Moving money online just got harder for internet banking and finance superstars Alibaba and Tencent.
The companies, particularly Alibaba, pioneered e-commerce and mobile payments in China while officials and state firms sat idly. More recently, the companies’ internet finance products have applied pressure on China’s central bank and the low fixed rate of interest banks pay on deposits.
The pace at which the two companies have developed new banking and financial products have taken the state-controlled financial services industry by storm. But conservative regulators that tend to back government-firms are waking to the trend and could come down hard on Alibaba and Tencent.
Late last week, the People’s Bank of China reportedly issued an urgent notice to the private internet giants asking them to temporarily halt QR code payments via their third party payment platforms, Alibaba’s Alipay and Tencent’s Tenpay. The notice also told the companies to delay the virtual credit cards that they planned to launch soon.
The central bank says more research must be carried out on user identification before QR codes, the two-dimensional barcodes that can be scanned to make payments, and online credit cards can proliferate. The security claim is valid but the official crackdown on third party payment methods is strikingly similar to disputes Alibaba has run into before.
Inconvenient delay
Last August, China UnionPay, a state-backed credit card monopoly, said all third party payments must be routed through its system and cleared by its clearing house by June 1 2014. Alibaba responded by shutting down its offline point-of-sales payment processor “for obvious reasons,” the company said.
The UnionPay-set deadline is fast approaching, and the state-owned company is hungry for the profits it stands to earn if all third party payments are processed in its system, up to 0.55% on each transaction. UnionPay may have applied pressure to the central bank to crack down on QR payments, which still dodges UnionPay’s reach. At least that’s what CICC, a Chinese investment bank, thinks. A private report circulated by the bank said PBOC’s move was likely aimed at protecting UnionPay.
Killing QR payments for now won’t cause too much distress at Alibaba or Tencent in the short run. At Tencent, the majority of users connect their bank accounts or Tenpay accounts to WeChat but don’t necessarily scan QR codes to make payments, Barclays Research said in a report. “Nevertheless, if the temporary ban extends to a prolonged period, this would no doubt affect the monetization ramping up of WeChat payments,” according to the report.
Delaying the issuance of online credit cards could do damage, however.
China’s credit card sector is greatly underserved. While many young, urban consumers have the financial wherewithal to make payments on credit cards, the application process can be difficult and services are limited. Issuing virtual credit cards could have been yet another breakthrough for China’s top internet firms in the country’s undeveloped financial space.
Depending on how long PBOC bans the services for, Alibaba and Tencent could lose the first-mover advantage.
“It’s too early to tell right now [if they lost that advantage],” said one analyst at a Chinese securities firm who asked not to be named. “We’ll have to wait and see how other players react and if anyone moves to fill this space.”
Normal treatment
Perhaps regulators imagined online credit cards exploding onto China’s financial scene in the same way Yu’ebao, Alibaba’s online money-market fund, did last year.
To many ordinary Chinese the fund, which began taking investments in June, has become an alternative to putting deposits into low-return bank accounts. The higher interest rate, more than 6% during its first eight months of operation, had attracted more than 80 million users and nearly RMB80 billion by the end of February. Alibaba partners with Tianhong Asset Management, and bought a majority stake in the company in October, to offer the money-market fund.
In January, Tencent rolled out Licaitong, a similar investment fund, partnering with China Asset management.
Regulators gave online finance an approving nod at the National People’s Congress last week but the placidity belies the government’s and the state-backed banking industry’s trepidation over the funds, which they view as lacking oversight and encroaching on their business.
In late February, the China Banking Association, an industry body, met to discuss what it called “self-regulation of bank deposits.” The real question on the agenda, however, according to Chinese media, was how to deal with online finance, which some traditional bankers have accused of raising the cost of lending at bricks and mortar banks.
The association will reportedly push the China Banking Regulatory Commission to start treating online funds such as Yu’ebao like normal deposits. That means Yu’ebao and Licaitong would have to start setting aside deposit reserves from the funds, 20% on the investment that would not accumulate interest at a high rate. Such a move has the potential to significantly tame the funds.
“Enforcing reserve deposits [on money market funds] would have a huge effect on returns,” Xue Hexiang, an analyst at Guotai Junan Securities, said on Monday. “It would be like losing a full 20% of the investment.”
Degrees of pressure
It’s unclear if CBRC will heed the banking association’s suggestion. Yet, while Alibaba and Tencent wait for that regulator and PBOC to formulate their stance on the online bank and finance business, the return that the companies can offer on Yu’ebao and Licaitong is decreasing as the cost of financing falls.
Just a week after Yu’ebao came online last year, interbank rates soared as PBOC refused to pump liquidity into the market. The money market funds thrived off the high cost of borrowing that remained much higher than before through the beginning of 2014, at times giving investors a return above 7%.
The rates have come down, though, and so have the returns from the funds. At the beginning of March, the annual interest rate on Yu’ebao products fell below 6% for the first time and the return has continued to fall as the central bank eases its monetary policy.
The falling rate of return is just another challenge Alibaba and Tencent face as they come up against an increasingly hostile regulatory environment. This year will be decisive in marking the role the companies are allowed to play in banking and finance. If legacy players such as UnionPay and state-backed banks apply a greater degree of pressure on PBOC and the CSRC, the internet giants could find themselves relegated to a much smaller space in the financial world.