Case exposes weakness in payment regulations

Troubled prepaid card provider raises speculation of misappropriation

Chang-go Card, a Shanghai-based third-party payment service provider, is said to be teetering on the brink of bankruptcy. Its cards have reportedly been rejected at numerous shops, sending scores of irate customers to the company's headquarters to demand refunds. If stories of the company's worsening financial straits prove true, Chang-go may become the first company of its kind in China to go under.

This case underscores the fact that loopholes still exist within the supervision and management of third-party payment service companies. Authorities should further strengthen relevant oversight and management policies, while also creating an exit mechanism for failed companies. For those who violate relevant rules, authorities should also be ready to mete out strict punishments.

China's payment service industry has grown rapidly over recent years and deserves the further guidance and encouragement of regulators as it continues to mature. At present, the space is occupied by a host of nonfinancial institutions, including online payment service providers and prepaid card issuers like Chang-go.

Early in 2011, the People's Bank of China (PBC) issued its first batch of third-party payment licenses to 27 companies, including Alipay and Tenpay. This was seen as a major step toward supervising the once lightly regulated industry. By the end of July, the PBC had issued a total of 269 such licenses, with prepaid card companies like Chang-go accounted for 169 of the total licensees by that point.

From its licensing last summer to the start of this year, things appear to have deteriorated quickly at Chang-go, which had obtained approval to operate in Shanghai as well as Anhui, Jiangsu, Zhejiang and Shandong provinces.

Local media reported Monday that the company's owner was rumored to have absconded as shops in eastern China stopped accepting Chang-go cards. Weeks earlier, the company had posted an announcement on its website saying that it was correcting defects with its system.

The extent to which Chang-go's current woes can be attributed to technical issues remains unclear. But with hundreds of millions of yuan in customer funds on the line - indeed, reports say that cardholders in Ningbo alone are owed some 400 million yuan ($64.4 million) - the doubts and suspicions surrounding the company have certainly done nothing for its reputation.

According to a report released last year by the Commercial Prepaid Card Regulatory Committee, a body under the China General Chamber of Commerce, sales of the commercial prepaid cards climbed 5.13 percent in 2013 to reach 906.88 billion yuan.

As the market grows, authorities should beef up oversight and management standards. Early efforts have already been made along these lines, with the central bank releasing reserve deposit management rules for third-party payment companies in June 2013. Later, in November, the PBC issued an announcement that it would further enhance supervision over such companies to ensure that reserve rules were being followed.

According to the terms of these measures, reserve deposits from third-party payment companies are not to be used for investment purposes. Yet, some experts have speculated that some banks responsible for holding these reserves may be turning a blind eye to such regulations. Indeed, some have hypothesized that a soured real estate or stock market play may have punched a crippling hole in Chang-go's account books.

Payment service companies have been the subject of scandal in the past thanks to incomplete regulations and legal gaps. For instance, Wuhu Yinxin Communication Ltd, founded in 2008, issued prepaid cards without a license in Wuhu, Anhui Province. In March, word broke that some of its cards had been refused by certain retailers. The issue is currently under negotiation.

More should be done to address the risks and pitfalls within this promising corner of China's financial services industry. Strong implementation of existing rules, as well as continued effort to close loopholes, will steer the industry toward healthy development and protect the rights of consumers.