Five Things You Need to Know About China’s First Online-Payment Clearinghouse

There is no doubt that China has become the world’s largest online-payments market, whether measured by user numbers, transaction value or annual growth rate. Data from the central bank showed that from 2013 through 2016, the number of transactions handled by nonbank payment service providers increased from 37 billion a year to 185.5 billion a year. The total value of these transactions surged from 18 trillion yuan ($2.85 trillion) to 120 trillion yuan.

The success of online payments is backed by the rapid development of internet and mobile technologies in China, as well as the booming domestic consumer market and the rise of a new generation of young consumers who were quick to adopt the new payment method. However, the increasing prevalence of online-payment options has also posed challenges for users in terms of privacy protection, information security and risk controls in the financial system.

The construction of an independent clearinghouse dedicated to third-party online payments is a key step to address these concerns and tighten oversight on internet finance. As the world’s first online-payment clearinghouse, the Online Settlement Platform for Non-Bank Payment Institutions — as the clearinghouse is formally called — is also an innovative move because it is the first time that market players have been granted the leading role in building such an important national financial infrastructure. The central bank and the Payment & Clearing Association of China jointly hold a 37% stake in the new platform, while 38 other online service providers own the remaining 63% of the business.

Here are some key facts about the China’s first online-payment clearinghouse.

Why do we need a clearinghouse for third-party payments?

Third-party payment providers offer the convenience for users to complete a payment for goods or services by simply clicking a button on their mobile phones or computer screens, but behind the click is a series of transactions, clearance and settlement activities making money transfers possible between customers’ and merchants’ accounts.

Before the establishment of the online-payment clearinghouse, all the necessary procedures of payment transactions, from making payment requests to clearing, were handled by third-party payment providers despite the fact they don’t have payment clearing licenses. The blurred boundaries between payment and clearing services also allowed payment companies to pool customers’ money in their accounts before the money was transferred to receivers, raising concerns that they could be used for unintended purposes. Most payment firms negotiated with banks separately on terms and fees to facilitate transactions and build direct links with banks, falling outside of the central bank’s oversight. These practices raised concerns that the online-payments market is becoming a potential hotbed for money-laundering and other cybercrimes, and posing risks to users’ privacy.

With the introduction of the new clearinghouse, a clear boundary will be drawn between online payments and clearing services, forcing payments firms to improve the compliance of their businesses and offer better protection to consumers. It is a key step toward ensuring the healthy development of the payment markets and the security of the financial markets.

How did the online-payment clearinghouse go live?

The new clearinghouse needed the capacity to handle hundreds of millions of transaction requests from over 200 payment companies and possible sudden surges of transactions during holiday seasons and special sales events like Alibaba’s Singles Day annual shopping event on Nov. 11. A distribution computing network offers the right solution to the platform.

Work to build the clearinghouse began in September after a meeting was held between the central bank and representatives from 22 of the leading payment firms. The central bank proposed the principle of “Build together, own together and share together” to encourage more market players to join forces.

In the following months, over 200 professionals from more than 30 companies and institutions, including some top data architects, software engineers and internet security experts, worked together to draft a technical road map and construction plan for the new clearinghouse.

The final plan won approval from a special team of experts from the central bank in December. Work on building the platform began immediately, with technology, personnel and equipment being contributed from a variety of institutions. The first trial run of the platform was completed on March 31. Four commercial banks and the three biggest payment providers — Ant Financial-affiliated Alipay, Tencent’s Tenpay and JD.com’s Chinabank Payments — were among the first institutions to connect with the platform. The new platform handled its first online-payment clearance for Tenpay, involving a transaction between the Bank of China and China Merchants Bank.

Why should third-party payment firms connect with the new clearinghouse?

China has issued over 250 third-party payment licenses, but the market has become increasingly consolidated as the top nine firms control over 96% of the market share.

Unlike traditional bank card payments — which are handled by the state-backed bank card association, China UnionPay, under a unified clearing system applied equally to all banks — online payments have to follow different standards, and it has been increasingly difficult for small players to win the support of banks and break into the market.

By connecting with the online-payment clearinghouse, payment firms — no matter big or small — will be granted equal access to transaction clearing services and will be subject to the same standards of business operations and risk control measures.

With the unified clearing platform, capital flows between payers and receivers will be more transparent because it will cut the multiple direct links between third-party payment firms and banks. Instead, payment firms will connect with the new platform and clear their transactions through the platform, which in turn connect with banks. It will save the operating costs of both payment firms and banks and help make transactions more standardized and trackable.

What is the technology architecture of the clearinghouse?

The clearinghouse adopted a multicentered structure to ensure security. With six data processing and storage centers based in three different locations, each center has a built-in processing capacity of 20,000 to 30,000 transactions per second. This multicentered structure allows for greater data backup and ensures consistent operations, even if one facility encounters problems. The system employs the most up-to-date security standards and encryption technology to protect data from cyberattacks, hacking and leaks.

The distributed architecture of the platform also makes it easy to expand its capacity in the future by adding extra data centers to the system.

How does the clearinghouse work?

Payment companies connecting with the clearing platform initiate payment requests with the system. The requests are then distributed among the different data centers to process before being passed to related receiver banks accessing the system.

Payments are processed at each center and submitted to the central system. The gathered data is submitted to the central bank’s clearing system to complete money transfers among banks.

The clearing platform is currently undergoing final preparations before its final launch.

This story has been corrected to show that the number of annual transactions by nonbank payment service providers increased from 37 billion to 185.5 billion.

Dong Junfeng is the director of the preparation team that is leading the development and construction of the Online Settlement Platform for Non-Bank Payment Institutions. He was previously the deputy general manager of Bank of China’s internet finance department and an online-payment industry commentator.