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E-payment guide: overview of e-payment regulatory landscape in China
As opposed to cash or card payments for traditional brick-and-mortar businesses, electronic or online payments enable electronic transfer of funds via the internet or network (including several methods such as online banking, credit card transactions or e-wallets, etc). This is increasingly becoming the primary payment option in the wake of fast-developing online transactions. Such payment services can be provided, where applicable, by bank, financial institution or various payment companies. This article will discuss some of the significant aspects of regulating payment companies in China, such as AliPay which provides alternative payment solutions such as open online virtual accounts, allowing the transfer of funds via a customer’s virtual account and bank account for the purpose of settling online transactions. It will also outline other payment products and their functionality as permitted under Chinese law.
Third party payment
In China, despite a somewhat different legal term, a specific phrase ‘third party payment company’ is often used in practice to refer to the payment company. It was so named reportedly during the emergence of China’s e-commerce market where there is a need for such a third party acting as a neutral and independent ‘escrow agent’ for processing payments arising from online transactions made between consumers and merchants. The third party company handles the payment according to the distribution waterfall, online platform policies or related arrangement agreed among consumers, merchants and the platform. Because the payment companies are to handle money to the online transactions on behalf of transaction parties, the law deals with the ownership complexity when all funds will be retained in the payment company’s bank account. It also requires demarcation between the transaction funds they handle for customers and their own funds.
Like in many other jurisdictions, the payment company is not a financial institution or bank in the eye of Chinese law. The law also distinguishes it from other payment intermediaries with which it could sometimes have been easily confused. These include for example, bank card clearing houses such as UnionPay, an integrated payment company which integrates and consolidates numerous electronic or online payment methods of different platforms also as known as ‘fourth party payment agent’. Different regulatory requirements apply to these other payment intermediaries.
A potential payment company will need to obtain a ‘Payment Business Permit’ (Payment Licence) from the regulator People’s Bank of China before engaging in payment business. There are generally three types of specific payment business for which a potential company can apply. These are ultimately shown on the Payment Licence as proof of its authorised scope of payment business, namely: (1) network payment (including eg, internet payments, mobile phone payments etc); (2) prepaid card issuance and acceptance; and (3) bank card acquiring. This ‘three-pillar’ scheme is reportedly a regulatory classification based on these three different types payment processing method. Related qualification requirements (technical or otherwise) are set when considering the respective features of the type of payment business. To receive the Payment Licence, a potential company must meet the related criteria applicable to all or any of the ‘three-pillar’ businesses for which the company wishes to choose.
However, the ‘three-pillar’ scheme is currently not in operation following the introduction of a new draft rule of non-bank payment institutes in 2021. The scheme is likely to be replaced by a ‘two-pillar’ one. Some believe that the new ‘two-pillar’ scheme is based more functional classifications. These includes: the operation of stored-value accounts (involving opening of payment accounts or providing prepaid value); and payment processing services (with no such payment account or prepaid value). As result, it is expected that related qualifications and criteria once tailored to fit the previous regulatory classifications and system may also undergo fundamental changes. Among many other changes, the antitrust review and heightened scrutiny over unlicensed payment operations have also been introduced in the new draft rule.
Cross-border and foreign participation
In addition to the Payment Licence, qualifying to run a payment business (either domestic or cross-border) also requires engagement with the business registration bureau, telecoms authority, relation banks and the NetsUnion Clearing Corporation etc, as well as requirements relating to anti-money laundering, anti-terrorism financing, data or privacy protection etc. These all need to be met. When cross-border payment business is pursued, further filing or registrations with foreign exchange authority (for cross-border payment businesses denominated in foreign currencies) or People’s Bank of China (for those denominated in RMB) would be needed. Although significant legislative efforts have been made over the years from the early pilot programme to the latest 2021 draft rule concerning cross-border payment services, several issues or challenges remain. For example: how best to ensure a proper regulatory visibility or supervision over related data or transaction information and fund flow for purposes such as anti-money laundering, anti-terrorism financing, tax and foreign exchange control etc; and the noncompliance controversy arising from the supply of so-called cross-border ‘passage service’ to non-licence holders, where many licensed payment companies only provide fund settlement channels but do not hold client relation or information for compliance and risk control purposes.
Foreign payment companies have for years, been major players in China’s cross-border payment business alongside the continuous development of exporting China’s products overseas and the e-commerce surge arising from it, and 2018 was seen as a watershed year for regulating such foreign participation in the market. In that year, Circular No 7 of People’s Bank of China was issued. It set out a clear path for the first time for the market entry of foreign payment companies. However, the practice of getting licence according to Circular No 7 has undoubtedly been more than an academic exercise. Starting from the first WorldFirst case, each application is reviewed and dealt with by the regulator People’s Bank of China on case-by-case basis during which somewhat different conditions and requirements – though generally in line with the principles set out in the Circular – would be finalised and applied to each application for issuing the licence. Given that many of the foreign applicants have been participating to some extent in China’s market before the Circular was issued, their previous business model or product line needs to be cleared with the authority, and some adjustments would be expected.
Furthermore, although from the legal perspective the above regulatory landscape for foreign participation under Circular No.7 remains effective, it too is likely to change with the introduction of the 2021 draft rule relating to cross-border payment service. One fundamental change under the draft rule, is that foreign payment companies are no longer required to establish onshore presence and may instead choose to collaborate with local licence holder in China for the purpose of providing cross-border payment services. It is also worth noting that this change might have already started in practice, despite the draft rule technically not yet being in effect. From our recent experience, we note that some candidate foreign payment companies have been allowed to apply through their local licensed partners in China for regulatory clearance with People’s Bank of China, and they have not been required to establish onshore presence under the existing Circular No 7 framework.
* This article is intended to be a general overview for general information purpose only, and should not be taken as a legal opinion or legal advice on matters included herein.
 In addition to the standard foreign investment requirements, key qualification requirements for regulatory clearance at People’s Bank of China include: (1) establishing onshore presence in the form of foreign invested enterprise; (2) obtaining the Payment Licence; (3) the storage, handling/processing and analysis of personal information and financial data need to be undertaken in China; (4) establishing a safe and standardised business system and a disaster recovery system capable of independent completion of payment business in China.