Read the passage and answer the questions.

Electronic copy available at: https://ssrn.com/abstract=3103751

KEY POINTS
�� Backed by the e-commerce giant Alibaba, Alipay has become the world ’s largest mobile

payment system. Together with Wechat Pay, they dominate China’s $5.7trn mobile
payment sector. Alipay has a presence in over 70 countries including the UK, US, Japan,
South Korea and Australia.
�� Due to the popularisation of mobile payment facilities, many Chinese cities have become a

cashless (and cardless) society, as 40% of Chinese people carry almost no cash when going out.
�� Alipay relies on the Quick Response code (or QR code) technology, in contrast to the Near

Field Communication (NFC) adopted by competitors like Apple Pay.
�� Mobile payments and fintech have provoked debate as to legal and regulatory issues such

as the regulatory approval regime, data protection, fund security and fintech financing.
Most recently, China has set up a unified clearing house for all mobile payment service
providers to strengthen the industry supervision.

Author Dr Lerong Lu

Decoding Alipay: mobile payments,

a cashless society and regulatory challenges
The financial industry has witnessed the so-called “fintech revolution” in recent
years. Due to the emergence of information technologies such as cloud computing,
big data, blockchain and artificial intelligence, the landscape of the traditional
financial industry has been largely transformed. The interplay between finance and
technology has resulted in various new forms of financial services and products,
like online P2P lending, digital-based banking, insurtech, bitcoin as well as the
burgeoning mobile payment sector. Alipay, the mobile payment service arm of the
Ant Financial Services Group (hereafter referred to as Ant Financial), is a perfect
example to illustrate the ongoing fintech revolution and how it is disrupting the
conventional retail banking model and payment industry.

This article aims to introduce and analyse the world’s largest mobile payment
system as well as some of the regulatory challenges it poses. It attempts to offer
some guidance for legal practitioners in banking and finance, in particular, the multi-
billion dollar fintech sector.

ANT FINANCIAL: THE FULL-FLEDGED
FINTECH GROUP

■
According to the Economist, China has
emerged quickly as the leading country

in terms of fintech innovation, accounting for
over half of the global digital payment market
as well as three quarters of global online lending
transactions.1 Ant Financial has been one of the
successful fintech businesses originating from
China. In 2016, it had a valuation of $75bn,
which is higher than the market capitalisation
of Goldman Sachs.2 Clearly Ant Financial is
the most valuable fintech corporation in the
world, and it is a member of the elite unicorn
companies club (a tech start-up having a
valuation over $1bn). Ant Financial was
initiated by the e-commerce giant, Alibaba
Group, and several other institutional
investors. Established in October 2014, Ant
Financial is a dedicated fintech corporate group
whose businesses cover four main areas: mobile
payments (Alipay), mobile wealth management

(Ant Fortune), online-only banking (Mybank)
and big data credit ratings (Sesame Credit).3
The rapid growth of Ant Financial is partly due
to the strong technology background of the
Alibaba Group, as well as its enormous client
base and personal data reserve derived from
Alibaba’s online shopping platforms –
Taobao.com and Tmall.com.

ALIPAY: FROM ONLINE TO OFFLINE
Alipay had a very humble beginning. It was
first launched in 2003 as a simple built-in
payment tool of Taobao.com. Thanks to the
rapid development of the online shopping
industry over the past 15 years, Taobao
has become one of the most popular online
shopping portals in China. In 2010, Taobao
occupied 80% of China’s e-commerce market,
with 170 million registered shoppers. It
defeated eBay to become the market leader
in the country.4 Accordingly, Alipay enjoyed
an exponential growth as most transactions

on Taobao were settled via Alipay. In May
2011, the People’s Bank of China (the PBOC),
the central bank, granted third-party online
payment licences to Alipay, along with another
26 internet finance companies.5 Thus, Alipay
was among the first group of fintech companies
to obtain official authorisation to operate an
online payment system. Until then, it had been
largely regarded as an e-payment facility for
online shopping.

2011 marked a new era for Alipay, as it
expanded its payment service from online to
offline. Alipay launched its smartphone APP
on both Apple IOS and Google Android
platforms, allowing smartphone users to pay for
purchases and services in high street retailers,
cafes and restaurants. In contrast to mobile
payment systems which adopt the Near Field
Communication (NFC) technology, such as
Apple Pay and Samsung Pay, Alipay and most
Chinese fintech companies have chosen the
Quick Response code (QR code) to carry out
the mobile payment function. QR code is the
trademark for a type of matrix barcode (or
two-dimensional barcode) first designed for
the automotive industry in Japan. Alipay uses
QR code because it has a lower infrastructure
threshold, making it cheaper and easier to
popularise the country in a short time. When
making mobile payments in-store, shoppers
will use the Alipay APP on their smartphone
to generate a one-off QR code, and then the
retailers’ staff will hold a specially-designed
barcode reading gun to scan the QR code, and
complete the transaction. An alternative way of
receiving payment is for some retailers to print
out their Alipay accounts which are presented
in QR code, and then stick the printed QR

40 January 2018 Butterworths Journal of International Banking and Financial Law

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code near the counter. Consumers can use
their smartphone cameras to scan the QR
code and make immediate transfers. The latter
method does not even require any investment
in payment hardware, rendering the mobile
payment facility available for everyone including
small shops, street vendors and street artists.

