Third-party payment, the turning point is coming!

Recently, a number of independent and non-independent payment institutions have disclosed their semi-annual reports. Combined with the latest industry data, we have discovered new trends in the industry that are different from the past, as well as new impacts on the industry brought about by the introduction of a series of regulatory policies.

This article will restore the development context of third-party payment in 2019 from the perspective of industry and corporate data, and attempt to look forward to future development trends through important industry policies and events.

Industry development: Turning point appears, trend stabilizes

From the data trend, the number of transactions, amount and corresponding month-on-month growth rate of third-party payment have all experienced a turning point that is completely different from the previous development trend. The number of transactions rebounded after a seasonal decline, the month-on-month growth rate stopped falling and rebounded, and the average transaction amount also rebounded due to seasonal factors. Specifically:

According to the online payment business transaction data of non-bank payment institutions (hereinafter referred to as "third-party payment") released by the central bank, the number of transactions has declined for the second time since the Internet finance regulation work was launched in 2016 (the first time was in Q1 2017, that is, after the issuance of the "Notice" in October 2016). Since 2018, the year-on-year growth rate of transaction amount and number of transactions has rebounded for the first time.

We believe that, on the one hand, the lack of "shopping festivals" in the first quarter of e-commerce retail, the main force of online payment, led to a decline in the number of transactions; on the other hand, the continued development of Internet finance rectification has caused the payment transaction volume and number of transactions in the field of Internet finance to continue to decline. At the same time, we have observed that as the online Internet dividend has gradually peaked, some payment companies have begun to return to offline acquiring business. All these factors led to a seasonal decline in the number of transactions in the first quarter.

In the second quarter, affected by factors such as the mid-year e-commerce promotion, the year-on-year growth rates of transaction amount and number of transactions both showed a clear rebound and the trend stabilized.

At the same time, due to the sharp decline in the number of transactions in the first quarter, the average amount of third-party payment transactions showed a clear upward trend. In the second quarter, small-amount, high-frequency transactions in e-commerce retail increased significantly, causing the growth rate of transaction numbers to be much higher than the growth rate of transaction amounts, and the average amount of transactions fell again.

In terms of the scale of reserve fund deposits, on January 14, the reserve fund was officially 100% deposited, and since then the reserve fund has maintained a slight downward trend. On the one hand, the payment business of prepaid cards has become increasingly weak. On the other hand, Alipay and Tenpay, which account for most of the reserve funds, have basically converted the reserve funds into money funds by increasing the access of Yu'ebao to funds and expanding the scope of Lingqiantong, so the reserve funds have also remained at a relatively stable scale.

Enterprise development: initial exploration of transformation path and development differentiation

On April 25, the attention of the payment industry was focused on Lakala. Lakala, which successfully landed on the A-share market, became the "first payment stock" in the A-share market and the second independent payment institution to be listed after Huifu Tianxia.

Lakala's successful listing not only attracted the attention of the payment industry, but also triggered discussions in the industry about the "payment institution listing boom". Institutions such as Mandao Financial Services (Baofu), Yibao Payment, Fuyou Payment, and Yifu Payment, which had plans and rumors of listing, were constantly questioned by industry media. However, facts have proved that the early or late planning and the strong willingness cannot increase or change the success rate of listing, and the "payment institution listing boom" did not appear.

However, in addition to independent listed payment companies, there are also some payment institutions that rely on their parent companies to go public, such as Liandong Advantage and Helibao. These companies are representative in the industry. This article will restore the development of the industry based on the financial data disclosed by these companies, and summarize and look forward to the strategic choices of corporate transformation in the context of industry transformation.

First of all, we must look at the situation of the two giants, Alipay and Tenpay.

According to the financial report just released by Alibaba, it is estimated that Ant Financial's pre-tax profit in the second quarter was about 4.34 billion yuan. Together with the profit in the first quarter, the pre-tax profit in the first half of the year exceeded 5.7 billion yuan. The businesses that support Ant Financial's profits mainly include payment, consumer finance (Jiebei, Huabei, small loan licenses), wealth management (funds, wealth management, gold, etc.) and other businesses.

