The Financial Times, citing the People’s Bank of China, reported that under a new rule third-party payment services have to hold customer funds in reserve rather than in the past when these services could invest the funds of customers similar to what banks do with deposits. Unlike banks, digital payment services don’t pay any interest on the money they are holding for customers. The Financial Times noted that in January of 2017, the People’s Bank of China said third-party payment firms would have to keep 20 percent of customer deposits in reserve and specify that the account won’t pay interest. In April the People’s Bank of China increased that to 50 percent, and in June raised it again to 100 percent by next January, noted the Financial Times. The reason behind the increases is to prevent any fraud and to protect customers — the People’s Bank of China said last year that some firms used customer funds for investments that were risky while others engaged in embezzlement. This is on top of the fact that keeping customer funds at several financial institutions at the same time made it hard for monitoring.
While the Financial Times reported that Alipay and Tencent were conservative with customers’ funds, they did make a lot of money on placing the funds in accounts at banks that earned them interest on the money. The paper noted that interest accounted for 1.7 percent of Tencent’s revenue last year. Ant Financial, the payment affiliate of Alibaba, doesn’t disclose its financials — but the paper said interest income should be higher than at Tencent but still account for a small amount of its overall revenue.
The increase to 100 percent shouldn’t come as too much of a surprise for the digital payment companies in China, given the fact that the central bank warned in January of 2017 that the goal is to get the ratio to 100 percent over time. It also comes amid a broader move on the part of the government in China to have more control over digital payment companies. The Financial Times noted that the central bank in China has already placed a central clearing requirement for online payments. Alipay told the paper it “already completed the necessary work” to meet the reserve requirement and has “never relied on reserve funds as a source of income,” while Tencent said it was putting in place new rules. It noted that customer funds haven’t been part of the balance sheet since the third quarter of 2016.