Code crackdown: China payments restrictions to hit profits

A decision by China’s central bank to rein in reserve funds held by payment firms could cost the industry upwards of $689 million a year, spur consolidation and alter the way Asia’s biggest tech firms move money. Mobile payments using in-app QR or bar-codes have become ubiquitous for everything from taxis to grocery shopping and bike rental in China in recent years, with customers making $2.9 trillion in transactions in 2016, according to iResearch. The rapid uptake has spurred fears that mobile payment firms, without oversight, could misuse funds held while transactions between users and merchants clear. Regulations unveiled by the People’s Bank of China (PBOC) on Saturday require firms to allocate 42% to 50% of their total client funds in regulated interest-free reserve accounts by April, up from a current rate of 12% to 20%. The move will hit services backed by Tencent Group Holdings Ltd (0700.HK) and Alibaba Group Holding Ltd (BABA.N) affiliate Ant Financial, which together make up over 93% of China’s online payments market, according to research firm Analysys International. It’s part of a two-year government crackdown on financial risks in the country’s fast growing and loosely regulated online finance sector, aimed at limiting the activities of third-party payment services, online asset managers, micro lenders and others. The central bank has said it will eventually raise the ratio to 100% but hasn’t given a timeline. The moves will impact a major source of profit for online payment firms, particularly those that relied on the interest income for fast growth during the early boom years.

Interest income

China’s e-commerce and mobile payments market has enjoyed explosive growth in recent years with Alipay and Tencent’s Tenpay each accumulating over 500 million users. Client reserve funds are prepaid sums from buyers that are held temporarily by payment companies before they are transferred to merchants. Payment firms typically deposit them into bank accounts where they earn interest. Interest income earned on those reserve funds accounted for 11% of total income for internet-based payment companies, data from Zhongtai Securities shows. The latest hike in reserves will slash more than $689 million in annual interest earnings from the industry, according to Reuters calculations, under the assumption that payment companies could have earned 3% annualized interest rate on those funds. Analysts say large, diversified firms such as Ant Financial and Tencent will be able to absorb the costs, and seek to replace revenue with income from other products, including wealth management tools and micro-loans. The move puts extra pressure on the two top firms, however, who are facing barriers at home and abroad as regulators balk at the technical and financial implications of their rapid expansion. Ant Financial on Wednesday announced it has withdrawn a $1.2 billion acquisition bid for US money transfer firm Moneygram International Inc (MGI.O) after US government panel rejected the bid over national security concerns. Ant Financial said it was supportive of the PBOC’s move. Tencent did not respond to a request for comment. Smaller payment firms could face consolidation as their margins slide. There are currently more than 200 companies licensed to provide such services. Shanghai-based All In Pay Network Service, which has 1.7 million merchants, said it would adjust its business to comply with the central bank’s new policy.