Payment is the core business, and its revenue items include the 1% fee for personal credit card repayment and cash withdrawal, the 16% fee for B-end merchant services, and the 8% fee for merchants using Huabei. Due to the early free policy for C-ends and the loss of interest income caused by the full deposit of the reserve fund, overall, the net profit of the payment business should not occupy a major position, but the potential in the future is huge and the development space is worth looking forward to.

Tencent's financial report shows that in the first half of the year, the financial technology business achieved a revenue of 44.7 billion yuan, mainly composed of four business sectors: wealth management, payment, securities and innovative finance. It also pointed out that although the first quarter was affected by the loss of interest on the reserve fund, commercial payment still became the main source of revenue growth for the financial technology sector, relying on factors such as the growth of commercial payment users, the number of merchants, transaction volume and revenue.

Secondly, based on the availability of data, Lakala and Huifu Tianxia are taken as the objects of analysis.

According to Huifu's 2019 interim report, its payment transaction volume in the first half of the year was 1.06 trillion yuan, a year-on-year increase of 25%; operating income was 1.869 billion yuan, a year-on-year increase of 34%; and net profit was 142 million yuan, a year-on-year increase of 73%.

In Huifu's financial report this year, there have been new changes in the statistical caliber of transaction volume, from the original POS, mobile payment, Internet payment, and cross-border payment to comprehensive merchant acquiring, SaaS service providers, industry solutions, cross-border and international business. Therefore, historical statistical data are no longer comparable.

It is worth noting that in the new statistical caliber, the changes in SaaS service provider payment business and cross-border & international business reflect Huifu Tianxia's redefinition of business and choice of strategic direction. SaaS services completed payment transaction volume of 76.2 billion yuan and achieved operating income of 199 million yuan, an increase of 1.34 times and 1.52 times year-on-year respectively. The number of SaaS supplier cooperation increased from 137 at the end of 2018 to 221. In cross-border business, the transaction volume of cross-border and international business was 20.8 billion yuan, an increase of 2.1 times compared with 6.7 billion yuan in the first half of 2018.

For the payment business of SaaS service providers, Huifu Tianxia has chosen to cooperate with vertically segmented retail service providers. The cooperation includes providing aggregated payment services based on their payment capabilities and providing value-added services of financial technology and digital operations centered on payment. The data released in its financial report shows that the peak daily transaction volume has exceeded 10 million.

Compared with the impressive performance growth of Huifu Tianxia, ​​the semi-annual report released by Lakala, which was recently listed, is not so optimistic. In its first semi-annual report after listing, operating income and transaction volume declined.

The semi-annual report shows that in the first half of 2019, Lakala's net profit was 366 million yuan, an increase of 25.31% over the same period last year.

However, the key transaction volume and operating income declined significantly, with total revenue of 2.496 billion, down 9.7% from 2.765 billion in the first half of last year, and transaction volume of 1.7 trillion, down 11% year-on-year. Although the number of transactions increased by 67% to 3.67 billion, the payment industry's method of charging by transaction volume determined the decline in its operating income.

Lakala has achieved steady growth in the number of effective merchants it serves, exceeding 21 million in the first half of 2019, compared with 19 million at the end of 2018.

In terms of the composition of operating income, Lakala's non-payment fee-based value-added services have achieved relatively rapid growth. On the one hand, the transaction amount of the points consumption operation business increased by 181% year-on-year to 1.6 billion, and the net income increased by 64% year-on-year to 46 million yuan; on the other hand, through the accumulation of tens of millions of fans through aggregated payment, the launch of new information technology service businesses such as membership subscriptions achieved revenue of 72 million yuan.

In terms of strategic choice, Lakala also chose a two-way breakthrough. The first is to enter the SaaS market and acquire Qianmi, using its advantages as a vertical SaaS service provider in the retail field to acquire customers and serve merchants; the second is to enter overseas markets, typically Japan, and aggregate multiple local Japanese wallets to help Japanese merchants collect payments from consumers. At the same time, it signed agreements with VISA, MasterCard, Discover, and AE to fully cooperate with international card organizations. The financial report shows that its cross-border payment and overseas aggregated payment transaction amounts have exceeded 10 billion.

