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China's efforts to combat PayTech abuse

Editorial Staff

Mobile payments are exploited by criminals who use services such as AliPay and WePay coupled with QR codes and while the companies behind the services are, well, behind on customer protection, The People's Bank of China, the central bank, is running ahead of regulators in other jurisdictions to find a solution. Their first idea was harsh. Their second is brutal. Can it work?

A new Order from the PBoC requires that payment services provider must increase the deposits of what amount to escrow funds from the present 50% to 100%, in stages, between now and 2019. What was a strong measure is now brutal.

The measure has several important effects. The first is that, should a payment services provider, go into liquidation, the funds deposited with it are held safely in designated accounts at the PBoC.

The second is that, at present, the balances that are held by the payment services companies are held at interest, which the companies keep. Customers earn nothing on their balances which are estimated by some commentators at somewhere north of USD75,000 million. The accounts at PBoC will not be interest bearing, causing a significant loss of revenue to the payment services company.

The third is that the deposits, in the hands of the payment services companies are held in commercial banks and those deposits are then used by the banks as "assets" which they then use as security for their own borrowing. While unlikely, a "run" on a major payment services provider would undermine a bank's own credit rating and potentially destabilise the whole financial sector with effects that, potentially, could rival the global financial crisis that began in 2006 and from which the world has still not recovered.

However, this is not the only control mechanism on a payment system that has risen to rival banks and credit cards with PBoC saying that mobile payments for the two dominant providers (AliPay and WeChat Pay) in 2016 almost reaching the CNY equivalent of USD3 million million (count the zeros in that when you've nothing more urgent to do. Oh, you want us to do it for you? It's 3,000,000,000,000. For students of English, that's a (real) billion not, as so many say, a trillion). Another figure: that's an increase of around 2,000% as against the amount in 2012 - which the PBoC says gave them almost two thirds of all digital payments in China. It is said that in 2016, digital payments reached 3% of all financial transactions.

Last month, June, was the deadline for all payment services companies to route all their payments through a new system developed by the China National Clearing Centre. Called Wanglian, more than 40 payment services providers were required to join the system. The new system replaces what was, in effect, a direct credit system and it institutionalises, indeed is reportedly based on, the UnionPay model. Because each payment services provider does not need to connect with every bank individually, the system should reduce some operating costs and complexity. It provides visibility of all such transactions and therefore improves regulatory monitoring which helps in fraud detection and money laundering, etc. identification. However, whether it provides any form of consumer protection remains to be seen: there does not seem to be, at present at least, a "recall" or "freeze" button. Also, the new platform does not appear to be fully integrated with other clearing systems so that money can be credited using one system and moved using another.

In April this year, PBoC went on the offensive against QR code payments. It imposed, effectively without warning, daily limits on payments that could be made via smartphone. Different limits apply to different classes of transaction. For example, for payments relating to a QR code displayed by a retailer, the maximum per day is CNY500 - about USD80. The reason is simple: QR codes are easily modified so that money is sent to a fraudulent account. Online transactions via trading platforms such as Alibaba are affected as are payments through AliPay and WeChat Pay.

We highlighted the problem with payment fraud earlier this year when a case remained unresolved after several months - see article The case remains unresolved and there has been no contact from any of the companies that facilitated the fraud.

However, for the time being, there are no constraints on Near Field Communications payments from smartphones. These operate on a system similar to RFID chips in e.g. Visa Wave and are not subject to the same risks as QR codes. Mobile payments are incredibly popular with both companies and users in China. For foreign travellers to China, creating and using an account with such a service is almost the only convenient method of payment because the ATM network offers little service for foreign cards.

The question is whether the PBoC measures can work. When there was an outright ban on QR codes in 2014, it was temporary while PBoC assessed risks. Once available, criminals found ways to exploit them. That will continue to happen but the incentive to commit fraud is reduced where it is limited to a relatively small amount. Having said that, much internet fraud is a cottage industry and people sit at home doing it after work to supplement their income. It can be for pocket money or to support a low-income family. The barriers to entry, for on-line fraud, remain worryingly low.