Goodbye, the good days of making money without doing anything using Alipay and WeChat Pay!

There are more and more signs that the era of wild money-making in third-party payment is coming to an end.

Recently, the central bank issued a notice announcing that the proportion of payment institutions’ customer reserve funds to be deposited centrally will be gradually increased to 100%. This is one of the main contents of the special rectification work on Internet financial risks deployed by the State Council, and it is also the first time that the central bank has put forward a clear timetable for payment institutions to deposit 100% of their reserve funds centrally.

For third-party payment companies such as Alipay and WeChat Pay, this means that they will have to say goodbye to the good days of earning interest income from reserve funds. According to industry insiders, the interest income of large payment institutions could reach tens of billions of yuan before.

Payment institutions’ reserve funds will be 100% deposited

The so-called reserve fund, in layman's terms, is the money paid by customers when purchasing goods or services online. It is kept in the account of the payment institution until the customer receives the goods and confirms it.

The editor of Meike.com learned that increasing the reserve deposit ratio of payment institutions is a gradual process.

In January 2017, the central bank issued the "Notice on the Implementation of the Centralized Deposit of Payment Institutions' Customer Reserve Funds" stating that from April 17 of that year, payment institutions should deposit customer reserve funds in a certain proportion into the designated institution's special deposit account. The average proportion of the first deposit is about 20%, and the central bank's goal is to eventually achieve centralized deposit of all customer reserve funds. According to this document, after the reserve funds are centrally deposited, no interest will be generated.

In December 2017, the central bank required that the proportion of customer reserve funds deposited by payment institutions be increased from the current 20% to about 50% starting in 2018. Specifically, the proportion of 20% will continue to be implemented in January 2018, and will be increased by 10% per month from February to April, and will be adjusted to about 50% in April 2018.

According to data released by the central bank, at the end of January 2018, the customer reserve deposits of payment institutions exceeded 100 billion yuan, and since then, it has increased by about 100 billion yuan every month. At the end of April 2018, this figure was nearly 500 billion yuan, or 499.504 billion yuan, an increase of 494% over the initial amount. Based on the 50% transfer ratio, the total size of payment institutions' customer reserve funds is 999.008 billion yuan.

On the evening of June 29, the central bank issued a notice further increasing the deposit ratio. According to the notice, starting from July 9, 2018, the proportion of customer reserve funds deposited by payment institutions will be gradually increased on a monthly basis, and 100% centralized deposit will be achieved by January 14, 2019.

It is worth noting that the central bank requires payment institutions to open a "reserve fund centralized custody account" at the People's Bank of China branch in the legal person's location before January 14, 2019, based on the business connection with China UnionPay or NetsUnion clearing, and to close the "reserve fund deposit special account" opened by the original entrusted reserve fund deposit bank within 2 working days from the date of account opening. Funds transfers from the "reserve fund centralized custody account" of payment institutions should be handled through China UnionPay or NetsUnion clearing.

According to a notice issued by the central bank last year, starting from today (June 30, 2018), all online payment transactions involving bank accounts accepted by payment institutions will be processed through the China UnionPay platform.

Four risks of decentralized reserve funds

The China Payment and Clearing Association's "China Payment and Clearing Industry Operation Report (2018)" pointed out that the scale of payment service participants in my country has continued to expand, with banking financial institutions still the main force and non-bank payment institutions emerging as a new force. As of the end of 2017, there were 243 non-bank payment institutions in the country. The proportion of Internet payment and mobile payment business of non-bank payment institutions in the total amount of online payment business was 26.9% and 73.1% respectively.

The reason for centralized deposit of reserve funds is that previously, various payment institutions deposited customer reserve funds in multiple bank accounts in their own names. The scale of customer reserve funds is huge and the deposits are scattered, which poses a series of risks. The central bank has pointed out that there are four main risks in the scattered deposit of customer reserve funds:

• First, there is a risk that customer reserve funds may be misappropriated by payment institutions. For example, in December 2014, Shanghai Changgou Enterprise Service Co., Ltd. misappropriated customer reserve funds, resulting in a capital risk exposure of 780 million yuan, involving 51,400 cardholders.
• Second, some payment institutions illegally occupy customer reserve funds to purchase financial products or other high-risk investments.
• Third, payment institutions conduct inter-bank fund settlement in reserve accounts opened at commercial banks, operating beyond their scope and exercising the inter-bank settlement function of the central bank or clearing organizations in disguise. Some payment institutions even use this convenience to provide channels for criminal activities such as money laundering, which also increases the risk of financial risk transmission across the system.
• Fourth, the decentralized storage of customer reserve funds is not conducive to the payment institutions’ coordinated fund management and poses liquidity risks.

The days of third-party payment companies making money without doing anything will come to an end

Economic Observer reported that the vice president of a Shanghai-based payment institution said that the interest income from third-party payment reserve funds is a piece of cake that payment institutions are reluctant to give up, so the motivation for payment institutions to promote centralized custody is very weak.

"The interest income from the customer reserve funds of payment institutions and bank settlements is calculated according to the average daily amount of funds deposited and the method of agreement deposits. This means that the higher the amount of customer reserve funds deposited by payment institutions, the higher the interest given by the bank." The above-mentioned payment institution personnel said that the price range of agreement deposits is basically around 3% annualized, and the highest can reach more than 4%. "The average daily deposit amount of reserve funds of second-tier payment institutions can reach 3 billion to 5 billion, which means that a second-tier payment institution can obtain more than 100 million in reserve fund interest from the bank in a year, which is much higher than the outside world's estimates. Not to mention industry giants such as Alipay and Tenpay. According to the 21st Century Business Herald, a person from a payment institution in Shanghai told reporters that its annual interest income is about 100 million yuan. According to his understanding, the interest income of large payment institutions can reach 10 billion yuan.

Take the Hong Kong Stock Exchange-listed company Huifu Tianxia as an example. The company's prospectus disclosed that Huifu Tianxia's interest income (mainly from customer reserve balances) was RMB 26.1 million, RMB 38.3 million, and RMB 61.6 million in 2015, 2016, and 2017, respectively. "As we deposit more and more customer reserve funds into the centralized reserve fund account, our interest income from customer reserve funds may gradually decrease in 2018. If the proportion continues to increase, our interest income will continue to decrease." Huifu Tianxia said in its prospectus.

Obviously, for payment institutions, when the reserve funds are 100% deposited, the good days of "making money while doing nothing" will come to an end.