Payments in China: A Primer
Set forth below is a brief overview of payments in China. Later posts will provide updates as well as more detailed analysis of selected issues, in particular with respect to payment processing.
Foreign Exchange Controls and Cross-Border Payments
The Renminbi (RMB) is legal tender only within China’s domestic market. Foreign currencies may not be used in that market. Thus, domestic and cross-border payments must be handled differently. Moreover, foreign currency payments are defined under applicable law as a “settlement business,” which in turn is categorized as a “banking business.” Accordingly, all lawful cross-border payments must go through banks.
Such payments are classified as relating either to capital investment or trade. In general, RMB and foreign currencies may be freely converted in connection with trade transactions. But conversions in connection with capital investment may be subject to scrutiny. The Chinese foreign exchange control authority delegates certain regulatory functions to Chinese banks in connection with the supervision of trade-related foreign exchange transactions and holds the banks liable for non-compliant payments. The banks are, naturally, cautious about such transactions.
Domestic Payments
Most payments in China are handled by Chinese banks. Third-party payment processing is increasing, however, in particular to support e-commerce (although the banks are expanding their online-payment processing capabilities.
Non-cash domestic payment options in China include, among others:
Wire Transfers. This traditional mechanism remains popular, especially for large transfers. Most Chinese banks now permit customers to initiate wire-transfer requests from their home computers, smartphones and pads.
Credit/Debit Cards. As elsewhere, these payments are made through payment networks. China UnionPay (CUP) is the dominant player—due in part to low merchant cost and government support—although Visa, MasterCard and American Express are also present. All credit RMB payments are processed through CUP (while foreign currency payments may be processed directly with other networks and non-CUP point-of-sale processing is available in selected locations such as hotels and upmarket retailers.) Card use at the point of sale requires swiping the card.
Prepaid Cards. Prepaid cards in China are either self-managed or third-party managed. Self-managed prepaid cards are used mainly by telecom companies and public transportation companies. The service provider will produce the prepaid cards, establish their own network to sell the prepaid cards, and establish and maintain the hardware and software to process the payments. Different groups of entities use different systems—for example, the telecom companies use a password-based system, while public transportation providers use a contactless system. Alibaba is one vendor of the RFID technology supporting such systems. Third party-managed cards are mainly password based cards which can be used within the merchant networks established by the prepaid card operating companies.
Smartphones. During the 2010 Shanghai EXPO, China Telecom, together with a domestic technology company, offered NFC-based payments within the EXPO Park; consumers needed only to change their phones’ SIM cards. China Telecom stated that the experiment was successful, but merchant reterminalization may prove challenging.