China's central bank on Friday proposed a series of restrictions that may restrict overall e-commerce activity rather than simply funnel it through the state-controlled banking system.
The proposed rules would require five "external credible sources" for verifying the identity of a consumer opening a certain type of account, as well as place a low ceiling on daily e-commerce transactions and forcing person-to-person digital payments to go through banks. Most notably, the proposal differentiates payments done in-store with those done online.
"It would appear that the explosive growth of mobile and online payments in China might have gotten ahead of their understanding of the issues/risks inherent in payment and that theyre trying to get some discipline and control into the system," said Thad Peterson, a senior analyst with the Aite Group.
The proposed rules are open to comments until Aug. 28, opening the possibility that the restrictions might be loosened before they are put into effect.
"Fortunately, theyre proposing before theyre disposing, so theres a chance that some of the suggested regulations can be adjusted to minimize the increase in friction that they will undoubtedly create," Peterson said. "That said, given the size and growth of the Chinese market, theyre embarking on a very large beta test to see what works, what doesnt work and what happens when it's implemented, and a big chunk of their citizenry will unwittingly be part of that test."
The most charitable interpretation of the central bank's proposal to add friction to e-commerce is that it would prevent a poorly planned online shopping spree from wiping out a Chinese consumer's bank account, said Richard Crone, president of Crone Consulting.
"This could indeed be a concern about consumer protections. The financial management issue of seamless impulsive electronic commerce," Crone said.
The proposed rules are primarily designed to keep payments companiesofficially, non-bank payment institutions (NBPIs)away from core banking services.
According to a research note published by Barclays, the proposal clarified that NBPIs should focus on serving retail and corporate customers, rather than financial institutions.
A lot of attention has been paid to the monetary limits for online transactions, but those limits are directly tied in with authentication efforts. Customers who have undergone the strictest authentication can spend up to RMB200,000 (about US$32,213) per year, while customers with more accessible accounts can spend only half that amount, with further limits on daily spending depending on the type of authentication used.
"In essence, the (central bank) has set the rule that NBPIs should mainly facilitate small transactions and that large transactions should still go through banks," the Barclays note said.
But that's once a relationship has been established.
Consumption accounts, which the central bank defines as being used only to facilitate consumption payments, would require just three external credible sources for verifying the user's identity. Integrated accounts, which can also buy wealth management products and perform transfers, would require five sources or a face-to-face authentication.
These rules create an "artificially high barrier" for getting an integrated account, Crone said.
The proposed rules would severely restrict P2P transactions and most transfers between bank accounts, unless both accounts are in the same consumer's name at the same bank. The exception is when the transaction is processed through the main bank account, which would expose that consumer to bank fees. Thus, the size of the fees would determine the appeal of these transactions.
This is a potentially huge issue because of China's dependence on mobile transactions and money transfers.
"They don't have checkbooks. They are not writing checks," Crone said. "In the Chinese economy, person-to-person is really important. It's all about taking some of the friction out of a cash-based economy. The central bank is concerned about control."
But even if these rules are enacted as written, they may provide little benefit to the Chinese government, said Avivah Litan, a senior security analyst with Gartner.
"Sounds to me like a similar ploy to what the Chinese government did to prop up their stock market and how their moves eventually failed," Litan said. "The Chinese government obviously believes it can direct market forces, in this case online payments, through regulation, but their market is too dynamic and large to be bound by such restrictive measures. I think this will give rise to black market online payment prevalence."
Barclays' note said it is not concerned about an immediate impact on e-commerce.
"We believe it is not targeted at preventing or controlling online shopping purchases, and hence the impact to most e-commerce companies like JD, Vipshop and Alibaba would be quite limited," the note said. "Over the longer term, the more stringent restriction is likely to put a lot of smaller financing companies under pressure, in our view, and hence it is likely to be more beneficial to bigger third-party payment companies like Alipay and Tenpay as the industry consolidates."