PBOC suspends use of virtual credit cards

China's central bank hit the brakes on burgeoning virtual credit card services and barcode-based mobile payments as competition for the country's Internet finance services becomes cutthroat.

The move, made just two days after major Internet companies launched such services, has sent the shares of the relevant companies tumbling amid concerns that regulatory supervision may tighten in favor of the mammoth State-owned financial institutions.

The People's Bank of China issued a statement on Friday that halted virtual credit card products and face-to-face payment services, including QR code payments, ruling that this line of business was too risky.

According to the statement, both forms of mobile finance have gone beyond the traditional business models of point-of-sale machines and credit cards, which may have potential security loopholes.

In an additional blow, the directive also banned financial institutions from setting up accounts on third-party payment platforms, including Alipay and Tenpay, the payment arms of Internet giants Alibaba Group Holding Ltd and Tencent Holdings Ltd.

Feng Xinya from the payment and settlement department of the People's Bank of China told China Daily on Friday the central bank issued an official document on Thursday to its branches that are responsible for regulating financial services provided by Alibaba and Tencent.

"We asked the relevant online payment service providers to submit documents analyzing the security of their virtual credit card and QR code payment services. Then we will undertake a security risk assessment. During the process, we told the relevant companies to stop providing such services temporarily," Feng said.

She added further studies are needed to assess the security of such services and that the central bank has a responsibility to regulate new business models.

Tencent confirmed to China Daily that it has received the notice and is "closely negotiating" with the bank.

Alipay had "no comment" on the move when approached by China Daily on Friday.

But an Alipay official who declined to be named said in China many policies in relation to finance tend to protect the interests of "bulky stakeholders", namely State-backed banks.

To expand digital transactions, the Internet companies both announced on Tuesday they will allow "payment by credit" for users of third-party payment processors.

Both firms are partnering with mid-sized lender China CITIC Bank International Ltd and Zhong An Online Property Insurance Co, a joint venture co-invested by the pair along with Ping An Insurance (Group) Co of China Ltd, the world's second-largest insurer.

Following the move CITIC Bank's stock dropped 8 percent on Friday before trading was suspended. Tencent's shares were down about 4 percent in Hong Kong at the close of trading on Friday. Its market capitalization has more than doubled in the past year, a partial reflection of market confidence in its robust online finance business.

The financial sector in China has been shaken up in the past two years as Internet firms entered the arena by offering online saving funds with higher returns and online-to-offline payments.

Unlike physical credit cards, the virtual credit service will be bundled with users' Alipay or Tenpay accounts, allowing companies to assess customers before issuing lines of credit.

The time taken for the approval process by Alipay is significantly lessened to just one minute, bolstered by data analysis from the company's huge user base with its approximately 300 million customers in February.

Tencent's mobile chat app WeChat had more than 600 million users by the end of 2013. By scanning barcodes embedded in the respective mobile apps WeChat and Taobao Wallet, users can purchase items from brick-and-mortar stores using their smartphones.

Such mobile payment systems may displace debit cards and, more importantly, skirt services long monopolized by State-backed bank card processor China UnionPay Co Ltd, said market watchers.

"UnionPay typically takes a fee from every offline transaction. But when payment is made via QR codes, it is essentially cut out of transactions and its interests are severely dampened," according to a research note from China International Capital Corp.

The central bank order will deal a heavy blow to the online-to-offline strategy of many brick-and-mortar retailers, said analysts from Shenyin & Wanguo Securities Co Ltd.

The central bank said it will support the development of new forms of online finance but keep a watchful eye on them and prevent them from "crossing legal red lines", said Vice-Governor Liu Shiyu in February.

"There is a possibility that regulators simply want to rule out potential security issues with the QR code thing because it does have certain loopholes," said an IT specialist with China Mobile Communications Corp who declined to be named.

One problem may be that user information encoded in a barcode can be easily encrypted, he said. A merchant's barcode can be easily amended by a simple barcode generator and linked to a phishing site, posing huge security threats.

Phishing is an e-mail fraud method in which the perpetrator sends out a legitimate-looking e-mail in an attempt to gather personal and financial information from recipients. Typically, the messages appear to come from well-known and trustworthy websites.