On November 1, 2012, the Chinese government issued new payment service measures (“Measures”) governing payment services offered by “Non-Financial Institutions,” i.e., non-banks (click here for the Chinese text and click here for an English translation). Anyone engaging in (i) payments through networks, (ii) the issuance and acceptance of prepaid cards, (iii) the acquisition of bankcard payments, or (iv) other payment services must obtain an administrative license from the People’s Bank of China (“PBOC,” the central bank of China).
The following brief analysis will focus on prepaid cards, which are regulated by the PBOC and the Ministry of Commerce of China (“MOFCOM”). As discussed, the Measures are likely to present challenges to those attempting to comply with them. We invite your further questions and comments.
The Measures broadly define “Prepaid Cards” as cards that are issued for profit, use passwords, have magnetic stripes or electronic chips, and contain prepaid value usable for the purchase of goods or services.
Closed-system cards (cards issued and redeemed by a single legal person) are expressly exempted from PBOC oversight by the Measures, as are cards used to disburse social benefits or to pay for public transportation or telecommunications bills. However, the closed-system exemption is not available if a prepaid card can be redeemed by other members of the same company group or brand chain. The Measures do not further elaborate on the definition of closed system cards.
MOFCOM also requires certain closed-system prepaid card issuers to obtain a license. In its recently adopted “Prepaid Card Rule” MOFCOM defines a prepaid card as a voucher of prepaid value, including physical cards in the form of magnetic stripe cards, chip cards, and coupons, as well as virtual cards functioning by password, serial code, or biometric information. Closed-system prepaid cards regulated by MOFCOM include those issued and redeemed by legal persons in the retail, hospitality, dining and public service industries.
Both PBOC and MOFCOM appear to assert jurisdiction over prepaid cards issued and redeemed by commonly owned affiliates or franchisees. Issuers subject to this dual oversight are already expressing confusion about which agency’s rules to follow, and industry observers have speculated that PBOC and MOFCOM did not coordinate with each other before releasing their respective rules.
For example, PBOC requires prepaid card issuers to obtain a third party payment processing license before commencing operations. MOFCOM, by contrast, allows prepaid card issuers to commence operations before filing a registration statement with the Ministry. Given the difficulty of obtaining a third party payment processing license from PBOC versus the relaxed requirements for a registration statement from MOFCOM, it is likely many businesses will opt for the less burdensome MOFCOM process. But whether such registration will insulate card issuers from PBOC regulation is unknown, as is whether the agencies will coordinate jurisdiction or amend their rules to clarify which of them will regulate affiliate and franchise cards.
Notwithstanding the regulatory overlap, the agencies’ basic regulation of prepaid cards is very similar. Both PBOC and MOFCOM require that card issuers categorize their prepaid cards into two classes: (i) prepaid cards with the owner’s information and (ii) prepaid cards without the owner’s information.
Further, both PBOC and MOFCOM require that:
- Cards with the owner’s information have a pre-stored value cap of RMB5,000, while cards without the owner’s information have a pre-stored value cap of RMB1,000;
- Card issuers must collect information regarding a purchaser or its purchasing agent with respect to purchases prepaid cards of either type if they have a collective pre-stored value at RMB10,000. Such information must be stored for at least 5 years;
- Card issuers must ensure that card purchases are made solely by means of wire transfers where an individual or legal person purchases prepaid cards in with a collective value of RMB 5,000 or more at one time, or if an individual purchases prepaid cards with a collective value of RMB50,000 or more at one time;
- Card issuers may not impose any expiration date on prepaid cards with the owner’s information, but may impose a 3-year expiration date on prepaid cards without the owner’s information. If pre-stored value remains on prepaid cards without the owner’s information at the time their valid term expires, the card issuer must offer term extension, re-activation or exchange services; and
- Card issuers’ contracts must conform to the applicable financial statutes and the issuers must publish redemption rules that likewise conform to statutory requirements.
PBOC imposes its own, additional regulatory requirements on card issuers. For example, PBOC requires that card issuers must distribute prepaid cards themselves, and can only use distributors to sell prepaid cards whose pre-stored value is RMB200 or less. In addition, PBOC requires that card issuers host their prepaid card management systems within China, and bar them from outsourcing their prepaid card management functions to a third party. PBOC further requires that different prepaid cards issued by different issuers must not bear the same brand or logo, and that card issuers must also issue prepaid cards that can be settled to any extent in the bank card settlement channel.
MOFCOM Fund Management Regulation
MOFCOM imposes some of its own requirements on prepaid card issuers’ business that rival PBOC’s stringent obligations. Prepaid card fund management ranks near the top of MOFCOM’s concerns, and the Ministry claims that its strict supervision protects the interests of prepaid card customers.
Under the MOFCOM’s “Prepaid Card Rule,” revenue received by a prepaid card issuer can be used only in its main business and cannot be used for any investment or finance purpose, such as real estate, equity or securities investment, or lending. In addition, for the card issuers whose main businesses are retail, hospitality or dinning, revenue from prepaid card sales cannot exceed 40% of revenue from their main business in the preceding year.
Further, MOFCOM requires that a card issuer deposit a certain percentage of card revenues into a reserve account at the end of each quarter. The percentage varies. For example, if the card issuer’s revenue from prepaid card sales is more than 5 million RMB in the prior calendar year, the issuer must deposit 20% of its quarterly revenues in the reserve account. If the revenues are derived from closed-system cards involving a single legal person, the issuer must deposit 30% of its quarterly revenues in the reserve account. If the revenues are associated with cards involving a franchise operation, the issuer must deposit 40%.
“Philosophical” Differences between MOFCOM and PBOC
In general, MOFCOM takes a relatively light approach when regulating the prepaid card business, allowing card issuers freedom to operate in the market unless a specific violation of MOFCOM rules or specific public interests is shown. Violators initially face an order for rectification, or, in the case of serious infractions, administrative fines up to RMB30,000 for each occurrence.
PBOC takes a tighter regulatory approach because it believes that its responsibilities include not only protecting the public from nefarious business activities but also maintaining a stable and smoothly functioning financial system. Thus, for example, PBOC restricts co-branding arrangements, on the theory that this limits interest rate arbitrage.
PBOC also extends its regulation to merchants participating in issuer networks. PBOC requires that card issuers delist any merchant subject to criminal investigations or found to have committed certain statutory violations, such as money laundering or gambling, disclosing card or related transaction information or falsifying transactions. The most severe punishment available to PBOC is cancellation of the card issuer’s prepaid card business license.