Caixin
Jan 22, 2021 03:08 AM
FINANCE

China’s New Monopoly Rules Put Fintech Giants in the Crosshairs

Alipay had 55.39% of the third-party mobile payment market as of the second quarter of 2020, while WeChat Pay, which is owned by Tencent Holdings Ltd., held a 38.47% share.
Alipay had 55.39% of the third-party mobile payment market as of the second quarter of 2020, while WeChat Pay, which is owned by Tencent Holdings Ltd., held a 38.47% share.

China’s biggest third-party payment providers, Alipay and WeChat Pay, could face antitrust investigations and forced divestiture under proposed new rules that tighten oversight of nonbank institutions in the sector.

The government and regulators will gain new powers to fight monopolies and abuse of market power by dominant players if draft rules (link in Chinese) published Wednesday by the People’s Bank of China (PBOC) governing nonbank payment services providers are approved. The draft is open for public feedback until Feb. 19.

The rules are designed to “diversify regulatory measures with a focus on strengthening financial regulation and preventing systemic financial risks,” the central bank said in a statement (link in Chinese) accompanying the draft. They also “strengthen anti-monopoly measures in the payments field, clearly define the scope of the market and the standards for determining market dominance, and maintain fair competition and market order.”

The proposed regulations are the latest step in the government’s campaign to defuse financial risks and crack down on anti-competitive practices by powerful fintech and internet giants that intensified in the fourth quarter of 2020 when the authorities ordered the suspension Ant Group Co. Ltd.’s blockbuster IPO. Since then, regulators have let it be known that officials from Ant Group, which owns Alipay, have been summoned twice to discuss fair competition and consumer protection.

In December, the State Administration for Market Regulation (SAMR), whose mandate includes antitrust, said it was investigating Alibaba Group Holding Ltd. for monopolistic practices that included forcing merchants to work with it exclusively. Ant and Alibaba were founded by Jack Ma, the internet billionaire who surfaced this week after a three-month disappearance from the public eye that sparked speculation he had fallen foul of the law.

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The antitrust regulatory storm has gathered further momentum since the annual Central Economic Work Conference in December listed “curbing market monopolies and preventing the disorderly expansion of capital” as one of the government’s eight priorities for 2021. In a Dec. 27 statement (link in Chinese) on the PBOC website, Deputy Governor Pan Gongsheng said regulators will firmly break monopolies and promote fair competition in the fintech industry and will ensure that all financial activities are supervised in accordance with the law.

“The new regulation will strengthen the corporate governance of nonbank payment institutions by setting requirements on the qualifications and behaviors of their shareholders,” David Yin, vice president at Moody’s Financial Institution Group, said in a statement. “In addition, it could enhance fair competition in China’s payment sector as the rules suggest that relevant government authorities can take antitrust actions on nonbank payment institutions if these institutions abuse their dominant positions.”

The draft covers a broad spectrum of activity involving nonbank third-party payment providers including compliance with money laundering and terrorism financing regulations. It also codifies a requirement already in effect that funds users keep in their accounts with payment providers must be deposited in accounts managed by the central bank or qualified commercial banks.

But the biggest focus is on competition and monopoly behaviour. For the first time, the PBOC provides a definition of what constitutes a monopoly for third-party payment companies –– any nonbank payment provider with a market share of 50% in electronic payments, which includes online and mobile banking payments, or two such institutions that hold a combined two-thirds market share, or three that account for 75% of the market. The draft doesn’t make clear how the regulator will calculate market share, whether by number of transactions or value.

Any of these providers could be subject to an investigation by the State Council’s antitrust enforcement agency, according to the draft, which didn’t name the agency. If an investigation confirms a monopoly, the PBOC can then recommend a range of corrective actions ranging from a suspension of a particular service to the breakup of an institution “by business type,” the draft says.

The PBOC also lists criteria that would trigger a “regulatory interview,” including a provider with a market share of one-third or two providers with a combined share of 50%.

Since 2011, the central bank has issued more than 230 licenses to third-party payment providers, which process payments mostly from online shopping for goods and services. But Alipay and WeChat Pay are the dominant players in mobile and online payments.

Alipay had 55.39% of the third-party mobile payment market as of the second quarter of 2020, while WeChat Pay, which is owned by Tencent Holdings Ltd., held a 38.47% share, according to data (link in Chinese) from research firm Analysys. Other tech giants such as food delivery service Meituan, ride-hailing company Didi Chuxing Technology Co. Ltd., e-commerce platform and online retailer JD.com Inc., and smartphone maker Xiaomi Corp. are among rivals that have tried to make a dent in the sector, but they have negligible market shares. State-owned China UnionPay — the country’s largest payment and settlement organization, which dominates the bankcard market –– has been trying to break into mobile payments with its QuickPass service since its launch in 2017, but it is still a small player.

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The latest entrant into the market is ByteDance Ltd.-owned Douyin, the domestic Chinese version of TikTok. It debuted the eponymous e-wallet Douyin Pay Tuesday, putting itself in direct competition with Alipay and WeChat Pay by allowing users to purchase items from third-party vendors, buy virtual gifts for performers and pay to watch their shows, as well as buy goods during livestreamed e-commerce sessions. These sales events exploded into prominence in China last year as consumers left homebound turned to online shopping and entertainment.

Meanwhile, lawmakers are making major revisions to the Anti-Monopoly Law for the first time in 12 years to give it more teeth. A draft of the proposed changes unveiled early last year broadens the criteria used to assess a company’s control of a market and, for the first time, brings internet companies under the scope of the law.

No internet company has been penalized for violating the Anti-Monopoly Law, partly because it’s not easy to determine whether a player is abusing its dominant market position in the new economy. Criticism of fintech companies’ abuse of their power by both consumers and smaller rivals has been increasing, and there have been complaints that excessive tolerance has been granted to the sector.

Han Wei contributed to this report.

Contact reporter Timmy Shen (hongmingshen@caixin.com) and editor Nerys Avery (nerysavery@caixin.com).

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