People’s Bank of China regulates QR code payment processors, including Ant Financial and Tencent
Could the rules and a new product from UnionPay foster NFC growth in China? And perhaps change how Chinese travellers expect to pay?
QR code payments unlikely in Australia, except under certain circumstances – maybe?
Point of View
Ant Financial, Tencent, other non-bank payment institutions (NBPIs) and banks that process QR code payments will need to comply with new barcode standards announced by the People’s Bank of China (PBOC), from 1 April 2018. The PBOC expressed concerns that market players had “…not done enough to prevent payment risks” over the period of significant growth in mobile payments.
Ant Financial and Tencent are ostensibly supportive of the new regulations, despite that their profits will likely be hit hard by the new rules. The tech giants operate Alipay and WeChat Pay, respectively, which each have more than 500 million users.
The overarching purpose of the new standards appears to be: to strike a balance between innovation, convenience and risk management; support competition; reduce fraud; and protect consumers. The PBOC expects industry to self-regulate and to “…accept the self-discipline of the China Payment and Clearing Association (CPCA)”. Under PBOC guidance, the CPCA developed the standards together with industry and academics. Key requirements of the standards include:
NBPIs will need a licence and will not be allowed to undertake any other financial services business using QR codes.
NPBIs will have to increase the proportion of client funds held in regulated interest-free reserve accounts, from 12-20 per cent to 42-50 per cent. The rate will eventually rise to 100 per cent, but a timeline has not been disclosed.
Interbank transactions will have to be centrally cleared, either through the PBOC’s Wang’Lian or another legitimate clearing house.
KYC and AMLCTF compliance must be demonstrated.
Daily spending limits of ¥500 (around $100) per customer on static QR codes. These are vulnerable to fraud and have been used by participants to avoid KYC responsibilities as they can be easily reproduced and shared.
Limits on dynamic QR codes are higher, at ¥1,000, ¥5,000, or by agreement, depending on what identification has been used to authenticate the customer.
Subsidies and below-cost processing will be prohibited, to support fair market competition. Fees must be aligned with card interchange fees (caps are 35 bps for debit and 45 bps for credit card transactions).
QR codes vs NFC technology
Unlike in Australia, NFC technology has not taken off in China. As NFC began to emerge, Alipay and WeChat launched QR code mobile payments. Accordingly, only 10 per cent of all mobile payments in China use NFC, with Apple Pay taking the lion’s share.
China’s experience illustrates how starting points and timing matter. Banking infrastructure in Western societies is well-established, stable and accessible, where most people are ‘banked’ and merchant terminal technology is sophisticated. In contrast, emerging and developing nations, such as China, have traditionally been cash-based. With, inter alia, high mobile phone penetration, payments in China have largely leapfrogged cards, moving straight from cash to mobile.
Alipay, seeking to quickly and cheaply introduce point-of-sale mobile payments in China, adopted QR code technology in 2011. WeChat followed in 2012. Using NFC technology would have meant relying on UnionPay (the domestic card scheme), and phone and terminal manufacturers. By using QR code technology, Alipay and WeChat were able to set up their own hardware-independent mobile payment systems, without involving UnionPay or hardware manufacturers.
Take-up of Alipay and WeChat mobile payments has been rapid. Users need only download an app, regardless of phone brand, transactions are free for consumers, and merchant fees are lower than UnionPay charges, according to Kapronasia.
Could the introduction of QR code regulations by the PBOC be a game changer in China’s mobile payments industry? Perhaps the new rules might act as a catalyst to move mobile payments from QR code to NFC technology? Could there be flow-on effects outside of China?
Restrictions on static QR code payment limits, higher processing fees (to be in line with card fees) and the prohibition of subsidies are each likely to increase merchants’ cost of accepting Alipay and WeChat Pay. Accordingly, at the margin, some merchants not currently accepting cards could, ceteris paribus, begin to do so. If more merchants were to accept UnionPay, the card scheme would likely promote cards to consumers.
However, any significant change would depend on the preferences of consumers, who are mighty fond of QR codes. Although QR codes are purported to be an easy and fast way to pay, unlike NFC they can be fiddly, requiring the right angle, sufficient light and they take longer to scan (making them problematic for public transit). Furthermore, users must input the transaction value at the time of purchase and, for some transactions, verify themselves with a password or signature. In contrast, NFC is faster, more convenient and more secure. But, habits are hard to break, NFC hardware is comparatively expensive, payments is a network game and a lot of people use WeChat and Alipay.
If you can’t beat ‘em, join ‘em
Proponents of NFC, UnionPay and Apple, are nevertheless turning to QR code technology as well. Moreover, in July 2017, EMVCo released global QR code specifications, which aim to support standardisation of QR code products.
Apple has added automatic QR code recognition to its camera app in iOS 11. With one-third of all iPhones owned by Chinese people, yet a mobile payments market share of just 9 per cent, could Apple be angling towards using QR codes in China through Apple Pay?
UnionPay has wrapped up both QR code and NFC technology into one mobile payments package, called UnionPay Mobile QuickPass, which launched in late-2017. Users can continue to use their beloved QR codes but can, in parallel, also try out NFC as they feel comfortable. Concurrently, merchants can accept UnionPay QR code transactions with existing hardware, or upgrade to NFC-accepting terminals. Could the flexibility of this product ease users and merchants into using NFC and if so, how might the tech giants respond?
If the PBOC’s new regulations were to precipitate increased NFC use in China, could a changed balance of technologies influence payments elsewhere? For instance, would Chinese travellers to Australia be more likely to pay with a card product than expect to use Alipay or WeChat Pay? Either way, the behaviour of Chinese travellers – who numbered 1.2 million last year – is likely a factor in the acceptance strategies of Australian merchants and acquirers.
QR codes in Australia?
In Australia, the majority of mobile payments use NFC; QR codes are typically only used for sharing information. This is unlikely to change, prima facie.
In contrast, Seattle’s Amazon Go store uses QR code technology to identify customers as they walk into the store, so they never have to check out in the traditional sense. Upon exiting the store, customers are billed via their Amazon account and payment is taken from their linked card. Although payments are made at the store, they are in fact card-not-present transactions.
Under certain circumstances might QR codes start to grow in Australia? Perhaps, for example, as merchants respond to Chinese travellers’ expectation to use the same methods as they do back home, or if stores such as Amazon Go arrive on our shores.
If QR codes were to become more broadly accepted in Australia, would we need to consider developing QR code standards and clearing arrangements of our own?