Regulatory policy: Bank card acquiring is the focus of phased supervision

When summarizing the payment and settlement work, Fan Yifei, Deputy Governor of the People's Bank of China, put forward three requirements for payment market supervision, namely, payment supervision must continue to be strict, risk prevention must be strengthened in a timely manner, and crackdown on illegal and irregular behaviors must be effective.

In addition, supervision is more specifically directed towards guiding the healthy development of the industry, such as planning the interconnection and interoperability of barcode payments, supporting and encouraging innovation in mobile payments and the application of digital currencies.

"114" payment deadline, reserve fund becomes history

The end of the reserve fund interest era represents the end of an era for third-party payment. The existence of reserve fund interest objectively enables payment institutions to have some functions of attracting deposits, and the way of relying on reserve fund interest has also hindered the motivation of payment institutions to innovate to a certain extent. Under the superposition of multiple factors, it has become an industry consensus for payment institutions to transform to the B-side and provide good services. Of course, the completion of reserve fund payment is just the beginning, and the industry is also looking forward to the new "reserve fund management method".

The central bank issued the "Notice on Further Strengthening Payment and Settlement Management to Prevent New Types of Telecom Network Crimes" (Document No. 85)

Document No. 85 is a further supplement and reinforcement of Document No. 261, and is also a response to the "315 exposure of remote credit card fraud incident". It also proposes more specific management measures in terms of account management, special merchants, terminal management, etc. The increasingly clear regulatory details are aimed at "payment black industries" such as cash withdrawal and illegal provision of payment channels. The phenomenon that some payment institutions have long promoted illegal activities such as credit card fraud will be effectively curbed.

The State Administration of Foreign Exchange issued the "Administrative Measures for Foreign Exchange Business of Payment Institutions" (SAFE Document No. 13)

The expected "cross-border foreign exchange payment business license" did not arrive as scheduled, but the result exceeded expectations. The "Notice" is more like a transition from an "approval system" to a "registration system". It can be foreseen that more payment institutions will compete in the cross-border payment track in the future.

The National Development and Reform Commission and the Ministry of Transport issued the "Implementation Plan for Accelerating the Promotion of Electronic Non-Stop Quick Toll Collection Application Services on Expressways"

A piece of paper has stirred up the upstream and downstream industries of the ETC industry chain, and ETC-related industries have become the undisputed super hardcore industry in 2019. The giants eat meat, and small and medium-sized payment institutions drink soup. WeChat and Alipay rely on the ecosystem and banks and highway toll companies to play cross-border alliances. The second-tier UnionPay Cloud QuickPass and Suning Payment have a share of the ETC stored-value card recharge. Payment institutions from third-tier to eighteen-tier tiers are competing for the cake of building backend account service capabilities. From big to small, everyone has something to gain.

The central bank announced the renewal of the seventh batch of payment licenses

There will be two fewer payment licenses, and the current stock is only 236. The remaining payment institutions should cherish every moment on the road of transformation.

The People's Bank of China issued the "FinTech Development Plan (2019-2021)"

The three-year plan mentions "promoting the interconnection and interoperability of barcode payments, building standards, breaking down barriers, and realizing the mutual recognition and scanning of barcode logos of different APPs and merchants", which means that before 2021, the interconnection and interoperability of barcode payments will be truly implemented. Small and medium-sized payment institutions and banks will gain new scene customer acquisition capabilities, and consumers will not have to switch between various APPs when paying. In order to acquire and retain customers, the payment subsidy war may start again. But then again, are the user habits that have been formed really that easy to change? Looking forward to the performance of UnionPay Cloud QuickPass!

The CPC Central Committee and the State Council issued the Opinions on Supporting Shenzhen in Building a Pilot Demonstration Zone of Socialism with Chinese Characteristics.

The Opinion states that it supports the development of innovative applications such as digital currency research and mobile payment in Shenzhen. The regulatory sandbox system is more suitable for digital currency, and my country may be one step ahead in the issuance and application of digital currency. At the same time, full and 100% payment of reserves, central bank credit guarantee, unlimited legal compensation, and all-round measures will ensure that you no longer have to worry about being harvested!

