PBOC Requires Non-Bank Payment Institutions to Settle Online Transactions through a New Platform

On 4 August 2017, the Payment and Settlement Department of the People’s Bank of China (“PBOC”) issued the Notice on Migrating the Online Payment Business of Non-bank Payment Institutions from Direct Connection Mode to Network Platform Processing.

The notice requires third-party non-bank payment institutions such as Alipay and Tenpay to settle online client payment transactions through a centralised network platform, that is, the Non-bank Payment Institution Network Payment Settlement Platform, from 30 June 2018. The new platform is operated by the Network Connection Settlement Company Limited, a company established in 2017 by the PBOC (as the largest stakeholder) and other 44 entities and associations including Alipay, Tenpay and UnionPay.

Under the current direct connection model, third-party non-bank payment institutions connect directly with one or more banks, enabling them to settle online payments without the PBOC’s supervision, which frustrates the PBOC’s ability to regulate this sector and could facilitate illegal activities such as money laundering.

The move follows recent attempts to limit financial risks in the growing online payment sector by curbing the issuance of new payment business licences for non-bank payment institutions and limiting their ability to use client funds to finance their own investments.

The notice also requires all banks and non-bank payment institutions to access the network platform and prepare to migrate their payment settlement activities to the platform by 15 October 2017.

Market Reaction

Paul McKenzie, Partner, Morrison & Foerster, Beijing and Shanghai

“Establishment of this integrated platform is an important step in the PBOC’s continuing efforts to more closely supervise the operations of non-bank payment institutions. Basic standards applicable to these institutions were put in place in 2010, through the promulgation of the 2010 Measures for the Administration of Payment Services of Non-Banking Institutions. We anticipate that the PBOC enforcement will be strengthened through the supervision of this new platform.”

Action Items

General Counsel for banks and non-bank payment institutions will want to closely study the notice and work together with business partners to comply with the migration initiative. Counsel need to be aware that the period for migrating payment functions to the new platform begins 15 October 2017 and all payments must be settled through the platform from 30 June 2018.