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Closer Look: Clearinghouse needed to tame payment risk

By Ling Huawei

(Beijing) - Alibaba Group chairman Jack Ma once said he would deliver to the state his popular third-party payment service Alipay whenever it was needed. It seems that the time is coming, although what Alipay needs to hand over is only the part of the business that shouldn’t belong to it anyway.

Alipay and other online payment providers are facing a major reshuffle as the central bank is mulling building a new clearinghouse for all online transactions, part of the regulator’s efforts to tame internet financial risks.

As the top market players, Alipay and rival Tencent Holding’s Tenpay, have operated the de facto clearing platforms for online transactions through separate agreements they negotiated directly with banks. Under the central bank’s plan, these platforms will be integrated into a unified clearing system under the direct supervision of the central bank. Like all other smaller payment providers, Alipay and Tenpay will become shareholders of the new platform, which will be operated independently.

Over the past few years, Alipay and Tenpay have seen their online transaction volumes grew to the equivalent of world-class bankcard associations while staying outside regulatory oversight. Many analysts expected the pair might apply for licenses to issue bankcards. But neither showed an interest, since becoming a clearing service provider would have meant more restrictions on their current respective businesses.

Now the central bank is making the long-awaited move toward a unified clearing platform for online payments. Although there are still many unanswered questions on how to ensure the new clearinghouse will provide equal and secure services to all market players, the overall direction will not change.

For Alipay and Tenpay, participating in the new platform will ensure they better comply with regulations, ending an era of business growth exploiting regulatory loopholes. For the regulators, a unified clearinghouse will dismantle separate agreements between third-party payment firms and banks. This will allow them to better supervise the way payment firms manage their own clients’ funds.

An independent clearinghouse will also help small and medium-sized payment providers save operating costs.

The planned online clearinghouse is very likely to develop into an online version of China UnionPay — the sole bank card association with a license to provide clearing services for interbank yuan payments — after it completes the integration of all online clearing services.

It has taken more than 10 years for UnionPay to grow from an interbank clearing platform to a bankcard association with a worldwide business. However, it has missed the best opportunity to extend its business dominance online.

But where the new online clearinghouse will start is very different from China UnionPay. Its initial capacity is targeted to handle 120,000 transactions per second with higher requirements on system efficiency and stability in order to cope the huge amount of online transactions.

The future relationship between the online clearinghouse and UnionPay will be intriguing. But competition and collaboration between the pair will only benefit users.

Contact Ling Huawei at huaweiling@caixin.com; editor Ken Howe at kennethhowe@caixin.com

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