China’s booming cross-border e-commerce pits Alipay, WeChat Pay against the world

(By Caixin journalists Zhang Yuzhe, Ding Feng and Qing Na)

The explosion in China’s cross-border e-commerce fuelled by online platforms such as Temu, Shein and Amazon, as well as flourishing international tourism, has led to a boom in business for companies that process and settle international payments.

But it has become a headache for financial watchdogs and banks who are increasingly worried that the current system lacks transparency on cost and the origin of transactions, and increases the potential for fraud and money laundering. As nonbank payment service providers (PSPs) like Alipay and WeChat Pay transform the landscape of cross-border payments with a one-stop shop for services for merchants that is cheaper and more efficient, they are also taking business away from the country’s commercial banks that have traditionally dominated the sector.

A regulatory overhaul of the cross-border digital payments processed by nonbank PSPs was proposed by the People’s Bank of China (PBOC) in 2021 to align their practices, which mainly use QR codes, with the so-called “four-party model” used internationally.

This would improve interoperability with overseas cross-border payments systems and strengthen domestic watchdogs’ monitoring capabilities. But little progress has been made, partly due to the complexity of an ecosystem that involves a multitude of parties operating with different payment infrastructure, and in different countries, time zones and currencies.

Cross-border e-commerce in China is booming — the total value of imports and exports through this channel amounted to 2.38 trillion RMB in 2023, a 15.6% increase over 2022, according to government data. A report released by iResearch Inc. indicates that from 2017 to 2022, the average annual compound growth rate of cross-border e-commerce transaction volume in China was 24.4%, more than double the 10.9% growth rate of total imports and exports.

Exports have driven the increase in cross-border e-commerce, with their contribution by value more than tripling in the five years through 2023, data released in May by the General Administration of Customs show. In nonbank PSPs’ cross-border online business in 2023, the scale of payments and receipts for e-commerce exporters exceeded 1 trillion RMB, an 11% increase over 2022, according to estimates by BoTong Analysys, an industry consulting firm.

The growth in overseas tourism has also contributed to the jump in cross-border payments, especially in Asia, a top destination for Chinese visitors. An employee in the credit card department of a Chinese joint-stock bank said that QR code payments using Alipay or WeChat Pay now account for over 50% of outbound Chinese payment transactions in Southeast Asia and Japan. Although much less common in other major tourism destinations such as the US and Europe, mobile payments using the QR code system are increasingly being accepted in shops, restaurants and hotels.

The Chinese government has been actively encouraging the expansion of the cross-border payments industry and lowering the cost of transaction processing for merchants. In June, the PBOC, the Ministry of Commerce, the National Development and Reform Commission and six other departments jointly issued a document calling for support for “qualified banks and nonbank PSPs to provide efficient and low-cost cross-border fund settlement services for cross-border e-commerce enterprises”.

Simplifying and speeding up cross-border payments is not just an issue for China. It has been a concern for international leaders too. In 2019, finance ministers and central bank governors of the G20 group of nations instructed the Financial Stability Board, the Bank for International Settlements and other international standard-setting bodies to develop a roadmap to address the challenges facing cross-border payments. In November 2020, G20 leaders endorsed a roadmap to make cross-border payments cheaper, faster, more transparent and accessible by 2027. And in 2021, they set a target that the global average retail cross-border payment charges should not exceed 1% of the value of the transaction.

China’s commercial banks have traditionally dominated cross-border payments, carried out via what’s known as a correspondent banking model, where banks in different countries open accounts with each other and transfer funds to and from their customers — individuals, businesses and financial institutions — using the SWIFT international messaging system.

But this process is relatively inefficient, slow and costly. It is also unsuitable for the rapidly growing world of cross-border e-commerce and international tourism dominated by retail customers and small businesses who do not have the scale to be able to afford the fees charged by banks.

Nonbank PSPs have stepped in to meet the growing demand for cheaper, faster and more efficient cross-border payment processing and have, to a large extent, made merchants less dependent on banks.

They act as intermediaries between customers who make payments and businesses or other individuals who accept them. Many offer merchants a one-stop shop for a process that starts with the customer hitting the “pay” button or swiping their card and ends when the money reaches the seller’s bank account. In between is a complex payment infrastructure involving point-of-sale and payment gateway services, payment processing and settlement that involves moving money from one country to another through banking systems, risk management services and currency exchange and fraud prevention services.

Domestic players who already hold nonbank payment licenses from the PBOC include Alipay.com Co. Ltd., Ant Group Co. Ltd.’s subsidiary operating the cross-border Alipay+ platform, Tencent Holdings Ltd.’s Tenpay Payment Technology Co. Ltd., the licensed operating company of WeChat Pay, ChiNext-listed Lakala Payment Co. Ltd., as well as lesser-known companies such as Allinpay Network Services Co. Ltd.

