(Reuters) - A decision by China’s central bank to rein in reserve funds held by payment firms could cost the industry upwards of $689m a year, spur consolidation and alter the way Asia’s biggest tech firms move money.
Mobile payments using in-app QR or bar-codes have become ubiquitous for everything from taxis to grocery shopping and bike rental in China in recent years, with customers making 19 trillion yuan (£2.16trn) in transactions in 2016, according to iResearch.
The rapid uptake has spurred fears that mobile payment firms, without oversight, could misuse funds held while transactions between users and merchants clear.
Regulations unveiled by the People’s Bank of China (PBOC) on Saturday require firms to allocate 42 to 50% of their total client funds in regulated interest-free reserve accounts by April, up from a current rate of 12 to 20%.
The move will hit services backed by Tencent Group Holdings and Alibaba Group Holding affiliate Ant Financial, which together make up over 93% of China’s online payments market, according to research firm Analysys International.
It’s part of a two-year government crackdown on financial risks in the country’s fast growing and loosely regulated online finance sector, aimed at limiting the activities of third-party payment services, online asset managers, micro lenders and others.
The central bank has said it will eventually raise the ratio to 100% but hasn’t given a timeline.
The moves will impact a major source of profit for online payment firms, particularly those that relied on the interest income for fast growth during the early boom years. “From an industry perspective, these changes will alter the economics underlying certain revenue streams,” said James Lloyd, Asia-Pacific Fintech lead at EY.
“Clearly the PBOC is increasingly considering the potential financial stability risks associated with large-scale mass-market non-traditional players.”
China’s e-commerce and mobile payments market has enjoyed explosive growth in recent years with Alipay and Tencent’s Tenpay each accumulating over 500 million users.
Client reserve funds are prepaid sums from buyers that are held temporarily by payment companies before they are transferred to merchants. Payment firms typically deposit them into bank accounts where they earn interest.
Interest income earned on those reserve funds accounted for 11 percent of total income for internet-based payment companies, data from Zhongtai Securities shows. The latest hike in reserves will slash more than 4.48 billion yuan ($689m) in annual interest earnings from the industry, according to Reuters calculations, under the assumption that payment companies could have earned 3% annualised interest rate on those funds.
Analysts say large, diversified firms such as Ant Financial and Tencent will be able to absorb the costs, and seek to replace revenue with income from other products, including wealth management tools and micro-loans.