Foreign Investors are now welcome to enter China’s Payment Services Market

On 19 March 2018, the People’s Bank of China (PBOC) issued Announcement No.7 of 2018 (the Announcement), which allows qualified foreign-invested enterprises (FIEs) to apply for payment business licences (Payment Licence) under the existing legal regime applicable to domestically-owned entities. This is viewed by the market as a significant step towards opening up the payment industry to foreign investors, who were not permitted to enter prior to this Announcement.

We set out in this note the major qualification requirements applicable to the applicants of a Payment Licence under the current legal regime, and other related points which may be of interest to foreign investors.

The Announcement has allowed FIEs access to the payment market in China. As a result of the Announcement, FIEs can now apply for a Payment Licence from the PBOC. Once it has obtained a Payment Licence, an FIE, will be treated the same as local firms such as Union Pay and Alibaba’s Alipay. This means that it will be able to conduct the following three types of payment business:

• “online payment”, which refers to the act of transferring funds between payers and recipients through public network or special network, including currency exchange, online payment, mobile phone payment, telephone payment and digital TV payment;
• “issuance and acceptance of pre-paid cards”, which refers to the issuance and acceptance of a type of card (i) issued for profit, (ii) having a prepaid value which can be used to purchase goods or services from parties other than the card issuers, and (iii) taking different forms (e.g. being a physical card or otherwise) by utilizing magnetic stripes or chips or other technologies; and
• “bill collection via bankcards”, which refers to the act of collecting funds on behalf of designated bank card merchants through point of sale (POS) terminals or other devices.

In order to apply for a Payment Licence, an FIE may submit its application documents to the local branch of PBOC for preliminary review, which will upon completion of its review, forward the application documents as well as its preliminary review opinions to PBOC for approval.

A Payment Licence granted by PBOC is valid for five years, renewable for a further five years upon PBOC’s prior approval.

In order to qualify for a Payment Licence, an FIE must be a PRC-registered limited liability company or a joint stock company, which is not a financial institution. The company must comply with the existing legal regime and therefore meet the following requirements:

• it has a minimum paid-in registered capital of RMB100 million if it applies for a nationwide Payment Licence, or a minimum paid-in registered capital of RMB30 million if it only applies for a Payment Licence in a particular province;
• it has at least five senior management personnel who are familiar with the payment business;
• it has established anti-money laundering systems that meet the applicable requirements;
• it has the payment service facilities that meet the applicable requirements, including but not limited to, business operational system and disaster recovery system which can accomplish the payment business safely and independently;
• it must store, process and analyse all personal information and financial information collected and generated in China within the territory of China;
• if any outward transmission of data is necessary for conducting cross-border payment business, it must request its overseas counterparties to comply with confidentiality obligations and obtain consent from relevant data subjects;
• it has a well-established organizational structure, internal control system and risk management measures;
• it has business premises and security measures that meet the applicable requirements; and
• neither the FIE nor its senior management personnel have been subject to penalties in the last three years for committing any illegal activity or criminal offence by using the payment services or providing payment services  to any illegal activity or criminal offence.

In addition to these requirements, any investor of the FIE holding 10% or more equity interest in the FIE and any investor having de facto control of the FIE must meet the following requirements:

• it is a limited liability company or a joint stock company;
• it has provided information processing support services to financial institutions or for e-commerce activities for at least two consecutive years;
• it has been profit-making for at least two consecutive years; and
• it has not been subject to penalties in the last three years for committing any illegal activity or criminal offence by using the payment services or providing payment services to any illegal activity or criminal offence.

Although the qualification requirements resulting from the domestic legal regime are numerous, potentially the largest stumbling block will be the data localisation requirement under the recent Cybersecurity Law. By this law, any FIEs involved in payment services may be classified as Critical Information Infrastructure (CII), and made subject to the requirements that all personal information and financial data generated or collected in China must be stored, processed and analysed in China as a general principle and that cross-border data transfer is only allowed if that is necessary for business needs and the FIE has passed a security assessment.

For a long time now, China has maintained very tight control over its payment industry and this Announcement certainly fulfills its promise to further open up the financial services sector to foreign investors who have been waiting to enter the China market for almost a decade. The opening-up of China’s payment business to FIEs under the PBOC Announcement is welcome news for foreign investors in the payment industry.

However, the Chinese market has in the last decade cultivated three giant domestic payment institutions including AliPay, Tenpay (used by WeChat users) and Union Pay which collectively own almost 90% of the current payments market. Clearly, it will be challenging for FIEs to secure a decent market share with this level of local competition. It is likely that the real opportunities coming from this Announcement will be in the cross-border payments market. In addition, the cyber security requirements, especially the restrictions on cross-border data transfer under the Cybersecurity Law, pose compliance challenges to payments service providers.

While this regulatory change is a welcome development for foreign investors in the cross-border payments space, careful analysis is advisable before a foreign investor decides to make a significant investment in the China payments market.

Prepared by Sun Hong (Partner, Shanghai), Barbara Li (Partner, Beijing), Ai Tong (Senior Associate, Shanghai) and Jane Wang (Associate, Beijing) of Norton Rose Fulbright LLP