The People's Bank of China issued the "Notice on Strengthening the Supervision and Inspection of Payment and Settlement Management" (Yinzhifa [2019] No. 177)

The central bank will conduct nationwide supervision on strengthening payment and settlement management, and the on-site supervision will be completed before September 2019. The focus of the supervision is to prevent new types of crimes in telecommunications networks and "disconnect direct connections". The "Notice" shows that this supervision work has three stages: self-examination and self-correction (before the end of August 2019); on-site supervision stage (before the end of September 2019); problem handling stage (before the end of November 2019).

The punishment or fine may be known by the end of the year.

Future Outlook: Digital Currency Brings Catfish Effect

Through the above summary and review of the third-party payment industry, we put forward some views on the corporate transformation, regulatory direction and future of the industry that the industry is concerned about. We hope to provide practitioners with an observation perspective, clarify the development direction and look forward to future development.

1. About the transformation of third-party payment

There is no doubt that transformation is a challenge faced by all payment institutions. Currently, the transformation directions explored by enterprises in the industry are mainly the following:

• The first is diversification, groupization, and ecology. This transformation direction is mainly suitable for giants, which have their own scenarios, resources, and money. Typical examples include Alipay, Tenpay, Suning Finance, Du Xiaoman, Ping An Financial One Account, etc., which have basically achieved group management and grown into BigTech by themselves.
• The second is to switch to the B-end. Industry payment is a much larger market than the C-end consumer market, and the methods are not consistent. Some payment institutions rely on cooperation with leading Internet finance and consumer finance institutions, some join hands with airlines and travel companies, and some, like Huifu Tianxia, ​​cooperate with SaaS service providers in vertical fields to expand customers and provide value-added services on this basis.
• The third is cross-border payment business, or more accurately, internationalization. At present, the cross-border payment market for domestic buyers and sellers is difficult to support the transformation of payment institutions. Going global is more like an internationalization process of an enterprise, rather than just cross-border payment services, such as applying for corresponding payment licenses abroad.

Fourth, the resource endowment of an enterprise is important, but the exploration and experimentation of new businesses is more important. The path to transformation is never clear, nor is it imagined out of thin air, but requires constant trial and error and exploration. This is true for both small and medium-sized payment institutions and giants.

2. Regarding the supervision of third-party payment

Judging from the fines issued from January to August this year, anti-money laundering, anti-fraud and bank card acquiring business are currently the definite regulatory focus. On the one hand, fines are issued frequently, and on the other hand, the release of Document No. 85, UnionPay's regulations on acquiring service providers, and Document No. 177's inspection of the implementation of Document No. 85, this series of regulatory actions all demonstrate these situations.

At the same time, there were frequent major violations of laws and regulations in "aggregation payment (fourth-party payment)" and cross-border payment services in the first half of the year. Many crimes labeled as "aggregation payment (fourth-party payment)" are essentially unlicensed payment businesses. However, no matter what it is, new regulatory measures may be introduced.

3. About the future of third-party payment

Payment institutions and banks have been viewed as opposing parties for many years. Banks complain that payment institutions have no awareness of financial risks and are either gray or black industries; payment institutions complain that banks provide poor user experience. However, in fact, the two have always been interdependent. Banks provide underlying accounts and risk control, and payment accounts link users and scenarios at the front end to provide good user services. Therefore, in the future, banks will not be competitors of payment institutions, let alone enemies.

However, the emergence of digital currency has truly created the possibility of subverting third-party payment. Although the digital currency currently announced by the central bank is the central bank's top-level design, it builds a dual issuance system of the central bank and commercial banks, parallel to electronic payment, and digital currency accounts may appear for inter-bank transactions.

But what about the future? If the issuance, circulation and use of digital currency are all registered in the dual-introduction system, and transactions are still point-to-point transactions, then the transfer of currency is directly completed by the blockchain network protocol. At that time, payment institutions will no longer have any meaning to exist.

Of course, payment institutions themselves were born in competition and hardship, and have always been fiercely competitive. They believe that new technologies bring opportunities rather than destruction.