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China bank’s mpayments ban throws a curveball at Alibaba, Tencent

According to an article in The Wall Street Journal last week, China’s central bank decided to suspend mobile payments through QR codes and virtual credit cards until the company can figure out the security and technology involved. This could have a huge impact on companies such as Tencent and Alibaba, which are trying to make a bigger play in mobile payments in China.

“This seems to be a knee-jerk reaction by China’s central bank in response to rising payment security concerns worldwide,” said Jordan McKee, analyst for Yankee Group, Boston.

“I don’t anticipate the QR code ban will be long-term,” he said. “Rather, I suspect the government will investigate the procedures of companies like Alibaba and Tencent and lift the ban, permitted there are no blatant security flaws.

“Certainly this announcement is a big deal for mobile payments and represents the first time the QR code has been thrown into the security spotlight on such a large scale.”

Mobile payments
Tencent and Alibaba have both been working on mobile payment programs that will be greatly affected by this suspension. The companies have been acquiring smaller companies to come up with new payment services using QR codes working with bricks-and-mortar retailers, movie theaters and taxi companies.

They also recently announced a virtual credit card program in cooperation with China Citic Bank Corp.

There has been some controversy over the security of mobile payments in the United States as well, but nothing that comes close to a major bank ban.

However, mobile payment solutions are careful to address these issues and have strong security measures in place.

“It’s important to recognize that the overwhelming majority of QR code-based payment initiatives are not transmitting raw card data to the point-of-sale,” Mr. McKee said. “LevelUp, for instance, has partnered with Braintree and uses tokens that map to card credentials stored securely in Braintree’s servers.

“It would be very atypical for the U.S. government to step in and do what China has,” he said. “As with EMV, payments reforms are often industry-led.”

Nonetheless, security concerns persist both among the regulators and the consumers.

“Each country’s regulatory agency must make a judgment call on relative security risk in support of the larger consumer population they support,” said Peter Olynick, card and payments practice lead at Carlisle & Gallagher, Charlotte, NC.

“Right now, China’s central bank is temporarily suspending these payments,” he said. “It is reasonable to believe that they will work with the key providers of these transactions to understand the risks and then make a final decision on whether the benefits outweigh the risks.

“Consumers everywhere are becoming more open to mobile payments and want access as soon as the appropriate security can be assured. But in the end, security will continue to act as a gatekeeper to mobile payments technology.”

Total domination
Not only does this move challenge Tencent and Alibaba, but it also further strengthens China’s play to control global commerce.

“China is making a bid to be the world’s currency, essentially displacing the dollar,” said Paula Rosenblum, managing partner at Retail Systems and Research, Miami, FL. “I think this is the root behind all the country’s move with regard to payments and currencies.

“The government has made several moves along with finally de-valuing the Yuan to assist it,” she said. “The country has been amassing gold for years, it has attempted to displace Bitcoins and other ‘competing’ currencies, and then it is making moves like this.”

China is going for total control over commerce, and mobile commerce is no exception.

“Let’s assume they really do believe these two forms of payment are insecure,” Ms. Rosenblum said. “When you think about all the data theft happening in the U.S., most especially the Target data breach, you can see the value of ‘China taking a stand’ on protecting money.

“It creates a sense of security in the world community, or so the government must think,” she said. “ Being China, however, it also takes a stand on maintaining tight central control. It does not want any competition to the central bank, neither from Mastercard, Visa or any other private entity, including Alibaba.

“What China seems to be doing is keeping the horse in the barn.  If there are to be mobile payments, they will be controlled by the Central Bank.”

Final Take
Rebecca Borison is editorial assistant on Mobile Commerce Daily, New York