AN ANALYSIS OF THE PBOC'S NEW MOBILE PAYMENT REGULATION.

• Author: Liu, Andrew

In 2016 alone, China saw $9 trillion in mobile payments--in contrast to a comparably small $112 billion of mobile payments in the United States (Abkowitz 2018). The use of mobile payment systems such as Alipay and WeChat Pay are widespread in China, with users ranging from beggars to lenders to criminals. Previously, the mobile payments landscape was largely untouched and unregulated by the Chinese government because of its relative insignificance in the Chinese economy. However, with the explosive growth in mobile payment transactions, the People's Bank of China (PBOC) implemented a new mobile payment regulation on June 30, 2018. Most notably, the government will require all mobile payments to be cleared through the PBOC, and hence, all mobile payment transactions will begin to touch the hands of the Chinese Communist Party (CCP) (Hersey 2017).

The PBOC's stated reasoning for implementing this regulation is to curb money laundering and fraud. While those are valid concerns, it is unlikely that there are not additional motivations for the new regulation. In this article, I analyze the effects this new regulation has had and will likely have on the various mobile payment system stakeholders, competitors, and users, and also uncover what underlying motives the PBOC has in implementing the regulation.

Previous literature has analyzed the security of Chinese mobile payment networks and competition, regulation, and innovation in the mobile payment industry, but no formal literature has been written to this point analyzing the PBOC's new mobile payment regulation. Liu (2015) takes a deep dive into Alipay's user service agreement and analyzes its security; Liu, Kauffman, and Ma (2015) investigate how regulation affects innovation and competition between mobile payment platform providers. This article adds to the existing literature by analyzing the observed and probable effects of the PBOC's new mobile payment regulation.

In this article, I find that China's new mobile payment regulation gives the government access to the proprietary user data of mobile payment giants and will not improve mobile payment security. Instead, the new regulation will compromise the incentives of mobile payment providers and funnel mobile payment transactions into more illicit and unsecure channels.

A Brief History of Mobile Payment Regulations in China

Until recently, the Chinese government has largely taken a hands-off approach toward regulating mobile payment transactions. Users of third-party mobile payment platforms such as Alipay and WeChat Pay have been able to make transfers without transaction caps and other restrictions. Since the transactions are routed and directly settled through a third-party mobile payment platform provider, banks cannot see transaction details. For instance, a transaction for a pair of new sneakers settled through Alipay would show up to a bank as "Alipay," not the name of merchant selling the sneakers; in addition, the merchant's location would also be omitted (Wildau 2017). As a result, mobile payment providers have enjoyed exclusive access to billions of proprietary data points describing consumer behavior. Importantly, this means that the government does not possess this proprietary data, and, thus, is missing an enormous amount of information about its citizens that it otherwise could have obtained.

The lack of regulations on mobile payment platforms has indeed allowed for money laundering and other illicit activities to occur over the mobile payment networks, but simultaneously, the lack of regulations has also allowed for mobile payments to grow explosively and transform and improve the way consumers and merchants buy and sell their goods and services (Abkowitz 2018).

The PBOC began regulating mobile payments on June 30, 2018, by requiring all mobile payment transactions to be routed through a central clearing house, called the Online Settlement Platform for Non-Bank Payment Institutions. Consequently, transactions completed over mobile payment networks can no longer be settled directly through the mobile payment platform provider and must be sent to the centralized clearinghouse for settlement. This means that die previously proprietary consumer data collected by mobile payment platform providers like Alipay and WeChat Pay is now sent to the centralized clearinghouse, where other mobile payment platform providers and banks have access to this invaluable data (Wildau 2017).

The government's stated reason for this regulation is to make mobile payments more secure for users and to curb illicit activity over mobile payment networks, as the central bank and government now have the ability to inspect transaction details for all transfers made over mobile payment platforms and can identify and investigate fraudulent or other illegal activities occurring over mobile payment platforms (Zhang 2017).

However, this is far from the only motive involved. The PBOC and CCP have a host of additional uses for this data--mobile payments have become such an integral part of China's consumer economy that mobile payment transactions paint a detailed picture of an individual's daily habits, including their consumption preferences, whereabouts, and spending power (Abkowitz 2018). Thus, by obtaining mobile payment transactions data, the PBOC and CCP gain access to an intimate view of the daily behavior of a substantial...