Stop Earning Money on Clients’ Funds, Says China’s Central Bank
(Beijing) — More than 260 third-party payment companies, including Ant Financial’s Alipay and Tencent’s Tenpay, may lose a significant source of income after China’s central bank closes a loophole that allowed many of them to live off interest payments earned by the funds of their clients.
The changes, announced Friday by the People’s Bank of China, are expected to have a profound effect on how the companies manage funds worth more than 460 billion yuan ($66.3 billion). These are payments made by people using the firms’ services to purchase goods and services and are temporarily stored in the payment companies’ bank accounts until the transactions are settled.
Currently, even though the funds are still technically owned by the people who made the payments before the transaction is completed, the customers are not entitled to the interest paid by banks on the deposit. Instead, the interest goes to the companies, which sometimes argue they deserve it because they provide payment services for free or a low charge.
Regulators apparently did not agree.
The new rules will gradually cut off the income source from interest for all third-party payment service providers.
Reliance on interest for income creates the wrong incentives for companies, said the PBOC. It leads the companies to always seek expansion and look for ways to keep client money in their accounts for as long as possible.
As a result, “They have deviated from their main operation of providing payment services and caused to some extent disorder and confusion in the payment service market,” the central bank said in the announcement. “This has damaged the market environment of fair competition and violated the original intention of the central bank when it allowed them to do business.”
As of April 17, all third-party payment companies will need to deposit 12% to 24% of their client payment funds into a specialized interest-free account with a designated bank.
The ratios will be gradually raised to 100%, according to the announcement, meaning that in the future, no firms will be able to collect interest on funds temporarily stored in their own bank accounts.
The central bank did not give a timetable for the increase. It said the initial ratios vary among companies because they concentrate in different fields of payment-related services and have different levels of risk control ability. In general, the less capable a firm is to control risk, as perceived by the PBOC, the more funds it needs to deposit into the special account.
The regulations are meant to stop payment companies from relying on interest payments as their main source of income. According to the central bank, they should be focusing on what their license requires them to do — serving as a complement to interbank payment networks by facilitating small payments.
Central custody of funds would also bring more transparency to the industry and help prevent crime, the central bank said.
Currently, every third-party payment company has on average 13 bank accounts where they can store client funds, the central bank said.
A lack of supervision over how they manage the funds has given rise to many problems, ranging from murky inter-corporate dealings to outright crimes such as money laundering, according to the central bank.
Some companies have stolen client funds or appropriated them to make investment for themselves. Others have dealt with banks directly to settle and clear transactions, working around organizations that should be conducting the operation, the central bank said.
Contact reporter Wang Yuqian (firstname.lastname@example.org)
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