Professional Documents
Culture Documents
Author Dr Lerong Lu
code near the counter. Consumers can use Even beggars on the streets are presenting APP, various financial services are provided
their smartphone cameras to scan the QR QR codes to receive donations instead of such as wealth management, securities
code and make immediate transfers. The latter receiving notes and coins.11 The market scale investment, insurance and loan facilities. In
method does not even require any investment of China’s mobile payment sector amounted practice, Alipay is serving as a de facto gateway
in payment hardware, rendering the mobile to CNY38trn ($5.7trn) in 2016, which was to Ant Financial’s fintech business empire. To
payment facility available for everyone including 50 times that of the US market ($112bn).12 many consumers, what makes Alipay’s e-wallet
small shops, street vendors and street artists. Alipay is extremely streamlined and convenient, particularly attractive is an add-on service
allowing consumers to complete transactions in called Yu’E Bao (or left-over treasure) which
BUILDING A CASHLESS a few seconds without taking out their wallets. invests consumers’ money into money-market
(AND CARDLESS) SOCIETY Recently, even the giving of red envelopes funds but permits them to use and withdraw
Alipay, as a cost-effective payment option, has stuffed with lucky money, a millennium-old the money on demand like current accounts.
brought great benefits and convenience for Chinese New Year tradition, has been fully In addition, Yu’E Bao offers an annualised
both retailers and consumers. The QR codes digitalised. Nowadays people tend to hand return of 4-7% for its subscribers, and interest
automatically generated by the Alipay APP are out virtual red envelopes to their relatives and is paid on a daily base into consumers’ Alipay
one-off, constantly changing to enhance the level friends during the new year, which is a built-in accounts. Attracted by the decent return and
of security. Users have to set up a passcode or use function of Alipay and Wechat Pay.13 convenience, millions of savers have opted for
biometric information, such as the fingerprint As a result of the proliferation of mobile Alipay as their default banking account, leading
censor and facial recognition function on their payment facilities, many Chinese cities have to a sharp drop in deposits for major Chinese
smartphones, to verify their identities before become cashless and cardless. According banks. As of July 2017, Yu’E Bao had around
initiating payments. Alipay can be linked to debit to a China Daily survey, 14% of Chinese no 260 million users18 with the market volume
and credit cards issued by most banks, so as to longer carry any cash when they go out, whilst of money-market funds in China reaching
function as a mobile e-wallet. 26% carry less than 100 yuan ($15).14 74% of a record-breaking CNY5.11trn ($770bn).19
In China, the swift shift from traditional participants said they can survive for over one Apparently, the fast expansion of Alipay
payment (cash and card) to mobile payment month with only 100 yuan in their pocket.15 has eroded the deposit base, revenue and
is due to the popularisation of smartphones Clearly, smartphones installed with Alipay profitability of China’s banking industry.
in the last decade. 95% of internet users in APP have become the only essential thing
the country now go online through mobile for people to carry when going out shopping, ALIPAY’S LEGAL AND REGULATORY
equipment.6 At present, most brick-and- dining and for entertainment. CHALLENGES
mortar stores like supermarkets, restaurants
and cloth shops, as well as online-to-offline HOW ARE TRADITIONAL BANKS Seeking regulatory approvals
(O2O) services such as taxi hailing, food AND PAYMENT SYSTEMS AFFECTED? One main hurdle for fintech companies in
delivering and bike sharing, accept mobile As fintech service providers rewrite the rules carrying out business is the large amount
payment options including Alipay and its main of the financial industry, the businesses of of time and money to be spent on financial
rivals including Wechat Pay which is operated traditional banks and card payment systems regulation and compliance. Fintech companies
by another Internet giant – Tencent Holding.7 have taken a beat. In the past, China UnionPay need to obtain regulatory approvals or
Alibaba and Tencent have teamed up with was the principal payment system in the licences for the fintech corporate entity and
millions of retailers across the country to build country as most bank cards issued in China its relevant financial services. This remains an
a cashless society. For instance, the US cafe use UnionPay’s payment and clearing network. acute issue for fintech conglomerates like Ant
chain Starbucks decided to accept Wechat Even Visa and MasterCard found it difficult to Financial (Alipay) which provides a full range
Pay at its 2,600 shops in China, except for one compete with it. However, Alipay has surpassed of financial services through a single platform.
located at Alibaba’s Hangzhou headquarter.8 UnionPay in terms of the daily number of The current financial regulatory system in
Outside China, Alipay and Wechat Pay have processing payments, underscoring Alipay’s China is largely sector-based, with the central
been expanding fast to promote their innovative dominant position in the entire payment bank as monetary authority and three separate
payment services to consumers in Asia, Europe industry.16 In 2015, Alipay earned CNY139bn financial regulators for banking, the securities
and the US. In the UK, some department stores, ($20.84bn) from its payment services, which market and insurance. As Alipay’s business
including Harrods and Selfridges, already accept would otherwise have been channelled to involves payment, investment and banking, it
Alipay.9 Alipay now has 450 million users all UnionPay and major card issuers like the ICBC has to seek approvals from multiple regulators.
