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Analysis

Alipay Partners With UnionPay For Clearing House Services

Sep 20, 2018 by Rebecca Zhang
Alipay Partners With UnionPay For Clearing House Services

On September 10, Alipay, the electronic payment arm of the Chinese tech giant Alibaba, signed a cooperation agreement with state-controlled financial service provider UnionPay for processing its cardless and barcode payment services, Shanghai Securities

In April, TenPay, the Tencent affiliate that runs WeChat Pay also entered into a similar agreement with the payment service provider.

The partnerships come in the wake of Chinese authorities’ attempts to introduce tighter regulations for third-party payment transactions in the country.

In August 2017, the People’s Bank of China (PBOC) had ordered that all third-party payment platforms must route their transactions (involving bank account) through Nets Union Clearing Corporation, a new government-backed clearing house. The apex bank had set a deadline of June 30, 2018 for the payment platforms to comply.

In a separate order issued later in December, the PBOC ruled that all barcode payments must be similarly routed via any “qualified” service provider.

Although Nets Union announced its cooperation with TenPay in late March this year, Alipay did not respond to the order until the PBOC reportedly issued it a warning in April.

Not long after, Alipay reached an agreement with the clearing house service provider.

Prior to the central bank’s ruling, third-party payment platforms could conduct the payment process directly with the banks, bypassing the central bank’s clearing system. This made it difficult to track the flow of money, making the system vulnerable to internet fraud and money laundering.

Teaming up with UnionPay in addition to Nets Union will bring more flexibility to Alipay and Tenpay’s businesses.

The transaction volume of the third-party payment in China grew to CNY 40.4 trillion (around USD 5.9 trillion) in the first quarter of 2018, a report by Beijing-based internet consultancy Analysys said. Alipay accounted for 53.76% in the transaction volume followed by 38.95% of TenPay.

Regulations of China’s banking industry are behind the exponential growth of the mobile payment. The PBOC hopes that centralizing clearing services for internet payment platforms will reduce systemic risks caused by lack of oversight.

But some analysts are concerned about the uncertainties of the shift. The monopoly of the clearing service will create a single rate, which may increase the cost for customers, they feel.

However, the impact of the new arrangement needs some time to exercise any significant effect. Migrating all interbank transactions to Nets Union and UnionPay will take some time.

Nets Union was set up in 2017 to focus on clearing service for transactions involving banks and third-party payment platforms. Its shareholders include six entities linked to PBOC and dozens of financial firms. TenPay and Alipay own 10% shares of the new clearinghouse respectively.

Before the establishment of Nets Union, UnionPay was the only authorized institution providing bank-to-bank clearing service. The emergence of Nets Union comes as a jolt to UnionPay’s ambitions to expand its clearing service monopoly among third-party payment players.

Rebecca Zhang

Rebecca Zhang is a Washington DC-based journalist who focuses on fintech, e-commerce and online education. She can be reached at Rebecca_Zhang@hks18.harvard.edu

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