Only three days after the promulgation of the Circular on Improving Individual Bank Account Services and Strengthening Account Management (the “New Individual Bank Account Circular”), People's Bank of China (PBOC) promulgated the Administrative Measures for Internet Payment Services of Non-banking Payment Institutions (the “New Non-banking Internet Payment Measures”) on December 28, 2015. The New Non-banking Internet Payment Measures also introduce three categories of payment accounts and likewise require that non-banking payment institutions impose classified management based on the real name system with respect to different categories of internet payment accounts.
- The New Non-banking Internet Payment Measures require that non-banking payment institutions conduct “know-your-customer” check and implement the real name system for payment accounts, a similar principle that applies to banks.
- The New Non-banking Internet Payment Measures provide that payment accounts can only be opened by those payment institutions with Internet payment license at the request of customers.
- Payment institutions cannot open payment accounts for financial institutions or those institutions engaged in financial businesses such as lending, financing, wealth management, guarantee, trust, money exchange, etc.
- The New Non-banking Internet Payment Measures define the balance amount in the payment account as the pre-paid value that belongs to the customers but under the custody of the payment institutions and such amount is not protected by the Deposit Insurance Regulation.
- Both payment institutions and banks must enter into agreements with each other and obtain authorizations from the customers for initiating the payment instruction and for deducting the payment amount in accordance with the New Non-banking Internet Payment Measures.
- Banks shall undertake that they will take responsibilities to unconditionally compensate the risks and losses incurred in transactions infull and in advance.
- The major circumstances under which payment institutions may verify transactions on behalf of banks are: where the payment is below RMB200, or the payment is made for paying public utility fees, tax, and for repayment under credit cards.
- There shall be classified management with respect to three categories of payment accounts:
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Risk Management & Customer Rights Protection
- The New Non-banking Internet Payment Measures impose on payment institutions compliance duties on anti-money laundering and counter terrorist financing, similar to those imposed on banks.
- The New Non-banking Internet Payment Measures provide for a number of measures for the protection of customers’ rights. For example, the New Non-banking Internet Payment Measures require payment institutions to bear similar privacy protection obligation as banks have in respect of personal financial information. The New Non-banking Internet Payment Measures additionally require that payment institutions shall obtain the client's confirmation and authorization termwise if there is any necessity to provide the client's information to any third party. Such regulatory requirements may impede customer information sharing between payment institution and any third party including its affiliates for purposes other than such deemed necessary in respect of the service applied by the customer and the once-for-all and one-for-all provisions in the service agreements as already used by many payment institutions may not satisfy such regulatory requirements any more.
A regulatory levelling playfield?
With the rising online population and increased online payment in China, the risks associated with online payment services provided by payment institutions have become a great concern. In our opinion, the New Non-banking Internet Payment Measures provide for a relative balanced regulatory framework focused on client management, business management, risk control and customer rights protection, which is very much needed for the online payment industry at the moment. Importantly, the New Non-banking Internet Payment Measures clearly define the rights and obligations of the payment institutions and the banks in terms of verification of transactions and the responsibility of securing fund safety, etc., which will be good for the healthy development of the industry.
We also note that non-banking payment institutions are now facing compliance obligations similar to banks in terms of classified account management, know-your-customer check, customer confidentiality obligations, anti-money laundering and counter terrorist financing, etc., which clearly shows the regulator’s attempt to impose the similar supervision on banks and non-banking payment institutions. This will undoubtedly mean the rising compliance costs on the part of non-banking payment institutions.
On implications for the deal structuring, given that the New Non-banking Internet Payment Measures no longer allow non-banking payment institutions to open payment accounts for financial institutions and quasi-financial institutions, this means in the future only bank accounts can be used for the collection and payment of funds for those institutions engaged in Internet lending, equity crowdfunding, online fund subscription, Internet insurance, Internet trust and Internet consumer finance, etc., and any simplified alternatives based on payment accounts will not be allowed. We predict that significant adjustments will have to be made to many deal structures utilizing such payment accounts to evade the regulatory supervision.