THE DEVELOPMENT AND REGULATION OF MOBILE PAYMENT: CHINESE EXPERIENCES AND COMPARATIVE PERSPECTIVES.

• Author: Huang, Robin Hui

1. INTRODUCTION 4 II. BACKGROUND: THE MARKET, ENABLERS, AND RISKS 6 A. The Market and Typology of Mobile Payment 6 B. The Key Enablers 9 1. Technological Advancement 10 2. The Wide Acceptance bv the Local Consumer 11 3. Competitive Advantages 12 C. Risks of Mobile Payment 14 I. Unauthorized Transactions and Fraud 14 2. Money Laundering and Terrorist Financing 15 3. Data Security and Privacy Issues 16 4. Operational Mistakes and Misconduct 17 III. THE REGULATORY REGIME IN CHINA 18 A. Overview 18 B. Entry Threshold and Exit Mechanism 20 C. Management of Clients' Reserves 21 D. AML Measures 23 E. Consumer Protection 24 IV. INTERNATIONAL EXPERIENCES 26 A. The US 26 B. The UK 29 C. Singapore 31 D. Hong Kong 34 V. Analysis and Suggestions 36 A. Overview 36 1. Strengths of the Chinese Law 36 B. Weaknesses of the Chinese Law 37 C Improvement Suggestions 38 7. Entry Threshold and Exit Mechanism 38 2. Management of Clients' Reserves 40 3. AML 41 4. Consumer Protection 41 VI. CONCLUSION 42 I. INTRODUCTION

   The last decade witnessed a profound change in the payment landscape, with the wide-spread use of mobile payment having significantly transformed our lives and habits. Although mobile payment did not originate in China, China has successfully placed itself at the forefront of the global market in terms of the scale and market volume. According to PricewaterhouseCoopers' Global Consumer Insight Survey 2019, (1) the penetration rate of mobile payment in China is 86%, while the global penetration rate stands at 34%. Mobile payments can be seen in use in almost every corner of China, accepted by both humble street vendors and luxury brand stores. Even beggars accept mobile payment by displaying a QR-code printed on cardboard to pedestrians. (2)

   Probably due to the rapidly evolving nature of the mobile payment industry, however, there is today no universal definition of what exactly constitutes a mobile payment. The European Commission offers one useful definition, under which mobile payments refer to "payments for which the payment data and the payment instruction are initiated, transmitted, or confirmed via a mobile phone or device. This can apply to online or offline purchases of services, digital or physical goods." (3) Despite the large variety of forms a mobile payment may take, its essential function is to resolve the lack of trust between payors (such as consumers) and payees (such as merchants) by having the payment platform serve as an intermediary between them. The sum given by the consumer payor for the goods would be first forwarded to the payment platform and would only be transferred to the merchant payee when the transaction has been completed and confirmed by the payors. (4)

   From the perspective of financial innovation and regulatory challenges, mobile payment is very different from online banking and thus both forms should be distinguished. Online banking is essentially "old wine in a new bottle," insofar as it provides traditional banking services through internet-based channels. Third-party mobile payment, on the other hand, represents an innovative and potentially disruptive financial services. Moreover, while banks have long been subject to the conventionally well-established supervisory system, (5) the emerging third-party mobile payment service providers, mainly tech firms, present new regulatory challenges. Hence, this paper will focus on the issue of third-party (non-bank) mobile payment.

   The rapid development of mobile payment can be largely attributed to the significant advantages it possesses vis-a-vis the traditional payment. (6) Consumers can enjoy the convenience and speed of a cashless society, no longer restricted by geographical factors when transferring money or paying for goods. Merchants, on the other hand, can reduce their transaction costs and attract more consumers via a mobile payment platform. Meanwhile, the development of mobile payment has brought a range of legal, regulatory, and risk-management challenges, such as fund security, cybersecurity, and privacy issues. (7) Regulators are facing unprecedented difficulties as products and services related to mobile payment are increasingly complex and interdependent. It is not an easy task for regulators to balance multiple competing interests, such as financial stability, technological innovations, and consumer rights. Onerous regulations may stifle innovation and impede the growth of the industry, while loose regulations may leave consumers unprotected.

