“Direct model” payments on online and mobile payment platforms will be replaced by a “network model” operated through the People’s Bank of China (PBOC) network platform, with all direct payments to cease by June 30, 2018, according to a new notice promulgated on August 4th.
On August 4th, the PBOC’s Payment and Settlement Division issued the “Notice on the transition of non-bank payment entities from direct processing to network platform processing” (henceforth referred to as the “notice”).
The PBOC’s network platform is a payment clearing and audit platform aimed at non-bank payment entities. The notice requires all non-bank payment entities transactions involving bank accounts to be conducted through the network platform with an effective start date of June 30, 2018.
At the same time, all involved banks and non-bank payment entities will be required to access the network platform and begin the process of preparing and migrating essential business activities to it by October 15, 2017.
Dong Junfeng, the vice president of the Bank of China Network Finance Department and previously seconded to the PBOC’s payment division, will lead the effort to develop the network platform. According to information provided by sources close to the project, Dong will manage the work necessary to develop the platform and potentially serve as direction following completion. In addition, the vice president of Payment and Clearing Association of China (PCAC), Cai Hongbo, is expected to act as chairman.
“At present, Dong has already been in communication with Cai to deliver daily reports; if nothing changes in the future, the personnel arrangements of the newly established company should be as described above,” said a source close to the PCAC.
A source within the payments sector said that the notice issued on August 4th is aimed at ensuring that payment entities will meet regulatory requirements and control financial risks on the internet and in mobile applications.
But there are difficulties in setting up such a regulatory apparatus, including conflicts within the organization, and there are challenges in ensuring access to the system for all, which will also have an impact on card-based payment organizations,
said the businessperson.
Early this year, Caijing exclusively reported on the attention within the market towards a unified platform for clearing online and mobile payment transactions which would use a distributed architecture spread between Beijing, Shanghai, and Shenzhen and which started gray release testing in March of this year.
A source close to the platform project said that the network will operate under a “three cities, six centers” distributed architecture framework, with six IDC centers spread between Beijing, Shanghai, and Shenzhen, using the same level of infrastructure and implementing the same operations. Thus, the existence of a unified network platform is no longer just talk of a single payment entity monopolizing the market and building its own infrastructure, but rather a formal entity with its own R&D, operating six data centers, and physically and logically unified (i.e. working from the same standardized equipment and procedures).
“Only in this way can unified standards, including a unified access specification, unified message format, and universal business norms be implemented,” said the source.
In addition to the other advantages of such a system, the ownership structure has not been monopolized by individual payment entities. Recently, a memorandum entitled “An agreement to set up Online Payment Clearing Company, Ltd.” and signed by the PBOC Clearing Center, TenPay, AliPay, UnionPay and 45 other agencies and companies was revealed to the public.
The parties to the memorandum will contribute monetary investments to give the new entity a net registered capital of 2 billion yuan (US$ 298.5 million), divided into three rounds of funding. The first round will contribute 50% of the required capital, the second 30%, and the third 20%.
The seven PBOC agencies which will contribute funding, including the PBOC Clearing Center and Shanghai Clearing House, are collectively contributing 760 million yuan (US$113.4 million), 37% of the total capital investment, making the PBOC the largest stakeholder in the new company, followed by Alipay and TenPay at 9.61% each.
Traditionally, clearing has been done following the so-called “Four-party method”: UnionPay does transaction clearance, banks act as card issuers, collection agencies handle the receipts, and the merchants are the final party. Howevr, in recent years, as the payments business changes rapidly, some payment entities are handling clearance themselves, with funds managed in the banks. This has created a three-party system which has pushed payment entities to manage deposits and left the system extremely decentralized, creating risks which cannot be ignored.
According to previous PBOC data, of the 267 payment agencies in China, more than 10 have custodial accounts, some 70 and possibly as many as 100 accounts in total. Moreover, the amounts on deposit are growing rapidly, with conservative estimates around 500 billion yuan (US$74.6 billion).
To deal with this issue, the PBOC has also issued a document requiring centralized deposit management. The management of online payments and custodial accounts are closely related, thus the new network platform is also a necessary preparation for implementing centralized management of accounts as the latter will require such a platform for support. “The network platform aims to remove clearing from the process and manage it separately, thus improving transparency in custodial deposits,” said a source close to the PBOC.
Following the gray release, at the end of June, the network platform will begin business operations testing. As of June 30, seven payment entities, namely TenPay, ChinaBank Online, 99Bill, Baidu Wallet, AliPay, Pingan Pay, and BestPay have completed initial access procedures and are working towards full business access.
According to the requirements of the notice, the agency operating the network platform must formulate an implementation plan, organize banks and payment entities to prepare for full access, including joint testing, verification, stress testing and data migration, and provide technical support to related businesses.
Payment entities and banks are to cooperate fully to organize and coordinate the move, and complete the relevant work required by the implementation plan. Liasons have been designated at the various entities and are to forward contact lists to the PBOC payment division by August 15th.