China UnionPay has just launched a new mechanism for hooking up with type II and type III bank accounts, in a move that is expected to shake up the Chinese payments sector by giving greater play to smaller lenders.
China’s central bank divides individual accounts into three separate categories that differ in terms of access levels and functionality.
While Type I accounts are fully functioning normal accounts, Type II accounts restrict consumption and payments to 10,000 yuan per day, while Type III accounts are subject to a maximum balance restriction of 1,000 yuan.
Whereas in the past China UnionPay services could only be accessed via a Type I account, the new linkage mechanism permits account holders to use their Type II and Type III accounts for mobile or online transactions as long as they already have a Type I account.
In addition to the incorporation of Type II and Type III accounts into the UnionPay system, the company has also beefed up its risk guarantees to reassure prospective clients, providing up to 30,000 yuan in compensation to each customer per year for any unfair losses incurred in relation to online payment services.
UnionPay is expected to invest heavily in the improvements to Type II and Type II account technology and connection mechanisms, as well as expand the scope of cooperation.
The move is also expected to increase opportunities for small and medium-sized lenders to grab new clients by giving them better access to the nation-wide payments sector, which remains in a fractured condition.
The fractured state of China’s payments sector
The new move by UnionPay could also help bring greater cohesion to China’s payments sector, which is currently divided into a range of vying fiefdoms.
The big five state-owned banks (Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank and Industrial and Commercial Bank of China) established their own league at the start of 2015 to allow customers to perform cross-bank or cross-regional account transfers via their mobile phones, as well as remittance operations free of transaction charges.
Soon afterwards a group of 12 commercial banks in clouding China CITIC Bank and China Merchant’s entered an agreement to connect the online services of member banks, allowing clients of member banks to open electronic accounts with other members online, as well as purchase their fund, in surname or wealth management products.
In addition to the Big Five and commercial bank alliances in China, there is also the “One Belt One Road” financial alliance between a total of 23 financial institutions situated in provinces involved in the initiative, as well as the “Shandong Municipal Bank League”, comprised of 14 municipal lenders in Shandong province.
While these alliances often permit cross-bank co-operation with respect to matters such as Type II and III banks accounts, inter-alliance collaboration remains a rarity.
This gives the advantage to the big five state-owned banks, who in addition to possessing a vast network of branches and clients also collaborate with each other.
This advantage is particularly critical given that electronic payments are a key selling point for banks in the era of mobile finance, as is the provision of services in relation to Type II and Type III bank accounts.
UnionPay news move is expected to tilt the balance towards smaller lenders, who are already pursuing collaboration with FinTech giants such as AliPay and Tenpay in order to gain greater access to China’s payments system.