The central bank PBoC has set July 1st as the deadline for the new regulation to take effect. The new regulation requiring a lot of ID verifications looks not only to largely eliminate the dodgy P2P financing operated by small firms (there are thousands of them), but also to cause third party online payment and fund management by large companies (such as Alibaba and Tencent) to step back quite much.

It separates Internet financing into 3 categories: I. online payment in small amounts; II. online payment in medium amount (like less than 100K yuan per year); and III. online payment in large amount plus fund management. Users of the services will have to verify their ID's with the service providers. Under category I, a simple upload of ID card will suffice. For category II, one has to provide three ways to verify one's identity. Various providers require different ways. Alibaba requires uploading of personal ID, taking live facial shot, and providing 2 verifiable banking accounts from different banks. For category III, it is said that one has to provide 5-7 ways to cross identify oneself, which people say are very difficult to do.

Take Alibaba's service for example (before the new regulation), as one opens an account online, one provides one verifiable mobile phone number, links one bank account so that funds can be transferred. One can choose to transfer any amount of money into the Alibaba account. The default account is interest free. Alibaba provides a couple interest paying vehicles (one money market fund very popular) under the account which one can instantly transfer money to and from. The latter has been the best banking service in China that no other state banks offer with the ease of money transfer together with a high interest generation. When one makes an online payment, one provides the phone number registered with the account and a preset password, then confirms it with an instant passcode received through SMS. The money of the payment can be from Alibaba's default account, and/or an interest paying account, and/or the linked bank account.

With the new regulation, category I will be small payments from the default account and/or the linked bank account. Category II will be medium payment from the default account and/or the linked bank account, however, one time money outflow from the default account is limited to 5000 yuan with the rest having to come from the linked bank account. Category III relates to all the interest paying vehicles.

The government and PBoC say the new regulation is to make Internet a safe place. Many people say it is more focused on protecting the business of state banks.


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