There’s no shortage of folksy sayings that warn about the danger of mixing business and personal matters, and that’s the message China’s financial regulators want the hundreds of millions of users of mobile payment platforms like Alipay and WeChat Pay to take to heart.
New regulations released by the People’s Bank of China (PBOC) in October bar businesses from using barcodes generated by personal accounts on these platforms to take money from their customers. Instead, the central bank wants all businesses to use more tightly regulated accounts that feature merchant barcodes, which the platforms use to facilitate transactions between businesses and their customers.
In the PBOC’s own words, the regulations, set to take effect March 1, aim to clearly distinguish between business and personal transactions on the platforms in an effort to prevent financial crimes like cross-border gambling.
The new rules come as the government tightens oversight on the country’s fintech sector. Until recently, regulators largely turned a blind eye to internet giants’ rapidly developing financial businesses as government policy was focused on boosting innovation. But as these businesses have grown, regulators since last year have tightened restrictions on the fintech sector to check risks to the financial system.
The October regulations were more recently in the news late last November when speculation swirled that they would force businesses to stop accepting payment via Alipay and WeChat Pay quick response (QR) codes all together.
Although the rumors were unfounded, the hand-wringing highlights the stakes of fiddling with China’s nonbank mobile payment market, which handled transactions worth 71.2 trillion yuan ($11.2 trillion) in the fourth quarter of 2020, according to a report by consulting firm iResearch. The value of transactions made through QR codes — both merchant and personal — hit 11 trillion yuan in the period, accounting for about 15.4% of the total, the report showed. Nearly 100 million small and micro business owners in China use individual QR codes on Alipay and WeChat Pay to handle their payments, according to investment bank China International Capital Corp. Ltd.
Here are four key things to know about why the central bank wants to keep business and personal matters separate on China’s ubiquitous mobile payment platforms.
What do I need to know about the new regulations?
The October regulations stipulate that anyone using a payment platform in a way that looks a lot like a business should use a merchant barcode rather than an individual one to receive payments.
There are two types of payment collection barcodes: Individual barcodes are generated by personal accounts that are designed for people to receive money from their family or friends; merchant barcodes, however, are generated by accounts designed for businesses to receive payment from their customers. So to use a merchant barcode, one needs a merchant account, and registering for one on the payment platforms is a lot more involved than opening a personal account. Companies have to provide their business licenses and other documents to register for a merchant account, such as a scan copy or a photo of their legal representative’s identification card, and the companies’ bank account numbers.
However, many owners of mom-and-pop stores, food carts and other small and micro businesses have chosen to avoid the tedium of opening a merchant account. Instead, they have just gone on conducting business through their individual accounts.
QR codes for digital payment services on display at a snack shop in Beijing, Sept. 14, 2021. Gilles Sabrie/Bloomberg via People Visual
Although the regulations did not single out Alipay and WeChat Pay, the two platforms, separately run by tech giants Ant Group Co. Ltd. and Tencent Holdings Ltd., collectively held more than 90% of the nonbank mobile payment market in 2020, according to iResearch.
Currently, the Payment and Clearing Association of China, an industry group that helps regulate its member companies, is leading an effort to draft more detailed rules to help make sure business on the payment platforms is only conducted through merchant accounts, sources with knowledge of matter told Caixin.
In addition, China UnionPay Co. Ltd., the country’ major bank-card clearing institution, offered up one controversial proposal that would cap the amount of money that individual accounts can receive via a barcode transaction at 100 yuan a day, sources familiar with the matter said.
The suspiciously self-interested proposal would make Alipay and WeChat Pay less convenient for personal account users, who often use the platforms to send moderate amounts of money to each other.
Not surprisingly, the proposal was opposed by some payment platforms, the sources said.
The new regulations also prohibit static individual barcodes from being used to make payments unless they are done in person, as opposed to a vendor sending the code to a customer over a chat program like WeChat. There is an exception built into the rules for “necessities.” According to the regulations, such exceptions will be subject to stringent whitelist management, meaning that only those on the list will be allowed to make payments this way.
Why is the central bank bothering with barcodes?
In short, conducting business on personal accounts has made it harder for the central bank to identify questionable transactions that hint at illegal activity.
Regulators used to turn a blind eye to business being conducted with personal accounts, as they agreed that the practice made it easier to run a small business, industry insiders said.
However, some have taken advantage of the lax oversight. Online gambling is one example. With the exception of a couple of state-run lotteries, gambling is illegal on the Chinese mainland, but there are gambling websites that cater to its residents.
The ban on gambling makes it difficult to transfer money to and from such websites, but that’s where personal QR codes come in. Online gambling sites routinely rent personal accounts of willing individuals to receive money from their clients, a PBOC official said in a Q&A accompanying the regulations. In exchange the individuals who lease out their QR codes — usually by providing a screenshot of the codes to gambling site operators — receive a commission.
This makes it harder for regulators to trace the money flowing to online gambling sites from the mainland, the PBOC official said.
The ban against using individual barcodes to make payments remotely aims to prevent QR codes from being sold, rented or lent as channels for gambling funds, the central bank said.
Sounds good. So what’s standing in the way?
One problem is that the payment platforms already have trouble checking the information that small businesses provide when they sign up for a merchant account. For instance, it’s difficult for them to verify the locations of some smaller businesses because operations like food carts don’t set up shop in the same place every day.
In the Q&A, the PBOC suggested that the platforms conduct a video call with merchant account applicants to help verify their identities. Such due diligence, a requirement that is part of the “know your customer” principle, is important because payment companies need to completely understand an applicant’s business, an executive of one payment platform told Caixin. Doing so makes it easier for the platforms to identify dubious transactions by seeing whether they match the merchant account holder’s business.
In addition, some have pointed out that the new regulations will make it more costly for small businesses to do business because the payment platforms charge merchant accounts a transaction fee equivalent to 0.38% to 0.6% of each payment they receive. This creates a disincentive for small business owners to sign up for merchant accounts as personal accounts are not subject to such charges. And if businesses do switch to merchant accounts, they could end up passing on the added costs to their customers, a payment company employee said.
Who are the winners and losers?
The regulations are expected to result in a lot more money being deposited at Chinese banks. That’s because the payment platforms have to follow different requirements for how they deal with funds in merchant accounts and in personal accounts.
For personal accounts, the payment platforms have to set aside any funds that their users deposit and then keep them in special accounts overseen by the PBOC. The central bank pays the platforms interest on these deposits. It’s already a lot of money. At the end of November, these funds totaled 1.95 trillion yuan, with the vast majority deposited by Alipay and WeChat Pay, according to PBOC data.
For merchant accounts, however, the payment platforms face no such deposit requirement. Instead, they only have to make sure that any funds paid into a merchant account on their platforms gets transferred to the merchant’s corresponding bank account within 24 hours.
So if all the vendors currently doing business with individual barcodes switch over to merchant barcodes on the payment platforms, there will be a lot of money moving from the PBOC-run reserve accounts to commercial lenders, resulting in a liquidity boon for banks, industry insiders said.
Reporters: Zhang Yuzhe and Tang Ziyi. With contribution from Lin Jinbing.
This article was originally published by Caixin Global. It has been republished here with permission.
(Icons: Tom Nulens/DigitalVision/People Visual)
(Header image: A woman scans a digital payments QR code outside a shop in Beijing, Sept. 14, 2021. Gilles Sabrie/Bloomberg via People Visual)