Why Third-party Payment License Is The Most Coveted Resource For Chinese Tech Companies

By  for TechNode

If you are a company that runs online payment services in China, you must obtain a license to legally conduct the transactions in the country. That’s a basic rule. But for Chinese firms who want to dip their toes in payment industry, getting a license to legalize their status as an online payment agency is becoming increasingly difficult as more internet giants are making their forays into the business.

Over the past few months, China has recorded a continuous raft of acquisitions on companies holding third-party payment licenses, which authorize non-bank financial institutions to run online payment businesses. It is worth nothing that such licenses could not be treaded, so acquiring a company that already has it is the only path for another company to obtain the license.

Here’s a list of the recent deals that involves the shift of third-party payment license ownership.

The list goes on as this trend not only takes tech firms, but also companies across sectors. Over ten such cases were concluded and acquirers include big names such as China’s top real estate company Wanda and Evergrande, electric maker Midea, according to a non-inclusive report from local media.

Additionally, the competition further tightens with a group of potential “hunters” such as Didi-Uber, Qihoo 360, LeEco and Ctrip are lurching around to find their targets.

Big Market VS Limited Resources

As the prerequisite for e-commerce and fintech services, online payment system is growing to be an indispensable part of all tech companies that want a comprehensive business circle. The market size of China’s third-party payment industry doubled YOY to worth 6.2 trillion yuan ($915 billion USD) in the first quarter of this year, according to data from China E-commerce Research Center. The uprising trend continued in the second quarter to hit 9.34 trillion yuan, up 51% quarter-on-quarter.

China’s non-bank payment sector has been eaten into the user base of traditional bank services. China’s central bank has issued a total of 270 online payment licenses since 2011. Currently, there are overall 267 such licenses in the market, deducting three licenses that have been revoked by the bank due to malpractice by the agencies.

However, the fast expanding industry grapples with problems like financial fraud. To cope with the problems, the bank announced in July this year that it would temporarily cease to release new payment licenses to non-bank payment agencies for as it seeks to regulate the sector.

Surging demand on limited resources send the market value of payment license sky-high. Chinese news portal NetEase cites an industry insider that “the market value of third-party payment licenses has now surged to around 500 million yuan from tens of millions in last year.”

A Possible Way Out For Third-party Agencies

Despite the boom, China’s online payment market was a highly concentrated market dominated by a few leading players. Alipay, Tencent’s Tenpay and Lakala took the top-three spots in China’s mobile payment market, major vertical in online payment industry, accounting for 51.8%, 38.3% and 1.4% of the market share in Q1 this year.

While the top-three company takes an overwhelming 91.5% of the market, it left little space for the rest of companies to survive. Many independent third-party agencies have struggled to find good profit models. Some started to explore services such as peer-to-peer lending and crowdfunding platforms, which involve higher financial risks. Some has suspended related businesses.

This is also the reason why the central bank has suspended the release of new licenses along with the warning that it would punish agencies conducting illegal practices and cancel license of agencies that fail to offer payment services for a long time.

Given the circumstances, being acquired by a company that has user base and traffic resources to make full use of the license sounds a possible way out for third-party agencies with mediocre performance.

First appeared at TechNode