   Following this introduction, Part II will first briefly introduce the current mobile payment market and then explore the key enablers that contribute to the success of mobile payment in China. It will also discuss the various risks inherent in mobile payment, risks that call for regulatory attention. Part III will give an overview of the current regulatory regime in China, focusing on four aspects: the entry threshold and exit mechanism, restrictions on the management of consumer funds, crackdown measures on financial crimes (primarily for Anti-money Laundering), and consumer protection (data security and the liability distribution upon the unauthorized payment). Although China has in many ways led the world in the development of its mobile payment infrastructure, it is of crucial importance to look to the experiences of other jurisdictions, given that speed and scale do not necessarily entail quality and sustainability in the payment system. Part IV will thus examine regulations affecting mobile payment in four other jurisdictions: the US, the UK, Singapore, and Hong Kong. This is followed by Part V, which will evaluate the Chinese law from a comparative perspective, pointing out its strengths and weaknesses, as well as making suggestions for improvement. The last part will provide a unifying conclusion.

2. BACKGROUND: THE MARKET, ENABLERS, AND RISKS

   1. The Market and Typology of Mobile Payment

      In recent years, markets around the world have embraced the unstoppable global trend towards mobile payment. The global mobile payment market was worth USD 368 billion in 2017. Over the next two years, it surpassed USD 745.7 billion. (8) As a global frontrunner in this area, China has the biggest mobile payment market, accounting for almost half of the world. (9) In 2017, approximately 65% of all mobile users in China used their mobile phones as their wallets. Around RMB 38 trillion was spent through mobile payment in 2016. (10) According to the data of the People's Bank of China (PBOC), the Chinese central bank, China saw 101.43 billion mobile payment transactions in 2019, with a total value of RMB 347.11 trillion. (11) The US mobile payment market, although showing an incremental growth, is 6 times smaller than that of China. (12) Alipay, a Chinese mobile payment platform associated with the e-commerce giant Alibaba group, is the world's biggest mobile payment platform now with over 1.2 billion active users. (13)

      In general, mobile payment can be classified into two broad categories, namely: (1) remote mobile payment and (2) proximity payment. Each category can be further divided into several subgroups based on the technologies involved.

      Remote mobile payment can be made through premium short message service (SMS) or the Internet. SMS payment is the simplest method of mobile payment. Consumers are required to create an account with a mobile network operator to link their accounts to their bank accounts. (14) To make a mobile payment, SMS messages are sent between users and the mobile network operator to provide transaction details; once the user verifies the payment by entering his password, the mobile network operator will transfer the funds from payor to payee. (15) Although this method is somewhat simpler than the other payment methods discussed below, SMS can suffer from transmission delays between users and mobile network operators, and even potential transmission failures, (16) which hampers the use of SMS mobile payment in the global markets.

      Remote mobile payment can also be made through the Internet, namely the Wireless Application Protocol (WAP). (17) The WAP is a technical standard used in wireless devices for accessing and transmitting information over a mobile wireless network. In WAP mobile payment, mobile applications are created by financial institutions; the various players in mobile payment, such as merchants, third-party mobile payment service providers, and consumers, are all linked to these mobile applications. (18) In China, the most-used WAP mobile payment applications include AliPay and Tenpay. (19)

      Proximity payment, also called 'mobile point of sale payment,' involves the use of mobile phones to pay for goods in shops: the retailer uses a piece of hardware that can interact with the hardware in consumers' mobile phones. (20) Currently, Near Field Communications (NFC) and Quick Response Code (QR code) are the most common technologies used in proximity payment.

      The NFC is a "wireless protocol which allows for an encrypted exchange of payment and other data at a close range." (21) NFC hardware, embedded in the customer's mobile phone by its manufacturer, is scanned by the retailer's NFC reader installed at the point of sale. The NFC reader scans the consumer's payment account credentials when he taps or swipes his mobile phone on the reader. (22) Typically, NFC technology is used alongside some forms of mobile wallets, either prepaid cards or accounts that are saved in a mobile application. The NFC uses a "secure element" to record consumers' payment credentials on their mobile phones for access to retail shops. (23) NFC technology is considered to be the predominant mobile payment method adopted in the global market; it is used as a primary technology in Apple Pay, Samsung Pay, and Google Pay. (24)

      The QR code was originally developed as a "mobile advertising tool" but has now extended to the use of mobile payment. (25) The QR code is a two-dimensional...