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subject: Is China’s QR-code ban about security or lost revenue?

China’s central bank recently suspended mobile payments initiated through QR codes amid security concerns regarding the identification process involved with those transactions. The bank’s decision immediately affects China’s two largest third-party mobile-payments providers in Alibaba Group Holding, which operates Alipay, and Tencent Holdings Ltd.

On the surface, the bank’s edict could very well be based on security concerns. One, however, can make the argument The People’s Bank of China’s decision has more to do with lost revenue because third-party developers process those mobile payments and collect the transaction fees.
“[The bank] can’t go to the press and publicly say we are missing out on revenue,” Tristan Hugo-Webb, associate director for Mercator Advisory Group’s international payments practice, told Mobile Payments Today.

That theory stems from the fact the bank operates China UnionPay, which is the only interbank network in the mainland. China UnionPay is not processing Alibaba’s or Tencent’s mobile transactions, which means it can’t collect transaction fees.
Hugo-Webb believes the bank’s ruling will stifle mobile-payments growth under the guise of security concerns while it tries to determine how it might receive a cut from mobile payments enabled through methods outside NFC, which China UnionPay processes.

“There could be a situation where the bank might make [Alibaba and Tencent] switch to NFC-enabled payments,” Hugo-Webb said.
Chinese mobile payments in general reached 1.7 billion transactions in 2013, up 213 percent from the previous year, according to figures the bank released earlier this year. Those transactions were worth $1.6 trillion, up some 317 percent from 2012. Alibaba and Tencent are responsible for the bulk of those figures as NFC-enabled payments represent a small percent of the total because China, like many other countries, lacks the necessary contactless point-of-sale terminals.

China has 10.6 million terminals deployed throughout the country, but only 1.4 million devices accept contactless payments, according to the central bank. That has allowed Alibaba and Tencent to conquer mobile payments with QR codes.
Alipay processed nearly $150 billion in mobile transactions in 2013, which is significantly more than PayPal. The eBay-owned company processed $27 billion in mobile transactions last year.

Tencent, which also operates the mobile messaging service WeChat, earlier this year introduced a software update that enables users to use a QR code for mobile payments. The company said in its recent earnings report that 355 million people use WeChat, which represents enormous revenue potential as it competes directly with Alipay.

Both companies planned to launch virtual credit cards that use QR codes, but that is in serious doubt pending further action from the People’s Bank of China.
Indeed, QR codes do present some consumer safety issues because some codes can lead to fraudulent websites.

“One of the challenges with QR codes is that a QR code can take you to a link, which might be a phishing site, so it is important how the QR codes are implemented and used for payments,” Zilvinas Bareisis, senior analyst at Celent, told Mobile Payments Today.
Alibaba and Tencent recently gave the bank detailed reports about how their mobile systems operate, which Bareisis interpreted as the ban being a short-term one. Both companies said in statements they are awaiting further instruction from the bank.

“While the timing may not be great (Alibaba is scheduling an IPO in the United States), I don’t think this will have a lasting impact on innovation in the country,” Bareisis said.
Hugo-Webb isn’t so sure. He believes the bank’s ruling is intended to ensure China UnionPay remains profitable even as NFC-enabled mobile payments lag far behind their QR-code counterparts.

“The bank’s direct market intervention is an issue that will always hang over China and make operating there a significant risk,” Hugo-Webb said. “This particular issue could really hurt mobile growth in China.”
Proposed limits on mobile payments also could stifle growth, and the bank is reconsidering this after Alibaba, Tencent and consumers criticized the consideration over the weekend. The bank did not previously acknowledge the caps until companies leaked the proposed rules.
The bank proposed limits on mobile payments of 10,000 yuan (US$1,630) per year and a 1,000-yuan limit on a single transaction. In an interview with the official Xinhua News Agency, the bank said it would change the mobile limits if consumers found them unfair.



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