Starting in April 2017, third-party payment providers in China will have to put their client reserve funds under centralized management of People’s Bank of China (PBoC). This policy is expected to have a heavy impact on major domestic payment providers including Alibaba and Tencent as it prevents them from using the reserve funds to generate interest income or grow their businesses.

“Many of China’s internet finance companies went out of business or underwent restructuring through mergers and acquisitions after the government started a campaign in April 2016 to tighten its control over them,” said Yvette Lin, TrendForce analyst. “The rules that have been adopted since then especially target third-party payment platforms, which have been the pioneers and drivers of China’s internet finance market.

To bring transparency to the country’s third-party payment industry, the Chinese government has prohibited domestic payment providers from developing other financial services by tapping into their client reserve funds that are for transaction settlements. Furthermore, these funds will be placed under centralized management, and payment providers cannot charge interest on them.

“Reserve funds are money from customers’ accounts that are temporarily placed in the custody of payment companies during the clearing period,” Lin pointed out. “Payment companies can charge interest on these funds or use them to grow their businesses. Therefore, China’s recent regulatory framework will severely curtail the growth of the third-party payment industry as service providers rely on these funds to expand and survive.”

At the same time, China has also lifted its restriction on using 2D barcode scanning to process payments. This move allows the established, traditional banks to build their mobile payment services and seize the initiative away from third-party payment platforms in the domestic internet finance market.

The combination of liberal reforms for the traditional banking industry and increased regulatory oversight for the internet finance market has led to consolidation among Chinese third-party payment providers. According to TrendForce, there were at least 13 cases of mergers and acquisitions involving small- and medium-size domestic service providers in 2016.

Expanded rules have also impacted the larger players such as Alipay, which controls over 50% of China’s third-party payment market and constitutes the core business of Alibaba’s Ant Financial Services. Placing reserve funds under centralized management will invalidate the main part of Alipay’s revenue generation strategy.

Lin added that Alibaba’s recent activities concerning Alipay indicates that the Chinese e-commerce giant has been preparing for the effects of stricter regulations in the domestic market. Since 2015, Alibaba has made investment deals with foreign third-party payment providers to ensure that Alipay maintains an overseas presence. Notable foreign investment partners include India’s Paytm, Thailand’s Ascend Money and South Korea’s K Bank. Alibaba is also seeking collaborations with local players in Vietnam, Indonesia and the Philippines.

Another example of Alibaba adjusting its strategy is the overseas expansion of “Alipay+” program that is currently available in Thailand and several European countries. With Alipay+, Chinese tourists travelling abroad will be able to access services such as mobile payment and cross-border O2O ordering at participating retailers, which in turn will receive backend support for adopting these digital finance solutions.

From the long-term perspective, China’s efforts to regulate its own internet finance sector will compel domestic players such as Alibaba to develop their overseas markets. As one of the major platforms, Alipay furthermore has an opportunity to shape consumers’ payment habits worldwide as it increases its footprints in foreign countries and compete for market shares against local counterparts. In sum, China’s policy will have a global ramification for the third-party payment industry.