wealth management products or even high-risk investments, subjecting consumers to obvious potential risks.
The new policy will put an end to ‘direct connection’ practices between third-party payment service providers and banks for processing online payment transactions, Dong Ximiao, a visiting fellow at Chongyang Institute for Financial Studies affiliated to Renmin University of China, told Yicai Global. By building a centralized payment settlement platform for payment institutions, the policy will help increase the efficiency of payment transactions, and avoid overlapping platform-building projects, putting payment service providers of varying sizes on an equal footing in competition. It will also enable regulators to regulate online payment businesses more thoroughly, and protect consumers more effectively.
Apart from misappropriation of customers’ settlement reserves, existing third-party payment models are marred by low operating efficiency and redundant services. Payment institutions need to negotiate with different banks to access their payment settlement platforms. In some cases, a payment institution has to accommodate different platform connection interfaces provided by local branches of the same bank, making payment settlement inefficient. Furthermore, some major payment institutions have practically become interbank clearing banks, but interbank clearing should be conducted only by the central bank and clearing houses authorized by it.
Driven by the rise of cloud computing, the third-party payment market developed rapidly in recent years. The PBOC pointed out citing relevant statistics, payments processed via the national non-banking payment institution network totaled USD14.6 trillion (CNY99.27 trillion) last year, up 100.65 percent year-on-year.