Paying up

More regulated: Jack Ma's Alipay

How do you tell someone you care? In the West, one way is a gift of flowers, an act said to have been encouraged by the American Florists Telegraph Delivery Group which coined the expression “say it with flowers” a century ago.

In China the millennial generation does the same thing through their WeChat and Alipay accounts. Receive Rmb520 from somebody and the implication is that the sender is in love with you, because that is what the amount sounds like spoken in Chinese.

Third-party payment providers are now ubiquitous in China and the fintech revolution is much more advanced in the Middle Kingdom than anywhere else in the world. Instead of taking cash out of ATMs or waving their credit or debit cards, citizens route their payments through Alipay and WeChat, maintaining cash reserves in deposit-like accounts which they use to transfer money to friends or pay for goods and services.

As a result Alipay processed a higher value of payments than Visa last year – Rmb73 trillion ($10.87 trillion) compared to $10.5 trillion – and Alibaba’s payments arm had 870 million users and a domestic market share of 53.8% at the end of the first quarter this year, according to Analysys figures.

This is significantly below the dominant 74.9% share it held at the beginning of 2015, however, when it enjoyed greater dominance. Since then it has had to contend with Tencent’s WeChat Pay, which grew rapidly, although its share has now plateaued around the 39% mark.

WeChat Pay’s 800 million active users accounted for payments worth Rmb41 trillion during 2017. Together, the two brands account for 92.8% of the digital payments market, which has been growing at an annual growth rate of 80% since 2014.

Changes in the way the Chinese pay for goods and services have been incredibly swift and old-style banks are being muscled out of the market. Such is the speed of take-up that China’s central bank has even warned businesses not to refuse or discriminate against cash payment.

But as the sector gains prominence, it has begun to attract more regulation, and the Financial Times is claiming that “the era of free money is drawing to a close” for Alipay and WeChat Pay. Under previous rules, the two could take depositors’ pre-paid cash and invest it in a similar way to banks with their customer deposits. Even better was that they weren’t required to pay interest on the funds they held from customers. But new rules require the payments operators to place all of these reserves with custodian banks by next January (initially, only 20% had been lodged in this way). These deposits won’t earn any interest income either, which will cost the payment providers at least $1 billion a year in foregone revenues.

Elsewhere in the world the focus has shifted to another aspect of the third-party payments sector: its role in the development of the country’s emerging Big Brother-style surveillance system. All online payments handled by non-banks now have to pass through a centralised network, in what is being seen as a move to better regulate the market. But another argument is that the authorities want to track electronic payments as part of citizen profiling, not just in countering corruption or money laundering.

Few Chinese seem too worried about this at the moment, at least openly, although local commentators are less sanguine when it comes to another feature of the fintech sector: P2P (peer-to-peer lending).

Here the trend is similar to the payments firms, as the government is forcing the P2P players to put customer reserves into custodian banks, as well as limit the guarantees they offer.

New rules which came into effect this June also ban P2P companies from guaranteeing principal or interest on loans, as well as capping loans to Rmb1 million for individuals and Rmb5 million for companies.

The squeeze, which is part of the government’s wider deleveraging campaign, has prompted investors to withdraw money from many of the platforms, some of which were already struggling to keep their heads above water.

Bloomberg reports that 57 P2P companies either announced they were closing or that they were under investigation during the first two weeks of July. This follows 80 similar instances in June, a two-year high.

Two big platforms in Shanghai failed to repay savers this week and some of their key executives have disappeared without explanation. Police in the city’s Pudong district have been inundated with complaints about Yonglibao.com and Jucaicat.com, lending platforms where the value of outstanding claims is reported to be worth billions of yuan.

The clampdown is having its desired effect from the policymaking perspective in reducing the number of lenders: there were 1,800 P2P companies at the end of June versus 5,000 at the sector’s peak in 2014.

The restrictions on the P2P platforms are being felt by some of the largest, most reputable players including Ping An’s Lufax, which was valued at $60 billion recently.

It has postponed an initial public offering until the regulatory situation becomes clearer on a newer P2P licencing regime, reports the Financial Times.

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