In Depth: China’s Booming Cross-Border E-Commerce Pits Alipay, WeChat Pay Against the World

China's cross-border e-commerce surge, driven largely by platforms like Temu, Shein, and Amazon, alongside increased international tourism, has transformed the landscape for companies handling international payment processing and settlement. However, this growth presents challenges for financial regulators and banks who are concerned about transparency and fraud risks [para. 1][para. 2]. Nonbank payment service providers (PSPs) like Alipay and WeChat Pay, offering cost-effective services, are increasingly taking business away from traditional commercial banks [para. 2].

To address these concerns, China's central bank, the People's Bank of China (PBOC), proposed a regulatory overhaul in 2021. This aims to align nonbank PSPs' methods with the international “four-party model,” enhancing interoperability and regulatory oversight. Yet, progress has been slow due to the complexity of the cross-border payment ecosystem [para. 3][para. 4].

The cross-border e-commerce sector in China has witnessed significant growth, with a total value of imports and exports reaching 2.38 trillion yuan in 2023, a substantial increase from previous years [para. 5]. Exports have been a major factor driving this growth, with cross-border e-commerce payments handled by nonbank PSPs surpassing 1 trillion yuan in 2023 [para. 6]. Additionally, the rise in overseas tourism, especially to Asian destinations popular with Chinese tourists, has further fueled the demand for cross-border payments [para. 7].

The Chinese government is actively promoting this industry and reducing transaction costs. In 2023, a document supporting low-cost fund settlement services for cross-border e-commerce was jointly issued by various government departments [para. 8]. The inefficiencies in the traditional correspondent banking model, which has long dominated cross-border payments via platforms like SWIFT, contrast with the faster, cheaper alternatives offered by nonbank PSPs [para. 9][para. 10][para. 11].

Nonbank PSPs such as Alipay and WeChat Pay serve as intermediaries in transactions, clearing payments directly with banks, thus bypassing the traditional banking system and reducing merchant dependency on banks [para. 12]. Major players in this space include Alipay and WeChat Pay, which operate proprietary closed-loop systems that handle every aspect of cross-border transactions, primarily using QR codes [para. 17].

However, this proprietary system raises concerns for banks, particularly in terms of transparency and regulatory compliance. The lack of detailed transaction information challenges banks' ability to manage risks associated with fraud and money laundering [para. 18][para. 19][para. 20]. Foreign transactions processed through these platforms can appear as domestic transactions, which affects the transaction fee structure and regulatory compliance [para. 21][para. 22][para. 23].

Efforts are underway to enhance transaction transparency by including merchant details for foreign purchases, especially high-value transactions, to address banks' concerns about abnormal transactions [para. 25][para. 26]. Nonetheless, the transition to a global four-party model remains under consideration, aiming to provide better compliance and security for banks [para. 28][para. 29].

The potential shift to this model could disrupt Alipay and WeChat Pay’s current business practices by integrating their services more with international payment networks like Mastercard and Visa. This change aims to improve compliance and safeguard banking systems against risks associated with cross-border payments [para. 30][para. 31][para. 32]. Chinese regulators have been exploring this shift since 2020, with companies like LianLian Digitech reportedly involved in pilot testing programs [para. 34]. Meanwhile, integrating China's payment systems with international standards continues to be a crucial objective [para. 35].