PBoC’s halting to virtual credit cards shouldn’t be over-interpreted

On March 14, it is said that the People's Bank of China (PBoC) issued urgent document to suspend the usage of virtual credit cards of Alipay and Tengcent and also mobile payment service like the barcode payment. The document released by the PBoC thinks that the above-mentioned innovation may pose a threat to the information and capital security of the customers and needs further study.

The market interprets it as the virtual credit card and barcode payment infringe on the interests of China UnionPay which is directly related with PBoC; and some commentators point out that PBoC is nipping the financial innovation and this act has violated the principle of “government departments must not do anything unless it is mandated by the law” put forward by Premier Li Keqiang.

The suspension is not a kind of tamping down new products and not even protecting the interest of Unionpay

First of all, it is biased to criticize PBoC for protecting the interests of Unionpay. During the past ten years, the reform made by PBoC in the central ministries and commissions was relatively great with a very obvious market-oriented inclination. Take the online payment and settlement as example, though PBoC issued policies to standardize the third party payment market, but not excessively suppress the development of the third party payment and it successively granted more than 260 license, and as a result, nearly all qualified domestic organizations got the access license. This measure is the biggest action which damages the interest of Unionpay. The official from PBoC who is in charge of the payment and settlement department takes a stand for many times on this issue with no remarks expressed to suppress the development of third party payment or resist the financial innovation.

Secondly, PBoC is to suspend but not “stop” it this time. The document released requires relevant companies to report more detailed information such as their technological means, customer rights and interests guarantee mechanism and emergency disposal to PBoC and at the same time requires them to “assess the compliance and security of off-line barcode payment and virtual credit card in an all-round way” but not to close down this product. We can see from the document that PBoC doesn’t understand the details of this product and the fraud complaint about the off-line barcode payment service caused by Trojan software happens frequently.  Under the environment of the existing system, we needn’t question more about the action of PBoC.

Why does PBoC suspend the usage of the virtual credit card?

Let’s go further into this issue, how do the virtual credit card and barcode payment of Alipay and WeChat payment touch the supervision nerve of PBoC? It is easy to understand that the problem of barcode payment is more related to security. There are already many barcode fraud cases. I'm afraid it should be taken into consideration how to cope with fraud in this more elusive payment means.

Look back to the credit card. As the tool of personal consumption finance, people are required to visit and examine the applicant personally when approving the granting of the traditional credit card. This idea includes two key elements:  

First, autograph. Even if you apply on the Internet, you are required to type the materials and sign them and then mail them to the credit card center. After receiving the card, you need to sign on the back of the card and meanwhile the receiving unit is required to check the signature. The signature is treated as the main evidence when objection of credit card consumption occurs.

Second, the applicant is required to fill in his (her) unit’s name, address and telephone number. A permanent job is one of the main bases for verifying the credit of the credit card because a job promises the refunding ability. Profession, position and seniority are also main standards for determining the line of credit.

But the verification of the virtual credit card is unable to satisfy the above-mentioned two key factors. Because it is a virtual credit card, the verification of all information on the user is done on the Internet and people are unable to confirm information face to face, and autograph does not exist either. The cell-phone number and payment password are estimated to be the only channel for authorization identification. While any dispute occurs, the user often cannot verify the responsible part for the stolen money due to the stolen cell-phone number and password and the cost for the user’s lawsuit is very high; though the payment company would promise to compensate the losses of the user, it is very difficult for it to really implement the compensation because it does not know whether the user is lying or really deceived.

As for the virtual credit card, there is another problem with being unable to confirm the user’s identity face to face, and that is the possibility of usurpation of a large number of ID card numbers. Though the quantity of the credit card in China is enormous, it is centered in first/second/third tier cities and the residents living in prefecture-level cities or their administrative divisions have a very small number of credit cards. The users’ cognitive level is a very important factor, but the more important reason lies in the fact that many of them do not have permanent jobs and do not comply with the conditions for applying for the credit card; and meanwhile the number of POS machine is very small, so, even if people get a credit card, they have no place to use it. Once the credit card is popularized in small and medium-sized cities and the countryside, it will be a common thing to usurp other people’s ID card to apply for the virtual credit card.

It is difficult to avoid this kind of behavior. In the present virtual credit card scheme, the mechanism for protecting consumers' rights and interests against infringing act is not obvious.

Seen from a deeper perspective, the intervention in the virtual credit card by PBoC is not merely out of the consideration of payment and settlement, but out of the consideration of the monetary policy. The virtual credit card is undoubtedly a kind of creation of credit. The large number of users, even if the credit line is 1,000 yuan for each person, the scale of credit will reach 10 billion if there are 10 million applicants. How can PBoC ignore the newly-increased currency?

PBoC and Alipay: which one is right?

There is no denying that IT companies are very sensitive to the market demand. The products developed by them can cater to the demand of the majority of the customers and can effectively promote the efficiency and convenience of the deal. But in the financial field, obviously efficiency is not the only important factor. All actions that raise the efficiency would basically bring the risk. The staff members of IT companies are often not familiar with financial affairs and their sense of protection against the risk is not very strong.  

The dilemma of PBoC is that what it faces is not only the pressure of financial innovation by the payment organization, but also the large number of complaints from the financial consumers. This is also the reason why the relevant regulators have to establish the “protection bureau of financial consumers’ rights and interests”. To PBoC, the consumers may be a disadvantaged group and also a group it needs to consider first.

Suspension of the virtual credit card is perhaps due to the excessive conservativeness of PBoC which has not enough toleration for the risk coming from the financial innovation. The excessive protection for financial consumers makes them lose their own risk judgments. But, it goes too far to conclude it as PBoC tamping down innovation and protecting Unionpay. After all, PBoC didn’t close it down and it was finding out about the facts. So, its action shouldn’t be overly interpreted. As to Alipay and WeChat, it is their obligation to directly face the requirement from the supervision, standardize card-issuing norm of the payment/virtual credit card and observing the existing financial rules. More criticism for supervision should wait until the time PBoC finally stops the usage of the virtual credit card.