Banking & Finance

Pay restrictions

New online payment rules favour Alipay

Pay restrictions


Lest anyone think online payments are dull, think only of Elon Musk. The charismatic South African-born entrepreneur is – by the admission of Iron Man director, John Favreau – the “inspiration” behind the film’s hero-businessman, Tony Stark. Musk has pioneered the electric sports car, the Tesla (which does nought to 60mph in 3.7 seconds), as well as a business called SpaceX to build rockets for NASA.

But Musk started out in online payments, earning his $300 million fortune thanks to his sale of PayPal to eBay. Over in China – where the number of internet users now exceeds 400 million – his equivalent is Jack Ma, whose Alipay business has seen astronomical growth. Thanks to another of Ma’s businesses – an online shopping website called Taobao – Alipay has 49.8% of the online payments market. The Chinese spent Rmb580 billion online in 2009 and according to 21CN Business Herald that is forecast to grow to Rmb1 trillion ($146.7 billion) within two years.

With volumes like that China’s central bank has concluded it cannot afford to leave the online payments market unregulated. So this week it announced new rules. As of September only licensed firms will be permitted to operate online payment business models.

As Forbes blogger and legal specialist Stan Abram puts it: “This is a rule designed to bring online payments services into the banking regulatory environment, where it rightly belongs.”

In order to get a licence, firms must have operated profitably for two years, have registered capital of Rmb100 million and have a track record in e-commerce.

What grabbed more of the headlines was a provision related to ownership. “Internet companies have realised that anyone who has foreigners among its shareholders will be locked out of the relatively simple licensing process and instead be subject to a potentially onerous, opaque procedures,” points out the Financial Times. The FT sees it as another reminder that China is laden with “regulatory risk”.

The market is currently dominated by four major players. Besides Alipay, the local internet giant Tencents has a 20.6% share, China UnionPay (see WiC64) a 14.2% share and 99Bill has 4.1%. Caixin estimates there are 300 smaller players too, and that these are the ones likely to be weeded out by the new regulations.

But even the big firms will have to remodel to segregate their payments business – since only UnionPay has no foreign shareholders (Yahoo and Softbank are, for example, investors in Jack Ma’s firm).

Local media has speculated that Ma had, in fact, seen this coming and has crafted a new structure for Alipay’s ownership that will satisfy the central bank that it is domestically-owned. And 21CN Business Herald reckons the point of the regulations is solely to protect the major incumbents. “The new rules have made the barrier of entry higher for new entrants,” it comments. “In other words, the government has just dug a moat for Alipay, and a pretty deep one.”

Little wonder that an Alipay spokesperson told media the new rule “will not have any impact” on the company’s operations.

Perhaps the ruling’s most significant aspect: it will prevent foreign firms like PayPal and Visa from gaining a foothold in the payments segment. As the Chinese buy ever more stuff online, the central bank wants to ensure the process is facilitated by local parties. Like the recent Google debacle (see WiC54), it signals that the government wants China’s internet to be run by a handful of local players.

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