On March 13, 2014, People’s Bank of China (“PBC”) issued an opinion letter halting immediately the use of QR codes for payments using mobile phones (as distinguished from using QR codes at POS terminals) well as the use of virtual credit cards (“Opinion Letter”).
The Opinion Letter expressed concern that QR-based payments over mobile phones – which had gained substantial popularity in China – was not yet a safe or mature technology. The Opinion Letter also expressed concern about the safety of cardholder data in online transactions involving the issuance of virtual cards.
Many believe that the Opinion Letter’s primary objective was to protect China Union Pay against efforts by Alipay, Tencent and others to divert volume away from physical POS transactions, where Union Pay dominates, to the online world. In particular, the Opinion Letter was widely seen as a response to the announcement, a few days before, that Alipay and Tencent were allying with China Citic Bank to develop virtual credit card-based online payments.
Following the Opinion Letter, PBC issued two draft regulations to solicit feedback from the public: (1) Regulations Regarding Payment Institutions’ Online Payment Businesses (the “Online Payment Regulations”), and (2) Guidance on the Development of Mobile Phone Payment Businesses (the “Mobile Payment Guidance”).
The Online Payment Regulations would strictly limit online payments. For example, accounts established for online payments could be accessed only (i) to effect payment in online transactions, rather than transactions involving a physical POS, and (ii) to effect transfers with other online payment accounts. Moreover, each payment from such an account could not exceed RMB5,000, or RMB10,000 per month. Likewise, inter-account transfers could not exceed RMB1,000 or RMB10,000 per year. Payments or transfers exceeding these caps would have to be made by wire transfer. In addition, funds placed in online payment accounts could not be transferred back to bank accounts.
Thus, the Online Payment Regulations further ring-fence the online payments business, to the benefit of China Union Pay.
The Mobile Payment Guidance went on to propose that payment transactions conducted via mobile phone—except payments using mobile phones at physical POSs – would constitute a type of online payment, subject to the Online Payment Regulations. Mobile phone-based payments at physical POSs, in turn, would be permitted only by accessing bank accounts rather than online payment accounts and could be effected only by institutions qualified for traditional bank-card based transactions. QR-code based payments could not be implemented offline.
The PBC has stated that these restrictions would not preclude an “observation period” regarding otherwise prohibited products and services such as the use of QR codes in offline transactions. Such products and services are to be registered with the PBC 30 days before launch. We trust that a genuine commitment to foster innovation coexists in the PBC with its evident commitment to protect Union Pay.