China’s New Online Payment Regulation Creates Concern for Third-Party Payment Providers

China's central bank released a draft regulation that could limit transactions with third-party payment providers like Alipay to as little as 1,000 yuan (US $160). This move may wipe out smaller firms and force people to use state-owned bank services.

On Friday, the proposed regulation was announced that could greatly affect China's 8 trillion yuan (US $1.28 trillion) third-party online and mobile payments marketplace.

Third-party payment services that have two or more security measures but do not provide verification processes will have a daily 5,000 yuan (US $800) transaction limit per user. Payment services that offer less than two security measures will have a daily transaction limit of 1,000 yuan (US $160), according to South China Morning Post.

There will be no ceiling limit for payment providers which utilize digital certificates or signatures in their security measures. There won’t be any effect on Internet banking transactions. If these regulations come into the picture, smaller third-party services will be affected and they may need to work under great pressure. After the regulations are implemented, they will be required to implement multiple security measures which will increase their operational costs.

According to a report by Barclays, the move will lead to increased consolidation, strengthening the position of major players like Tencent and Alibaba, whose Alipay service already controls a commanding 50% market share.

The new regulation is in support of state-owned banks. Amid the backlash, the central bank said on Saturday that users who wish to make transactions over 5,000 yuan can use Internet banking to foot the excess amount.

According to Barclays, the essence of the regulations is to limit third-party payment services to small transactions and ensure that large transactions go through the banks.

According to market intelligence firm iResearch, in 2014, third-party online payment services such as Alipay and Tencent's Tenpay processed transactions worth 8 trillion yuan (US $1.28 trillion).

"(The proposal) is aimed at having better controls and governance of third-party online payment channels; it is not targeted at controlling online shopping," the Barclays report said.

As per the proposed rules, no third-party payment services can provide financial services such as deposits, loans, financing, currency exchange services, etc., to users. The FinTech market—in which players such as Alibaba's Yu'e Bao operate—will be affected by this proposal (Yu'e Bao allows users to generate interest on the amount of money they deposit in their Alipay wallets). Huabei, a credit loan product of Alipay which allow users to take loans between 1,000 and 30,000 yuan for online purchases, may also be impacted.