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Tencent Financial at a crossroads

Tenpay uses a legal loophole - policy arbitrage – to circumvent the obstacle. A new legislation might come up to prevent Tenpay from collecting interest in a third-party payment capacity.

Jan 25, 2019 by A. Alfaro
Tencent Financial at a crossroads

In the early days of 2019, Tencent secured the virtual banking license from Hong Kong Monetary Authority. Tencent Financial will now be able to offer retail banking services online.

Tencent´s financial business line already has licenses for insurance, banking and more. Though the Tencent Financial Technology brand was officially unveiled in September last year, Tencent´s financial department - mainly focused on online payments – had started operating in 2015.

From last year, the Shenzhen-based company has shifted its focus from consumers to businesses. The next 20 years of internet development will center on B2B, said a Tencent executive in November 2018 at a Nanjing event. The financial business line is expected to play an important role in Tencent’s future development, especially in the light of the videogame (Tencent’s biggest revenue channel) chokehold in China.

The total revenue of Tencent for the third quarter of 2018 stood at CNY 80 billion (USD 11 billion). Revenues from Tencent´s “other businesses” (including financial services) increased 69% to CNY 20 billion (25% of total revenue) on a year-on-year basis, thanks to major contributions from the payment-related and cloud services. Evidently, financial services have become one of the pillars for Tencent.

Meanwhile, Tencent Financial has not become an independent entity yet. According to industry sources, Tencent prefers to keep a low profile and stay away from the public and media attention. But as this business line keeps growing, it becomes harder and harder to avoid the regulators.

Tenpay, Tencent´s Financial embryo, started operations in 2005. Six years later, the China Central Bank issued a third-party payment license to Tenpay - the first financial license Tencent has obtained. Now, eight years and a slew of licenses later, Tencent has gotten good at navigating the regulatory frameworks. No other Internet giant has been granted so many licenses. Tencent has also partnered with other players to get licenses outside mainland China. For instance, Tencent teamed up with Hillhouse Capital Group and Aviva HK to acquire different licenses in Hong Kong.

In September last year, the company officially launched “Tencent Financial”, which marked the beginning of a new era for the Shenzhen-based company. In the same month, WeChat Pay breached 800-million user mark.

In November, Lingqiantong, a money-market mutual fund from Tencent, ran a beta. The 'wallet' function in WeChat app can be used to pay with WeChat, and users can earn income at the same time - a service similar to rival Alipay’s Yue Bao. According to areport by Yicai Global, “the function may also be used in direct payments in various consumption scenarios after it is set as the default payment method in WeChat and to repay credit cards.”

Everbright Securities accorded Tencent Financial a valuation of USD 106 billion. In 2017, during the annual plenary sessions of the National People's Congress (NPC) and the National Committee of the Chinese People's Political Consultative Conference, Tencent’s chairman Pony Ma said he won’t hive off Tencent Financial.

However, Tencent might face tighter regulations in 2019. As of the first half of 2018, Tenpay’s reserves amount to more than CNY 400 billion. Even at a minimum annualised rate of return (3%), Tenpay stands to earn over CNY 12 billion per year as interest. However, Tenpay is registered as a third-party payment firm and, in theory, are not entitled to the interest.

But Tenpay uses a legal loophole - policy arbitrage – to circumvent the obstacle. A new legislation might come up to prevent Tenpay from collecting interest in a third-party payment capacity. Lately, Tencent has published some articles on its official social media accounts embracing regulations.

In 2019, Tencent will find itself at a crossroads. Finance is a highly regulated area. The dramatic growth of payment institutions in last few years is an exception rather than a norm.

On January 29, 2018, Tencent launched Tencent Credit - only to be withdrawn 24 hours later. Tencent was allegedly warned by the regulators for using the word credit prompting the company to remove the service, Jeiman quoted insiders as saying.

Tencent also doesn’t have a specific section for the financial business on its quarterly filings. The income from the financial business is mentioned under the ‘others’ section. In 2017, during the annual plenary sessions of the National People's Congress (NPC) and the National Committee of the Chinese People's Political Consultative Conference, Pony Ma said: “Finance is about fighting for a long life, not about running fast”.

According to Xu Zhong, director of the research bureau of the People's Bank of China, fin-tech companies should expect tighter regulations soon. Xu said financial businesses of large technology companies will come under the scanner to keep the risks in check. At the end of 2018, the financial stability report issued by the Central Bank of China observed that risk exposure of most financial groups is on the high-end of the spectrum. The lack of regulation may threaten economic and social stability, the report stated.

A. Alfaro

A. Alfaro is a Beijing-based freelance reporter. He focuses on China's politics, culture and society. He can be reached at varofaro@gmail.com. 

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