Other nonbank PSPs with cross-border payment services have also obtained domestic licenses, often through acquisition, including Hangzhou-based Lianlian Digitech Co. Ltd. and Hangzhou PingPong Intelligent Technology Co. Ltd. Foreign cross-border payment platforms have also joined the fray either through joint ventures or acquisitions, such as PayPal Holdings Inc. and Tencent-backed Airwallex.

In China, Alipay and WeChat Pay have a stranglehold over the domestic e-commerce market and dominate the provision of online nonbank payment services from one end of the chain to the other. For cross-border businesses, they operate in a closed-loop proprietary system that deals with every aspect of the payment process and usually uses a payment model based on QR codes rather than contactless payment or bank cards.

China’s banks are concerned about the use of this closed-loop system in cross-border payments both for transparency and business reasons. The system can work by pooling the accounts of merchants into one main master account. Nonbank payment platforms like Alipay also clear and settle payments directly with individual banks. Although it can make payment processing faster and cut costs, the lack of information about the location of individual transactions or the name of the merchant exposes banks to greater risk of fraud and money laundering, industry insiders told Caixin. It could also pose regulatory and compliance risks, they said.

“If a bank cannot distinguish the person initiating a transaction and the actual location of the payment, how can it manage risks?” the employee in the credit card department of the joint-stock bank said.

Overseas purchases made through the QR code system on the Alipay and WeChat Pay platforms can show up as domestic transactions rather than foreign ones, and as transaction fees are higher on overseas purchases, banks get a lower share of the transaction fee.

For example, a Chinese individual visiting Japan links their credit card to Alipay, allowing them to use the card overseas to make payments by generating a code scanned by the merchant. Despite all payments originating in Japan, they show up on the consumer’s credit card records as being carried out in China. Transaction categories are roughly described as “entertainment” and the credit card issuer isn’t provided with the name of the merchant. Money sent to the merchant’s bank is shown as processing by “Alipay Singapore”, the company’s Singapore arm.

To the credit card issuer and China UnionPay Co. Ltd., the state-owned clearinghouse that facilitates cross-border payments, the transactions appear as domestic ones, industry insiders told Caixin.

By not specifying that the transaction took place overseas, the nonbank PSP has failed to present the bank with the full transaction information, which constitutes a violation of transaction processing regulations, a person close to UnionPay told Caixin. “Banks have already raised this issue multiple times,” the source said.

“A significant amount of our cross-border transactions are recorded as domestic transactions, which has been a source of concern for banks,” the bank employee told Caixin.

This lack of transparency also affects purchases made in China by foreign users who link their bank cards to the Alipay or WeChat Pay platforms, which has been one of the key efforts by the two PSPs to respond to the government’s call to make digital payments easier for overseas visitors.

“Under the model of ‘foreign cards linked domestically’, Alipay acts as the primary merchant, and provides transaction information that only shows ‘Alipay+’ without specifying the name of the original, or secondary, merchant,” a person familiar with the international card business told Caixin. “If there are too many transactions under the same primary merchant, there’s a higher possibility that foreign bank card issuers will identify them as abnormal transactions, which could lead to a higher rate of rejection,” the person said.

Payment networks such as MasterCard are working with Alipay to resolve this problem, including adding the names of secondary merchants for high-value transactions, Caixin has learned from sources with knowledge of the matter. However, such information is still not included for low-value transactions, the person familiar with the international card business said.

Regulators have overhauled the system for domestic electronic payments as part of a broader attempt to curb internet-based financial risks. In 2017, the PBOC issued regulations requiring that from 30 June 2018, nonbank PSPs must use central bank-backed NetsUnion Clearing Corp. to process their online payment services involving bank accounts.

However, the “four-party” model used internationally has not yet been applied to the offshore segments of Alipay and WeChat Pay’s cross-border payments.

The shift to a four-party model would challenge Alipay and WeChat Pay’s existing business models, which involve processing, clearing and settling payments within their proprietary closed-loop systems. It would benefit international payment networks like MasterCard and Visa that provide clearing services.

It would also provide more security for bank card issuers who, armed with full information about every transaction, would be better able to identify suspicious transactions and reject payments if necessary.

Chinese regulators have been studying the shift to a four-party model for nonbank PSPs’ cross-border payments since 2020 because of concerns about weaknesses in issues such as compliance, know-your-customer requirements, money-laundering monitoring, foreign-exchange controls, and the transfer of data and personal information, sources with knowledge of the matter told Caixin. LianLian Digitech is among several companies being considered to take part in pilot programmes, they said.

On top of the technical aspects, the compatibility and ability of China’s payment sector to integrate with the international digital payments sector is another key factor for China’s central bank to take into account in evaluating whether this four-party model is achievable, a payment industry veteran told Caixin.

This article was first published by Caixin Global as “In Depth: China’s Booming Cross-Border E-Commerce Pits Alipay, WeChat Pay Against the World”. Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

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