Public Clearinghouse Could Shake Up China’s Mobile Payment Market
There is a potentially massive shake-up coming to the trailblazing Chinese mobile payments market this summer. As part of a wave of new regulations designed to reel in China’s sprawling FinTech industry, the country’s payments providers — including tech giants Alipay and WeChat Pay — will be required to connect to Wanglian, a public clearing and settlement institution for online payments. Details about the new clearinghouse are hard to come by, but below is what we know so far, why we think it is happening and what the implications might be for the mobile payments landscape.
Why has Wanglian emerged?
As discussed in a recent CGAP blog post, “What Can Mobile Money Make Possible? China Has Many Answers,” mobile payments have grown in China like nowhere else in the world. The rapid spread of payments apps like Alipay and WeChat Pay have brought financial services to millions, but they have also benefited from light regulation and have raised concerns about their potential to abuse dominant market share. In 2015, regulators issued guidance “promoting internet finance’s healthy development,” and a series of new policies and restrictions emerged. Chief among them was a move to bring China’s popular third-party payments companies back into the fold of a larger planned economy. Wanglian was proposed in April 2016 and approved by the People’s Bank of China (PBOC) six months later. Wanglian, which loosely translates to “internet payments union,” is intended to mirror the structure and purpose of China’s card network, China UnionPay, but for businesses licensed as nonbank payments companies instead of banks.
Motives behind the decision to create Wanglian are the subject of heated debate. Critics say the government has been at least partly motivated to protect traditional financial institutions, such as a banks, which are losing market share and data as customers gravitate to tech firms that offer a better user experience. The government states that Wanglian is a much-needed step to bolster regulatory oversight of what is becoming a large, systemic piece of China’s financial industry. By the end of 2016, the temporary funds held by nonbank payments companies were valued at Y 460 billion ($73 billion), according to PBOC. This puts the industry on par with Bank of Ningbo, China’s 16th largest bank, in terms of deposit liabilities. But the combined user base of Alipay and WeChat Pay alone is more than 600 million, well above the number of accountholders at Bank of Ningbo and above that of China’s largest bank, which has 560 million customers. Regulators have little direct insight into the movement of funds or whether compliance measures are being implemented by these nonbank payments companies.
To date, these companies have driven innovation in China largely by operating on the periphery of what regulation has clearly defined, a deliberate approach by regulators to enable innovation. In lieu of suitable public infrastructure for online payments, businesses like Alipay and WeChat Pay have built their own payment rails by establishing bilateral partnerships with dozens a national, provincial and municipal banks. Contracts with these banks have allowed nonbank payments companies to effectively perform clearing and settlement on their own, despite not holding a settlement license. Users’ wallet funds are held in a small number of commercial bank accounts at traditional banks, under the names of nonbank payments companies.
How will Wanglian work?
The details about Wanglian remain obscure. In August 2017, PBOC announced that third-party payments companies would have until October to connect to Wanglian and that the system would go live by the end of June 2018. In the same announcement, it was revealed that PBOC and related subsidiaries would own 37 percent of Wanglian. The remaining equity would be carved up among private payments companies, with the largest shares going to Alipay (9.61 percent), Tencent/Tenpay (9.61 percent) and Chinabank Payment, the creator of JD.com (4.71 percent).
While it is unusual for private businesses to own public infrastructure in China, the circumstances around Wanglian may explain why this arrangement was chosen. In addition to Alipay and WeChat Pay spearheading the country’s mobile payments innovation, their system technology and architecture will reportedly form the foundation for Wanglian. If this is true, the government has effectively forced the country’s leading payments companies to transform their intellectual property into a public asset. Such a move may be necessary to ensure that the high-volume, high-frequency transaction demands of the entire Chinese market are met. PBOC aims to launch Wanglian with a capacity of 120,000 transactions per second, almost 50 percent more than what even Alipay has reported handling, according to Caixin. By the same account, the central bank is promising lower operational costs to all third-party payments companies. If true, Wanglian may mean better outcomes to providers and users alike.
What are the implications for mobile payments?
The creation of Wanglian also appears to be a move to ensure better market competition through greater interoperability. The closed-door deal-making and bilateral contracts that built Alipay’s and WeChat Pay’s bank networks are both prohibitively time- and resource-intensive to replicate for any new payments business. Wanglian offers small providers a chance to avoid building expensive private networks by giving them access to an advanced, nationally accepted payments system.
The Wanglian move seems to fit with other recent moves by regulators. In December 2017, PBOC announced its plans to standardize QR payment technology and tier transactions amounts with proportional authentication methods. As discussed in an earlier CGAP blog post, “Inside QR Codes: How Black & White Dots Simplify Digital Payments,” a third of all digital payments in China — $2.6 trillion in transactions — used QR codes. The emergence of public QR infrastructure is of little consequence to the largest two providers, Alipay and WeChat Pay. They have already developed QR codes to their own standards that are accepted by the vast majority of offline retailers. But as with connections to banks, building a QR system presents interoperability challenges for smaller providers. (It also increases the risk for fraud, malware, data protection and a host of other data security concerns that arise from a lack of security measures that might apply to a unified QR-code standard.)
By reducing these barriers to the market through better public infrastructure, Wanglian may end up forcing Alibaba and Tencent — the companies behind Alipay and WeChat Pay, respectively — to reduce their control of consumer data. Whatever the government’s motivations may be, the new clearinghouse may return a measure of power to other players, including more traditional parties like banks. Payments data collected through Alipay and WeChat Pay feed into all the other commercial businesses they own or manage. Data from those commercial businesses, in turn, fuel their financial offerings, driving customized marketing, variable products, better credit analytics and much more in a continuous, virtuous cycle. Under loose data protection regulation, data have been freely shared across independent businesses, but walled off from outside companies. Under Wanglian, this advantage could be reduced, providing more opportunities for other firms.
Public-private payments infrastructure like Wanglian brings to mind the much-vaunted India Stack. After Wanglian launches in June, it will be interesting to see how it develops and to compare it with what is happening in India. One thing we do know is that when players of this magnitude interact, the repercussions are likely far reaching.