Opportunities and challenges for FIEs in online payment business

This article intends to introduce the recent change in the online payment market, as well as related foreign-investment policies and main licenses for the online payment business in China.

Opportunities and challenges for foreign-invested companies in the online payment business

The Chinese market of online payment has been overwhelmingly dominated by two Chinese leading companies, which both together have occupied more than 90 percent of the market shares in China. However, with a new round of opening up in the online payment market, global companies have showed their interests in this market. The capability of facilitating cross border transactions is expected to be their selling point in the market.

This article intends to introduce the recent change in the online payment market, as well as related foreign-investment policies and main licenses for the online payment business in China.

The People’s Bank of China (hereinafter referred to as the “PBOC”), as the prime governmental regulator in the business of online payment in China, promulgated an announcement[1] (hereinafter referred to as the “PBOC Announcement No.7”) on 19 March 2018, which reaffirmed that a qualified foreign-invested company established in China may conduct the business of online payment as a non-financial institution.

A recent case of acquisition by a global leader in the sector of online payment business in 2019 is viewed as the first case of foreign investment in the business of online payment after the promulgation of the PBOC Announcement No.7.

As revealed by the official website of the PBOC, there were 237 companies equipped with valid and effective payment business licenses until 12 May 2020 in China. The overwhelming majority of those license qualified payment companies are Chinese domestic companies.

There have been not yet sufficient successful cases of foreign investors’ access to the market and the contemplated foreign investment is still upon discussion with the competent authority of the PBOC on a case by case basis. However, there are some principles as to the establishment of a foreign-invested online payment company provided in the PBOC Announcement No.7 and other regulations promulgated by the PBOC in the regime of payment business, which are outlined as follows,

The Payment Business License shall be valid for 5 years as of the date of issuance, and the application for an extension for another 5 years must be submitted to the competent authority of the PBOC prior to the expire date.

Though the promulgation of the PBOC Announcement No.7, few foreign-invested companies have obtained the payment business licenses during the past years by means of direct application with the PBOC. However, there seems more and more foreign investors will enter the market in China by way of acquisition with an existing local license qualified payment company.

It is essential for an online payment company to be equipped with the value-added telecommunications operating license on Internet Content Provider (hereinafter referred to as the “ICP license”) as long as the online services provided by the company relates to the internet information. The ICP license shall be obtained from the Ministry of Industry and Information Technology of China or its competent local authorities.

In addition to the ICP license, other kinds of the value-added telecommunications operating licenses are also necessary for a comprehensive business of online payment, subject to the actual business conducted, such as the license on the business of domestic call center services and the license on Electronic Data Interchange (hereinafter referred to as the “EDI license”) respectively.

All the business of ICP, EDI and call center services are open to foreign investors, according to the Negative List 2019[2]. However, a joint venture and foreign shareholding cap (not more than 50%) is required for ICP business. As to the business of EDI and call center services, even 100% foreign shareholding is allowed.

For the settlement of cross border transactions, a payment business company is required to file for registration in the Directory of Enterprises with Foreign Exchange Receipts and Payments in Trade (hereinafter referred to as the "Directory Registration") with the branch of the State Administration of Foreign Exchange where the payment business company is located.

As provided in the Circular of the State Administration of Foreign Exchange on Issuingthe Administrative Measures for the Foreign Exchange Business of Payment Institutions (hereinafter referred to as the “Circular HuiFa [2019] No.13”), effective as of 29 April 2019, a payment business company shall cooperate with a qualified PRC bank so as to have the Directory Registration successfully filed with the competent authority of the SAFE.

The period of validity of directory registration of payment business companies shall be five years and an application for the continuation of the Directory Registration prior to the expire date is required.

[1] The Announcement of the People's Bank of China [2018] No.7 Announcement on Matters Relating to Foreign-funded Payment Institutions

[2] The Special Administrative Measures for Access of Foreign Investment (Negative List) (2019 Edition)