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China has adopted a new set of regulations on non-bank payment institutions that will seek to modernise the sector and bring it under closer supervision of state regulators.
Last month, the State Council (China’s Cabinet) adopted a new decree entitled "Regulations on the Supervision and Administration of Non-bank Payment Institutions".
Chinese Premier Li Qiang signed the decree in early December, and the regulations are set to come into effect on May 1, 2024.
The regulations are the most significant changes to China’s legal landscape for payments firms since the disappearance of Jack Ma, founder of Alibaba and Ant Group, in 2020.
On the eve of a planned initial public offering (IPO) of Ant Group in October 2020, Ma made a speech in which he criticised China’s financial regulators and commercial banks.
In a widely quoted line, Ma accused both of suffering from a “pawnshop mentality” that is holding back China’s economy by restricting fintechs from offering credit.
Ma re-emerged three years later, in 2023, after Ant Group was handed a $1bn fine for violations of consumer protection and corporate governance laws.
He was also forced to sell his controlling stake in Ant Group and step away from the company.
Taming China’s fast-moving fintechs
In a statement, the People’s Bank of China (PBOC) said the State Council attaches “great importance” to the development and risk management of the non-bank payment sector.
“In recent years, fast-growing non-bank payment institutions in China have played an important role in boosting transactions and market prosperity,” it said.
“The Regulations are meant to promote the law-based supervision and administration of such institutions and facilitate the sound and healthy development of the sector.”
With six chapters and 60 articles, the regulations aim to protect customers’ legal rights and help payment firms to better serve the needs of consumers.
First, the regulations clarify the definition of non-bank payment institutions and their establishment requirements under the law.
Non-bank payment institutions are defined as companies that transfer money according to electronic payment instructions submitted by users.
The regulations stipulate that the establishment of a non-bank payment institution must be approved by the PBOC after meeting service and risk criteria.
For example, non-bank payment firms should provide “small-value” services and must not engage in other business lines, such as clearing or credit provision, that are subject to additional approval.
Non-bank payment firms will also be divided into one of two types of payment business: stored-value account operators; and payment processors.
Depending on the classification of the firm, further rules will follow, such as rules on business and data management, and technologies to ensure security, resilience and traceability of transactions.
Know your customer (KYC) standards are also applied, as are reserve fund requirements and prohibitions on commingling and rehypothecation (use of customer assets for financing the business).
Foreign firms welcome
In a separate statement, the State Council highlighted its aim to ensure “national treatment” for foreign non-bank payment firms in China.
As per the statement, national treatment means that China will treat foreign companies in the same way it treats its own companies.
Zhang Qingsong, deputy governor of the PBOC, said that opening up to foreign firms will be mutually beneficial both for China and its foreign partners.
"We equally emphasise 'bringing in' and 'going global', which will help further enhance the efficiency of domestic and cross-border capital circulation,” he said.
It will also “improve the standards of payment services for new business forms, such as cross-border e-commerce”.
The regulations stipulate that overseas non-banks that intend to provide cross-border payment services to domestic users shall establish non-banking payment institutions within China, under the same requirements described above.
Zhang noted that several overseas firms, including PayPal and Airwallex, have already obtained online payment licences in China, and others, such as Thunes, are currently applying for one.
Keyan Chen, vice-president of Airwallex in China, said the regulations further clarify licensing requirements for cross-border payment operators.
Han Qiu, senior vice-president and CEO of PayPal China, added that the new rules will lead to a more stable market environment for non-bank payment firms in China.
The PBOC noted that non-bank payment services have experienced rapid growth in China.
At present, non-bank payment firms currently handle more than 1trn transactions worth nearly 400trn yuan ($56trn) per year.
Consumer rights, protections
The final sections of the regulations clarify the role of non-bank payment firms in protecting users’ “legitimate rights and interests”.
For example, firms are asked to draw up payment service agreements with users that are to be signed before services are provided.
Firms should safeguard user funds and information, not entrust core business and technical services to third parties and keep user information and transaction records safe.
Additionally, firms should ensure that payment accounts are not used for illicit fundraising, telecom fraud, money laundering, gambling or other criminal activities.
As noted by the PBOC and Ministry of Justice, preventing misuse of payment accounts for these activities was one of the main motivations for introducing the regulations.
As such, firms must consent to greater supervision from and reporting to regulatory agencies.
