Virtual Credit Card Risks

The PBOC is fleshing out some of their concerns about virtual credit cards. It boils down to this: the tech companies were going to break the model for credit card issuance.

China Blocks Alibaba, Tencent From Offering Virtual Credit Cards

“The PBOC could be worried about payment risks involving QR codes,” said Wang Weidong, an analyst with Shanghai-based consultant IResearch. “As for the credit cards, a lot of the credit risk calculation is based on data provided by Tencent and Alibaba, so the central bank might be worried about their models.”

The central bank could allow such virtual credit cards after it reviews and steps up regulations, Wang said. Li Dongrong, deputy governor of People’s Bank of China, said March 3 the central bank is studying ways to regulate online finance.

They were planning to use new models for credit risk based on the data they collect on their users, and that has the PBOC wanting to review the situation.

“We suspect that there may have been some behind-the-scenes lobbying done by the major banks in the wake of the National People’s Congress,” said Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia Ltd. “The banking lobby in every country is a powerful force to be reckoned with, and the same is undoubtedly true in China.”

Tencent, led by billionaire Ma Huateng, announced plans to invest at least 10 billion yuan in the nation’s Qianhai economic zone near Hong Kong that was created as a testing ground for more liberal financial policies.

Tech companies are literally racing ahead of the banking sector, they are moving faster than the regulators can handle as evidenced by the PBOC admitting they only learned of virtual credit cards from the news.

What are E-Credit Cards?

E-credit cards are like regular credit cards except they have much lower credit limits and, of course, are not tangible. Instead, they appear to users as features built into the mobile phone apps WeChat and Alipay. They allow users to make purchases on credit and pay later from their bank accounts. The companies are still working out the details about interest rates, expiration dates and the length of payment periods.
WeChat users will see a virtual credit card in the "My Bankcard" section together with other bank cards they have linked to the app. They can check their payment history and other card information by clicking on the e-credit card. The Alipay version is presented in a similar way in its app.

What's in it for China CITIC Bank?

The bank will be responsible for chasing down payments, but the risk from e-credit cards is relatively low compared to conventional cards because owners of virtual cards have predictable shopping patterns, a source from the banking industry said. But then the profitability is also lower than traditional credit card business.