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Payment Connect, the first linkage between the instant payments systems of Hong Kong and mainland China, is now in operation, connecting Hong Kong’s Faster Payment System (FPS) with China’s Internet Banking Payment System (IBPS).
Offering both peer-to-peer (P2P) and person-to-merchant (P2M) functionality, Payment Connect has the potential to transform the cross-border economy of the two jurisdictions.
When Payment Connect was launched on June 22, only 12 commercial banks were enrolled as participants: six from China and six from Hong Kong.
In mainland China, the IBPS is open only to bank participants, meaning non-bank stored value facilities (SVFs) such as Alipay and WeChat Pay cannot join the network.
However, on the Hong Kong side, non-bank SVFs may join Payment Connect following regulatory approval, and are set to play a key role in the network.
Although cards still dominate Hong Kong’s electronic payments market, SVFs are growing rapidly: in Q1 2024, the total number and value of SVF transactions grew 5.5 percent and 19.9 percent respectively year-on-year.
Similarly, in Q1 2024, the total number of SVF accounts in use was 16.9 percent higher than in Q1 2023, according to the Hong Kong Monetary Authority (HKMA).
Non-bank SVFs that join Payment Connect have much to gain from establishing a reputation for safety, efficiency and customer satisfaction in advance of their rivals.
However, as regulators in both jurisdictions have made clear, the high standards of compliance that apply to FPS and IBPS participants will continue to apply within Payment Connect.
Participation in Payment Connect brings a number of risks for non-bank SVFs, particularly in relation to money laundering, and providers should prepare for increased regulatory scrutiny.
Meeting the regulators’ requirements while also facilitating rapid growth in transactions and protecting themselves against financial crime will be key challenges for firms.
The bigger picture
Payment Connect is designed to facilitate small-value transfers between mainland China and Hong Kong.
Mainland-bound transfers are subject to a daily transaction limit of HKD10,000 ($1,280) per person, and an annual transaction limit of HKD200,000 ($25,500) per person.
Hong Kong-bound transfers are not subject to a per-day transaction limit, but are subject to an annual transaction cap of $50,000 per person (roughly RMB350,000).
Mainland-bound transfers are settled instantly 24/7, while Hong Kong-bound transfers are settled instantly between the hours of 07:00 and 23:00 HKT.
Although the rules governing P2P transfers are straightforward, the current rules governing P2M transfers are less so.
In a joint statement, the HKMA and the People’s Bank of China (PBoC) said that Payment Connect can be used to pay tuition fees, medical bills and utility bills. These payees are referred to as “select corporate accounts”.
In the future, the two regulators plan to approve “other use cases” that are deemed “beneficial to the integration” of the two jurisdictions, and will introduce policies to clarify these use cases.
A final use case already approved is salary disbursements, provided that they fall within the transaction limits specified above.
Persons that have already opened an FPS or IBPS account need not provide any further identifying information to transact via Payment Connect.
Having already passed know-your-customer (KYC) verification, all that payers require when sending outbound transfers is the email address, mobile number or account number of the payee.
This applies whether the payee is an individual account or a corporate account.
Why should you care?
The speed and cross-border complexity of Payment Connect transactions will challenge organisations’ ability to perform robust transaction monitoring and behavioural analysis.
The network may be vulnerable to “structuring” (breaking down large transactions into smaller ones to avoid triggering reporting thresholds) and "smurfing" (a more complex form of structuring in which multiple individuals – smurfs – conduct these smaller transactions).
Payment Connect’s P2M functionality also creates new opportunities for mule accounts, fake invoices and trade-based money laundering.
In addition, variances in anti-money laundering (AML) controls between the two jurisdictions may result in regulatory arbitrage, given that China’s AML framework is less mature (and its supervision less proactive) than that of Hong Kong.
Although China will be joining Payment Connect with a new-look AML framework, compliance may be patchy across financial institutions (FIs), and supervision and enforcement may be a work in progress.
Non-bank SVFs should review their processes to ensure that participating in Payment Connect does not make them vulnerable to breaches of regulatory requirements.
To avoid enforcement action, firms seeking to join the network should consider:
- Implementing or upgrading customer due diligence (CDD) procedures to cover cross-border risks, especially related to the beneficial ownership of both senders and recipients and to source of funds verification for larger transactions.
- Enhancing transaction monitoring rules specific to risk-based scoring and usage patterns inconsistent with declared purpose (e.g., spikes near daily/yearly limits).
- Implementing real-time transaction screening against international sanction lists such as the Office of Foreign Assets Control (OFAC), the UN and the EU.
- Enforcing daily and annual limits according to the Payment Connect rules.
- Establishing automated alerts for users nearing or exceeding limits.
- Implementing control logic to track individual usage across multiple accounts, especially where users may attempt to bypass limits.
- Designing systems to generate detailed audit logs of all Payment Connect transactions, including user ID, transaction ID, timestamp, amount, recipient and IP/device information, as well as alerts or flags raised during AML checks.
- Complying with HKMA requirements for record retention (generally a minimum of five years for AML/counter-terrorism financing purposes).
- Preparing for ongoing regulatory reporting and possible onsite inspections by the HKMA or other authorities.
Payment Connect should enhance the efficiency and convenience of cross-border remittances between Hong Kong and Mainland China, but firms that aim to participate must do so carefully, given the potentially heightened risk of money laundering.
