Exclusive: PBOC Backtracks on ‘No Interest’ Policy for Third-Party Payment Providers

China’s central bank has finally bestowed some good news on the third-party payment industry after a two-year campaign to tighten oversight of the booming sector as part of a broader initiative to combat fraud and curb financial risk.

The People’s Bank of China (PBOC) has decided to pay interest on trillions of yuan of customers’ money that payment companies are required to deposit into accounts managed by the central bank, Caixin has learned, backtracking on a ‘no interest’ policy it imposed in 2017 when firms were first ordered to move the funds out of interest-bearing accounts with commercial banks.

The rate only amounts to an annual 0.35%, but it’s some compensation for payment providers who lost a lucrative stream of income in 2019 after they completed the transition to shift money they held temporarily for customers – mostly prepayments for goods and services – into accounts at the PBOC that didn’t pay any interest. The move dealt a significant financial blow to some smaller providers who had often lent funds to money markets overnight or on short-term contracts to get higher rates. Sources previously told Caixin that interest income accounted for as much as 80% of the profit of some smaller payment companies.

The central bank recognized that the change had caused difficulties for some companies and decided to start paying interest on the deposits to help them improve their ability to sustain operations, a source with knowledge of the matter who declined to be identified told Caixin. But although the PBOC move was widely expected, the interest rate of 0.35% was about half of what the industry was hoping for.

Level playing field

Caixin has learned that there was considerable debate inside the central bank over whether to pay interest on the deposits. The PBOC originally decided against paying interest because payment companies are not subject to the same level of capital supervision as commercial banks. But some argued that as reserves held by lenders at the PBOC do receive interest – 1.62% on reserve requirement ratio funds and 0.72% on excess reserves – payment companies should be put on a level playing field. In addition, some argued that interest rates are an important tool to modify the behavior of institutions, so the central bank should show some flexibility.

The new interest-rate policy runs from August 2019 to July 2022 and interest will be paid quarterly, sources close to the matter told Caixin. But the payment companies won’t get all of the interest – 10% of the income will be transferred into a protection fund for the non-bank payments industry, multiple sources told Caixin.

Payment companies’ client deposits at the PBOC amounted to 1.48 trillion yuan ($213 billion) at the end of November, central bank data (link in Chinese) show. Historically, 90% of the total has been accounted for by the two companies that dominate the third-party payments sector – Alibaba Group affiliate Ant Financial Services Group, which operates the Alipay platform, and Tencent Holdings Ltd., which runs WeChat Pay.

The central bank started licensing third-party payment providers, who process payments mostly from online shopping for goods and services, in May 2011, and the latest data show 237 companies with official approval.

The PBOC has tightened oversight of the way providers handle customer funds because of concerns about the potential for fraud and embezzlement. In 2013 it required payment companies to put customer funds in special accounts at custodian banks, and in 2017 it ordered all payment companies to submit 20% of clients’ deposits to designated central bank accounts, gradually raising the figure to 100% by January 2019.

Han Wei contributed to the report.

Contact reporter Timmy Shen (hongmingshen@caixin.com, Twitter: @timmyhmshen)

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