Chinese regulators dropped the first bombshell on the internet finance party on March 14. The Central Bank of China halted the QR code scanning payment service and online credit card offering by Tencent and Alibaba. Unlike the previous guidelines for P2P (Peer-to-Peer) lending, which draws only principles for players to follow, this time it is much closer to the “real deal”. Almost like a deja vu of the China Mobile vs. Tencent episode last year, investors panicked in a frantic selling as if the heat on Chinese internet is over all of a sudden. All sorts of conspiracy theories followed in the media almost overnight. But as an analyst in this field, one couldn’t help but wonder the peculiar timing of this news.
Alibaba and Tencent had just received blessing from Beijing to join a group of 10 qualified candidates to start running privately-held banking enterprises, so Central Bank’s move to issue the ban is a slap in the face. Or is it supposed to be a warning signal for Alibaba, a firm that had just announced its plans for New York IPO? Whatever happened, don’t tell us that it was due to lack of communication with the regulators before launching its QR code transaction feature and the partnership with Citic Bank for online credit card issuance — that just doesn’t make sense. This is China, everybody talks to the regulators!
So what could have gone wrong this time? Is it really about the internet companies putting their hands in the UnionPay’s pocket as the critic says? Or is it because state-owned banks’ joint chorus finally reached the central bank? In fact, little was reported about the banking association’s proposal for classifying the Internet Monetary Funds like Yu’e Bao as ordinary bank deposits. Then again, with or without the green light of the watchdogs, three largest state-owned banks have already refused taking negotiated deposits from funds related to Yu’e Bao. (For those who does not know it works, Yu’e Bao and other monetary funds are able to derive higher rates alone by channeling aggregated deposits and receive higher rates with negotiated deposits. The truth is, in China you can always bargain your way to a better deal despite the fixed policy rates imposed by the Central Bank on the banks if you have a big enough amount.)
There is another theory which we like that tells the story of the Central Bank doing the bidding of those higher ups who might want to create some leverage with the fast growing internet oligarchs of the country by giving them a lesson. After all, these “barbarians at the gate” may help shake up the stranglehold by the vested interest groups on the economy, but their “ambitions” have to be kept in check from time to time to make sure things don’t go out of control, especially when everything in the online economy grows at such ferocious speed today. So perhaps that explains why the ban came in the form of an opinion letter issued by the Central Bank’s Hanzhou local branch, as opposed to a formal decree by the headquarter in Beijing. No wonder over the past week there has been an array of closed door talks between regulators and the representatives of all the major internet finance companies.
In fact, the most controversial subject is not even the QR code and online credit card halt, but a widely circulated consultation draft by the Central Bank to limit the use of third party payment by placing caps on transactions. The stringent new rules will cap transfers via third-party payment accounts at RMB 1,000 (US$161) per transaction, while total transfers in a year can be no more than RMB 10,000 (US$1610). For shopping, the draft rules restrict single purchases using third-party payment accounts to RMB 5,000 (US$805), with a monthly limit of RMB 10,000 (US$1610).
Luckily, at the time of writing, media reports quoted senior staff members of the Central Bank saying that after having met with strong resistance by third party payment firms, the likelihood of passing the resolution is small.
Thank God regulators finally realised that had they pushed through those regulations, the entire online payment industry would soon crumble to dust. And we can sure forget about the O2O (Online to Offline) revolution without mobile payment playing the pivot role. By no means are we suggesting that online payment innovations should not be subjected to regulations. Anti-money laundering and transaction information safety, for instance, are some very valid concerns and should be examined under the lens. After all, we are all too familiar with the tale of how the misguided financial innovation coupled with lax regulatory oversight nearly brought down the world during the global financial crisis. However, the whole idea of imposing transactions caps, which regulators seemed to have in their mind, is just flawed outright.
Many advocates who propose to regulate the internet finance industry simply think that internet finance forces pose a threat to the banking industry as they empty the banks of normal deposits, and that these cyber vampires needs to be dealt with in earnest to stem out rising systemic risk. These proponents obviously forget the very reason why these “vampires” can grow so fast is that the traditional banking system has too much fat to be sucked out. In other words, internet finance innovation is merely squeezing the excesses out of a non-competitive, overly protected banking system. P2P lending and internet monetary funds simply compress handling costs of small borrowers and lenders to below the ‘Coasean Floor’ of banks through the use of efficient platform and risk management tools. This in economics is called a Pareto Improvement, one that is underpinned by the progressive forces of technological advancement. Any attempt to block this off would undermine the efficiency improvement of the overall system.
Frankly speaking, the competitiveness of Chinese internet majors already ranks among the top around the globe. The government should take this incident as a trigger to review its regulatory landscape as the era of “internet penetrating the traditional industries” has dawned, and the separation between online and offline world is quickly disappearing. It is time for the government to discard the traditional departmental thinking and embrace a holistic approach to keep up with the pace of the online economy. Otherwise, pretty soon various ministries would be setting rules in every corner of the economy to stifle competition spawning from internet crossover, all in the name of industry regulation.
This article is contributed by Analyst Hugo Yu
The views are of the author, and e27 may not necessarily subscribe to them
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