Now licensed, third-party payment firms eye future profits

(Ecns.cn) -- It has been one year since the People's Bank of China, the country's central bank, awarded the first batch of licenses to 27 third-party payment service providers. Now, 101 such companies hold legal operating status, although many of them say profitability is a long way off, the Beijing News reports.

During the past year China's online third-party payment market has boomed while also enduring setbacks to its development, leading one industry watcher to point out that licensing is just the first step, and that fledgling companies must now find their core competencies and start fighting to secure their futures.

Licensed growth

In the first quarter of 2012, China's online payment market reached 776 billion yuan (US$112 billion), representing a 112.6 percent year-on-year increase, according to the latest statistics cited by the Beijing News.

Instead of hindering development, licensing regulations for third-party transactions have helped spur growth and keep the market orderly, adds the newspaper.

In such an environment, Qiandai (Beijing) Information Technology Co Ltd, a professional payment service provider and among the first 27 companies to be licensed, has achieved massive trading volume growth in the past year, exploding from zero to 5 billion yuan (US$788 million).

The company is a typical example of how rapidly the third-party payment industry is developing in China, with demand for convenient payment services surging in all professions and trades, much of which cannot be adequately met by traditional banks.

Enterprises have different needs for financial products, but banks are rarely able to satisfy their demands, says Guan Guoguang, CEO of 99bill.com.

However, third-party payment service providers can perfectly meet those needs, so the industry is preparing for a period of explosive growth in maybe three to five years, he adds.

Game on

Licensing has also inspired third-party payment companies to grab as much market share as they can, and for the time being they are expanding their services to as many businesses as possible, regardless of the costs, says the Beijing News.

A license only makes a third-party payment company qualified for competition, but success still requires strength, Guan points out.

Online games and e-shopping have been natural partners for third-party payment platforms, but they tend to offer little potential for profit growth. As a result, companies are now luring businesses that handle tradable funds, insurance sales and offline payments.

For example, Beijing Lakala Billing Service has point-of-sale (POS) terminals distributed not only in major supermarkets and convenience stores but also among couriers, which make offline transactions a possibility almost anywhere.

To create widespread networks, Lakala has invested huge sums of capital in the initiative, so much so that the company's board chairman Sun Taoran says he is prepared for another two years of unprofitability.

The cost of a POS terminal can reach thousands of yuan, and there are also maintenance costs, reveals Sun. It is a very risky move, he adds, and the company will make profits only if the number of POS transactions exceeds 30 million every month, a goal he hopes to achieve by next year.

Cao Honghui, a researcher with the Chinese Academy of Social Sciences, says third-party payment companies must be cautious about their investments, and warns that price wars should be properly controlled. Otherwise, fierce competition will lead to tragedy for some.

Battle with UnionPay

Although third-party payment services are developing rapidly, China UnionPay has exerted great pressure on the companies because of its competitive relationship, notes the Beijing News.

Established in 2002, China UnionPay is the only bank card organization in the country that operates an interbank transaction system that functions across regions and borders.

On May 14 of this year, Lakala posted on its weibo, a Chinese Twitter-like microblog, that thousands of its users had complained of failing to make interbank credit card payments with debit cards issued by the Industrial and Commercial Bank of China (ICBC), and that the company would investigate the matter.

A few days later, follow-up reports revealed that the failures had all resulted from ICBC's unexpected closing of its interbank repayment service, but that Lakala had not been informed in advance.

The incident exposed the close and sometimes tentative relationship between banks and third-party payment companies.

And because the linkage between them is not direct, UnionPay has created barriers and affected third-party payment companies. Moreover, UnionPay charges for each transaction, greatly increasing the costs of third-party payment services.