Internet Third Party Payment Market Development and Regulation

The emergence of e-commerce has given rise to the third-party payment market on the Internet. Due to the characteristics of e-commerce online transactions, in order to solve the problem of credit deficiency between consumers and merchants, some enterprises have established a third-party payment platform, which is a transit platform for transaction funds between merchants and consumers. With the characteristics of “small payment and micro field”, third-party payment has rapidly occupied the Internet payment market. Currently, third-party payment platforms, represented by Alipay and CaiPay, are playing an increasingly important role in the Internet payment system and in the daily consumption of Chinese citizens.

Third-party payment, also known as non-financial institution payment and non-bank payment service, refers to the payment mode in which enterprises with certain strength and credit guarantee adopt the way of contracting with major commercial banks to facilitate transactions between two parties through the Netlink platform. In layman’s terms, the third-party payment platform is a “middle platform” for buyers and sellers in the transaction process, and does not involve the ownership of funds, but only plays the role of transit, providing funds for buyers and sellers to collect and pay on behalf of the buyer and seller to facilitate the completion of the transaction. Nowadays, third-party payments no longer only emphasize credit guarantee, but also enhance the convenience of payment and comprehensive financial services, and expand the application scenarios.

In 1999, China’s first third-party payment platform, Shouxinbao, was born, and in 2002, the central bank joined hands with commercial banks to establish China UnionPay, a joint cost-sharing scheme in which banks provide merchants with multiple payments. In 2002, the central bank joined hands with commercial banks to establish China UnionPay, which provides merchants with a unified interface for multi-bank card online payments, making it possible for cross-location interbank online payments. Third-party payment platforms acted as intermediaries, connecting banks and merchants respectively, thus helping consumers and merchants to jump to each bank’s online banking interface for payment operations in the course of online transaction payments. However, during this period, Internet penetration was not yet high and most individual users did not trust the security of online payment enough, so the overall transaction scale of third-party payment was relatively small and its influence was weak. 2005, after the promulgation of the “Electronic Payment Guidelines (No. 1)” by the Central Bank of China, capital flooded into the payment field and Alipay became an independent third-party payment platform. At the same time, the emergence of a number of offline financial services also combined to drive third-party payment platforms to show strong development. During this period, the third-party payment industry standards and related institutional norms were still in a fumbling state, with the absence of laws and regulations and the long-term lack of supervision, resulting in the misappropriation of reserve funds, illegal cashing and fraud being exposed one after another, and the third-party payment industry is in urgent need of remediation and supervision, both in terms of industry volume and development status.

Due to the continuous optimization of China’s e-commerce environment, the enrichment and development of online payment scenarios, and active financial innovation, the third-party payment business continues to grow rapidly. 2011 marked the establishment of its legal status with the issuance of payment business licenses, i.e. payment licenses, and after 2012, mobile payment has become an important factor for payment as the e-commerce market has matured and smartphones and 4G and 5G networks have become popular. The industry has become an important area of innovation and explosive growth. The development of mobile payment is further promoted by the high popularity of smartphones, and transaction subjects only need a smartphone to meet various daily payment needs. Mobile payment based on smartphones and mobile networks has become an essential way of life for ordinary residents, deeply integrated into every aspect of users’ clothing, food, housing and transportation.

In 2016, mobile payment replaced bank card acquiring as the largest business type in the third-party payment industry. By 2019, the scale of mobile payment transactions had reached 62.8%, becoming the most mainstream payment method in society.

Industry regulatory path of third-party payment. The development of the third-party payment industry is accompanied by many risks, such as illegal cashing, money laundering, illegal misappropriation of provision funds, and information security. Therefore, there is also a strong practical need to implement and strengthen the regulation of third-party payments. In the early days, the state actively encouraged and gradually regulated the development of third-party payment platforms, and companies took advantage of the relaxed and favorable policy and market environment to achieve leapfrog development in a short period of time. However, after 2014, the central bank’s regulatory attitude changed and gradually shifted to prudential supervision. The central bank first suspended Alipay’s offline barcode payment business, then suspended the QR code sweeping payment business, and then withdrew some third-party payment licenses and centralized the depository of all the provision funds. As can be seen, the central bank is currently regulating the business activities of third-party institutions mainly from a financial perspective. Specifically, the relevant regulatory measures actually also guide the industry towards a healthy development path, such as planning the interconnection of barcode payment, supporting and encouraging the innovation of mobile payment and digital currency application, which also provides new ideas for the regulatory regulation of third-party payment.

In 2010, the Central Bank of China promulgated the Measures for the Administration of Payment Services by Non-financial Institutions and its implementation rules, which for the first time legally regulated third-party payments by means of departmental regulations of the State Council. In 2011, 27 companies, including Alipay, received the first batch of payment licenses issued by the central bank, officially establishing the legal status of the third-party payment industry. After several years of large-scale issuance, the central bank has significantly slowed down the issuance of licenses in recent years. In 2015, Lakala, Guangdong Yimin and other payment companies were fined or had their payment licenses revoked due to misappropriation of customer reserve funds and ineffective transaction monitoring, ending the history of “issuing but not withdrawing” payment licenses in the third-party payment industry. In August 2016, the central bank said that in principle, no new non-financial payment institutions will be approved for a period of time in the future. In 2017, the central bank revoked and consolidated more than 20 payment licenses one after another.

Up to now, the issuance of third-party payment licenses in China has been at a “standstill”, with 238 existing third-party payment licenses. With the further tightening of license regulation, payment license acquisition has become a new way to obtain payment business. Licenses with three business qualifications of “Internet payment + mobile payment + bank card acquiring” have become a scarce resource in the market with high prices. Based on the need for business type expansion or scale development, large third-party payment companies may acquire smaller payment companies in the future. This is a new trend in the development of third-party payments, and also puts forward new requirements for market competition regulation beyond industry regulation.

Strengthen market regulation with a focus on provisioning. The safety of the reserve fund is related to the core interests of customers and is a top priority for the regulation of third-party payment institutions. The reserve fund refers to the monetary funds pre-deposited or retained by customers in payment institutions, as well as the monetary funds received or paid by payment institutions on behalf of customers. Reserve fund risk is the main internal risk of third-party payment institutions. Under the business model of third-party payment, delayed payment and clearing of funds transfer between the two sides of the transaction is common, which makes the financial accounts of third-party payment platforms deposit a large amount of funds. Misappropriation, borrowing and misappropriation of the deposited funds can greatly disrupt the market order, cause significant losses, seriously damage customers’ rights and interests, endanger the survival of the industry, and are serious violations of the law. Provision fund management is the red line of payment industry supervision and the bottom line of third-party payment institutions’ business operation. All along, the relevant documents issued by the central bank have called for strengthening the management of the reserve fund. China’s “Measures for the Administration of Non-financial Institution Payment Services”, a programmatic document for third-party payment regulation, clarifies for the first time that the nature of the provision fund is not the payment institution’s own property, and that payment institutions can only transfer the provision fund according to payment instructions initiated by customers and are prohibited from misappropriating customer provision funds in any form. Accordingly, a separate depository system for third-party payment institutions’ own funds and customer funds was established. According to the regulations, third-party payment institutions must open special deposit accounts for customer reserve funds with commercial banks. However, in actual operation, most of the customer reserve accounts opened by institutions only have the nature of basic deposit accounts, and banks have no obligation to supervise their daily fund transfers, which shows that there are more risk points in the daily management of reserve funds by third-party payment platforms.

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