over the world, making it the largest mobile and Bank of China.17 According to the ‘Administrative Measures
payment system contesting fiercely with its US Moreover, Alipay also poses a major threat for the Payment Services Provided by Non-
competitors like PayPal and Apple Pay.10 to retail banking, as an increasing number of Financial Institutions’ (PBOC Order No
Making payment by smartphones has savers have moved their money from their bank 2 [2010]), operating an electronic payment
become a default option for many Chinese. accounts to Alipay e-wallets. Within the Alipay system requires a licence (a Payment Business
Feature
Permit) from the People’s Bank. Alipay be disclosed to third parties without the Capital, putting the company at a valuation
obtained a Payment Business Permit for five permission of the data subjects (Art 20). of $45bn.20 In April 2016, Ant Financial
years in 2011, and then renewed it in 2016 for Despite the existence of strict rules regarding closed its B-round private equity financing
another five years. As Alipay also sells fund personal digital data protection, the by raising another $4.5bn. Subsequently its
products via its fintech platform to financial implementation process is considered difficult, valuation climbed to $60bn.21 Most recently,
consumers, it has been required to obtain a as the flow of online information is extremely it completed a $3.5bn debt round to fund
Fund Sales Licence from the China Securities hard to monitor and supervise. Alipay’s international expansion.22 At the
Regulatory Commission. The difficulty is time of writing, Ant Financial is planning an
that sometimes it is difficult to categorise Fund safety IPO for late 2018, depending on approval
innovative fintech services into existing The third regulatory concern surrounds from Chinese financial authorities. In terms
financial sectors and services, resulting in the protection of financial consumers’ of where to list, the relevant jurisdictional
some uncertainty about which regulatory money held by Alipay and other members listing rules as well as the regulatory
regimes these fintech activities should be of Ant Financial. Depositors at traditional requirements of fintech businesses play a vital
subject to. The problem can be compounded financial institutions like banks and credit role. In 2015, Alibaba Group chose the New
as Alipay is going global quickly, so it needs to co-operatives fall within the protection of York Stock Exchange over Hong Kong for
apply for licences in many jurisdictions with the national deposit insurance scheme. If a its record-breaking $25bn listing, because
in some cases, differing regulatory standards. depositor’s bank gets into financial difficulty, only the former agreed to accept a listed
Also, some jurisdictions like the US and the the depositor’s money will be reimbursed company with a dual-class share structure.23
European Union have imposed strict rules on unconditionally by the state up to a certain The corporate structures of many fintech
foreign capital entering into key industries limit. According to China’s Deposit Insurance companies, such as Alipay, are expected to
such as the financial sector, creating extra Regulation ([2015] State Council Order be as complicated as that of tech businesses,
hurdles for Alipay’s global expansion. For No 660), the maximum coverage of deposit which will require legal practitioners and
instance, Ant Financial is buying a US-based insurance is CNY500,000 (US$75,000) investment bankers to advise on the most
money transfer company, MoneyGram, and per saver per bank (Art 5). However, as suitable funding arrangements on cross-
is currently awaiting the approval of the an increasing number of depositors move border capital marks.
Committee on Foreign Investment in the their money from bank accounts to fintech
United States (CFIUS). e-wallets like Alipay and Yu’E Bao, they will THE LATEST REGULATORY CHANGE IN
no longer be entitled to the official protection CHINA’S MOBILE PAYMENT SECTOR:
Data security law over their money. Most depositors do not NETS UNION CLEARING CORP
Big data is critical to the functioning of realise this potential risk when using fintech As money keeps circulating within the
fintech companies like Alipay. Clearly, businesses, as they perceive Yu’E Bao as a mobile payment system itself, it evades the
big data accumulated from Alibaba’s safe substitute for bank savings. Accordingly, central bank’s clearing system designed for
e-commerce websites gives Alipay an obvious financial regulators and fintech companies commercial banks and bankcard payments
competitive advantage over traditional urgently need to educate their investors to give (eg China UnionPay), making it impossible
financial institutions. How to gather, process financial consumers a better understanding for financial regulators to track and monitor
and use consumers’ personal data remains of the potential financial risks associated with the direction of fund movement and where
a controversial issue as well as primarily a fintech services and products. financial risks lie. It creates difficulties
concern for financial regulators. According to in relation to anti-money laundering,
the State Council’s Administrative Regulation Finance issues and IPO monetary policy adjustments and financial
of Credit Investigation Industry (2013 Order The final legal issue relating to the growing data gathering and analysis (for regulatory
No 631), to collect personal information, fintech industry concerns fund raising and purposes). As a result, in August 2017, the
the regulator is required to seek the consent corporate finance, such as how to draft best PBOC issued an order to urge all mobile
of data subjects; without such consent the funding arrangements in terms of private payment companies to operate their businesses
information may not be collected, except that equity, initial public offerings, and mergers via a newly created centralised clearing house,
the information is required to be disclosed and acquisitions. Unsurprisingly, Alipay’s China Nets Union Clearing Corporation.24 It has
under certain laws and administrative bright prospects are helping it to attract a registered capital of CNY2bn ($300m), and
regulations (Art 13.1). The Regulation requires investor funding. In July 2015, Ant Financial its shareholders include some of the central
that any entities using personal information completed its A-round equity financing bank’s affiliated institutions, state agencies,
must reach an agreement as to the purpose of and received billion-dollar investments the State Administration of Foreign Exchange
its use with the data subjects, the information from China’s National Social Security (SAFE), and most mobile payment service
must not be used for purposes other than Fund, Guokai Finance, four major Chinese companies in China (see the chart opposite).
as agreed and the information must not insurers, Primavera Capital and Shanghai GP The new clearing corporation will be put under