Licensing and Retained Funds Regulation of Internet Third Party Payment Providers in China
Lil, Wen, Journal of Information, Law and Technology
In years past, cash, paper-based negotiable instruments, and electronic funds transfers within a closed intranet of commercial banks as well as traditional payment, clearance and settlement systems, were the dominant methods of making a payment. Nowadays, new payment mechanisms have been developed and are becoming popular in both domestic and cross-border transactions in China.
In response to these commercial developments, the Chinese central bank--People's Bank of China--issued in 2006 the first 'China Payment System Development Report'. It was the first time that the Chinese central bank had comprehensively and systematically disclosed the latest developments, relevant data and future policy orientations of the Chinese payment system to the rest of the world. (2) A term 'new electronic payment instruments' appears in this official report. This term encompasses newly evolved payment instruments including Internet payment, telephone payment, mobile payment, and multiple stored-value cards. (3)
These new electronic payment instruments are primarily created and facilitated through nonbank Internet third party payment platform providers. This article will treat the law of nonbank Internet third party payment platform providers as the theme under discussion.
Thereafter, the terms 'non-bank Internet third party payment platform providers', 'Internet third party payment providers', 'Internet third party providers' and 'third party providers' should all be understood as referring to the same thing.
In this article, the working mechanisms of the Internet third party payment are firstly introduced. Then, the crucial forthcoming Chinese legislation--the 'Measures of Management on Payment and Clearance Organisations' is discussed and its international aspects are analysed. Following this, two key legal aspects of the regulation of Internet third party payment provider in China, namely, licensing and retained funds regulation, are examined in turn.
2. Working Mechanism: Virtual Accounts Payment Model
A virtual accounts payment model is the major payment model provided by the Internet third party payment services providers, although some other payment models exist as well, such as the Internet third party gateway payment model. However, it is the virtual accounts payment model that has attracted regulation interests and generated important legal issues, including the legal risk of retained funds. Therefore, the article sets out to discuss extensively its working mechanism.
The virtual accounts payment model is used to build a series of virtual accounts, held by nonbanks (such as Alipay, YeePay, and Paypal which are all Internet third party payment service providers) between Internet traders. A virtual account performs similar functions as traditional bank accounts do, i.e. hosting funds, paying and receiving funds, keeping records and etc. More specifically, the virtual accounts payment can be further divided into two categories, (4) namely the direct payment model and the third party assurance model (indirect payment model). Paypal is a good example of the direct payment model. When bank account A transfers funds to a virtual account A in Paypal, this virtual account A will directly transfer the funds to the recipient's virtual account B in Paypal, and after that, the recipient's real bank account B shall be credited accordingly. However, in the third party assurance model, the third party not only does transfer funds, but it also acts as an assurance agency (5) for both customers and Internet merchants/sellers. Below are the six steps whereby funds are transferred through a third party assurance model:
* Two parties, which could be either a consumer and a business; or a customer and a customer; or a business and a business; reach an agreement for a transaction;
* The buyer transfers the funds to an Internet third party provider, (6) where he/she has registered;
* The third party provider notifies the seller by informing that the relevant funds have been received;
* The seller should deliver the goods to the buyer within a period of time agreed by them;
* The buyer shall notify the third party when he/she receives the goods;
* The third party provider should transfer the relevant funds to the seller either immediately or within a period of time agreed by the buyer and seller with the third party provider. …