China's 'No Direct Access' Payment Regulation Revisited

In August 2017, the People's Bank of China (PBOC, China's central bank) issued its 'Notice on Non-bank Payment Organisation Network Payment Operations Shifting from the Direct Model to China NetsUnion Platform Handling', which banned third-party payment platforms in China from directly accessing bank accounts. Pursuant to this new payment regulation which is also called 'No Direct Access' regulation, each transaction of these third-party payment institutions needs to be sent to the non-bank payment organisation internet payments and clearing platform built under the approval of the PBOC for unified settlement. This regulatory move of the Chinese authority which was referred to as '630 Daxian' in China (Daxian in Chinese means 'deadline') was soon widely discussed across all vertical markets of payment. Among them, the foreign exchange market in which traders need to continue to deposit and withdraw funds was among the worst hit.

Even today, when more than two years have passed since the '630 Daxian', brokers operating in China still face payment channel problems such as "customers' bank cards were frozen after they withdrew their funds". Given its long-standing impact, brokers and payment services companies who want to expand presence into the Chinese markets had better get the ins and outs of the 'No Direct Access' regulation first.

What Is 'No Direct Access'?

To understand 'No Direct Access', we need to look at what 'Direct Access' is and what the direct access of third-party payment platforms to bank accounts means. Prior to the '630 Daxian', third-party payment institutions usually opened accounts with several commercial banks and performed inter-bank clearing and settlement all by themselves. This meant those third-party institutions were performing the inter-bank clearing function of the central bank or clearing organization. The aim of the 'No Direct Access' regulation is just to remove third-party payment institutions from these functions and ensure that all online payment services involving bank accounts are processed via the non-bank payment organisation internet payments and clearing platform built under the approval of the PBOC.

Why Implement the 'No Direct Access' Regulation?

China's third-party payment industry is growing the fastest in the world. In the several years before 2017, the rapid development of China's e-commerce, the increase in demand for payment services by small and micro merchants, and the advancement of payment technology all supported the fast growth of the third-party payment market. By 2017, the transaction volume of this market climbed by 89.23% YoY to 152.9 trillion yuan.

Third-party payment services providers in China are divided into two categories: independent and non-independent. Independent providers refer to those that are not owned or controlled by financial institutions or large e-commerce platforms. Their neutrality can help them gain the trust of merchants and their independence makes it easier for them to integrate a wider range of payments gateway and provide multi-channel payment solutions.

In 2017, the transaction volume of China's independent third-party payment market reached 14.8 trillion yuan with a YoY increase of 80.5%. With its increasingly important role in promoting the innovation of payment solutions, the independent third-party payment market was expected to expand further. Its transaction volume was estimated to grow to RMB 57.1 trillion in 2021 with a compound annual growth rate (CAGR) of 40.2% from 2017 to 2021.

Customers of the independent third-party payment industry are mainly companies in its vertical markets. Independent third-party payment institutions can provide customized solutions and one-stop services to meet the personalized requirements of different companies and industries, facilitating the free flow of capital between the upstream and downstream industries of a market.

However, many problems of the third-party payment industry were exposed as China's financial regulators went forward with the deleveraging campaign and continued to enhance the regulation of online payments. Because third-party payment institutions had direct access to bank accounts, large amounts of funds had flowed into various industries through the third-party payment platform without the supervision and control of the central bank, which created a series of grey zones for payment, bringing a lot of social problems. Therefore, in 2017, the PBOC decided to take actions to rectify the third-party payment industry and deployed the infrastructure for the 'No Direct Access' regulation by establishing a unified clearing center, NetsUnion Clearing Corporation (NUCC).

Forex Payment Methods in China with the 'No Direct Access' Regulation

Prior to the '630 Daxian', most brokers supported the use of third-party UnionPay to deposit online, which was convenient, fast and safe for traders. However, because of the tightened regulatory environment after the '630 Daxian', brokers now only support payment methods including private account transfers, IBs transfers, wire transfers, and crypto deposits. These methods all have obvious shortcomings.

Although payment is only a small part of the foreign exchange trading business, its impact on the entire forex industry cannot be ignored. Fazzaco, as a leading information portal for the entire forex trading ecosystem, provides a lot of information related to brokers and payment companies worldwide, as well as professional analysis of the status quo of China's payment industry. If you plan to start a brokerage or payment services business in China and want to know more about China’s third-party payment market, please visit Fazzaco​.