Security concerns stymie China's virtual credit cards

An employee at Alipay, the online payment arm of Alibaba Holding Group Co Ltd, shows how to make payments by scanning a bar code with mobile devices in Hangzhou, Zhejiang province. China's central bank ordered on Friday a halt to such payments amid concerns over the security of their verification procedures. Han Chuanhao / Xinhua

The People's Bank of China (PBoC), the central bank, has suspended virtual credit cards and payments via code scanning over security concerns, an official told Xinhua on Friday.

Zhou Jinhuang, vice director of the PBoC's payment and settlement department, said the central bank has issued a notice to suspend Tencent and Alipay's virtual credit cards and payments by scanning a bar or QR code.

"It's just a suspension, rather than a prohibition," said Zhou, adding that the decision will regulate business in the sector and protect consumers' interests. It is not aimed at any specific company.

"We are in communication with the central bank. Please don't worry and keep faith in Alipay," the company told its investors in a public notice late Friday.

Tencent and China CITIC Bank, who is a partner with both companies in the virtual card business, have not yet commented on the PBoC decision.

Tencent's Hong Kong-listed shares tumbled more than four percent over the suspension during Friday trading, and China CITIC Bank's Shanghai-listed stocks dived 8.26 percent before trading was halted at midday. Alipay is not a public firm.

On Tuesday, China CITIC Bank announced partnerships with Tencent and Alipay to issue online credit cards. Alipay aimed to issue one million virtual credit cards with a minimum credit line of 200 yuan (32.6 U.S. dollars). The service was expected to appear next week on Alipay Wallet, a mobile app that also allows users to make online payments by scanning a digital code and invest in a wealth management product called Yu'ebao.

Tencent also planned to issue one million such cards.

Financial authorities have repeatedly announced their intention to regulate Internet finance, which many bankers believe is biting into their territory.

Zhou said PBoC is always supportive of innovation in the finance sector, but payments via code scanning and virtual credit cards are closely linked to consumers' personal information and therefore require further consideration.

"It is much easier to apply for and get a virtual card without the strict approval procedures required by banks," said Huang Zhen, director of the Internet research center at the Central University of Finance and Economics.

"With the convenience, come security risks," Huang said, adding that virtual cards can be easily copied. There are already cases of personal information and money being stolen during code scanning payments.

A research note by China International Capital Corporation Ltd. said China UnionPay, a national bank card association, may back the PBoC decision. The association does not charge transaction fees on code scanning payments. Around one tenth of transaction fees from off-line bank card payments flow directly to China UnionPay.

Internet finance and its influence on traditional banking business is a hot topic in China. Internet finance products are popular with the public and generate bigger returns than bank deposits. Financial regulators have promised not to shut down Internet finance products, and a central government work report published on Friday promotes healthy development of Internet finance. In that light, both Tencent and Alibaba were granted licenses this week to trial private banks.

Zhao Qingming, an Internet finance expert, told Xinhua that the suspension may be temporary as "virtual credit cards represent the way forward".