BUILDING A CASHLESS
(AND CARDLESS) SOCIETY
Alipay, as a cost-effective payment option, has
brought great benefits and convenience for
both retailers and consumers. The QR codes
automatically generated by the Alipay APP are
one-off, constantly changing to enhance the level
of security. Users have to set up a passcode or use
biometric information, such as the fingerprint
censor and facial recognition function on their
smartphones, to verify their identities before
initiating payments. Alipay can be linked to debit
and credit cards issued by most banks, so as to
function as a mobile e-wallet.

In China, the swift shift from traditional
payment (cash and card) to mobile payment
is due to the popularisation of smartphones
in the last decade. 95% of internet users in
the country now go online through mobile
equipment.6 At present, most brick-and-
mortar stores like supermarkets, restaurants
and cloth shops, as well as online-to-offline
(O2O) services such as taxi hailing, food
delivering and bike sharing, accept mobile
payment options including Alipay and its main
rivals including Wechat Pay which is operated
by another Internet giant – Tencent Holding.7
Alibaba and Tencent have teamed up with
millions of retailers across the country to build
a cashless society. For instance, the US cafe
chain Starbucks decided to accept Wechat
Pay at its 2,600 shops in China, except for one
located at Alibaba’s Hangzhou headquarter.8

Outside China, Alipay and Wechat Pay have
been expanding fast to promote their innovative
payment services to consumers in Asia, Europe
and the US. In the UK, some department stores,
including Harrods and Selfridges, already accept
Alipay.9 Alipay now has 450 million users all
over the world, making it the largest mobile
payment system contesting fiercely with its US
competitors like PayPal and Apple Pay.10

Making payment by smartphones has
become a default option for many Chinese.

Even beggars on the streets are presenting
QR codes to receive donations instead of
receiving notes and coins.11 The market scale
of China’s mobile payment sector amounted
to CNY38trn ($5.7trn) in 2016, which was
50 times that of the US market ($112bn).12

Alipay is extremely streamlined and convenient,
allowing consumers to complete transactions in
a few seconds without taking out their wallets.
Recently, even the giving of red envelopes
stuffed with lucky money, a millennium-old
Chinese New Year tradition, has been fully
digitalised. Nowadays people tend to hand
out virtual red envelopes to their relatives and
friends during the new year, which is a built-in
function of Alipay and Wechat Pay.13

As a result of the proliferation of mobile
payment facilities, many Chinese cities have
become cashless and cardless. According
to a China Daily survey, 14% of Chinese no
longer carry any cash when they go out, whilst
26% carry less than 100 yuan ($15).14 74% of
participants said they can survive for over one
month with only 100 yuan in their pocket.15

Clearly, smartphones installed with Alipay
APP have become the only essential thing
for people to carry when going out shopping,
dining and for entertainment.

HOW ARE TRADITIONAL BANKS
AND PAYMENT SYSTEMS AFFECTED?
As fintech service providers rewrite the rules
of the financial industry, the businesses of
traditional banks and card payment systems
have taken a beat. In the past, China UnionPay
was the principal payment system in the
country as most bank cards issued in China
use UnionPay’s payment and clearing network.
Even Visa and MasterCard found it difficult to
compete with it. However, Alipay has surpassed
UnionPay in terms of the daily number of
processing payments, underscoring Alipay’s
dominant position in the entire payment
industry.16 In 2015, Alipay earned CNY139bn
($20.84bn) from its payment services, which
would otherwise have been channelled to
UnionPay and major card issuers like the ICBC
and Bank of China.17

Moreover, Alipay also poses a major threat
to retail banking, as an increasing number of
savers have moved their money from their bank
accounts to Alipay e-wallets. Within the Alipay

APP, various financial services are provided
such as wealth management, securities
investment, insurance and loan facilities. In
practice, Alipay is serving as a de facto gateway
to Ant Financial’s fintech business empire. To
many consumers, what makes Alipay’s e-wallet
particularly attractive is an add-on service
called Yu’E Bao (or left-over treasure) which
invests consumers’ money into money-market
funds but permits them to use and withdraw
the money on demand like current accounts.

In addition, Yu’E Bao offers an annualised
return of 4-7% for its subscribers, and interest
is paid on a daily base into consumers’ Alipay
accounts. Attracted by the decent return and
convenience, millions of savers have opted for
Alipay as their default banking account, leading
to a sharp drop in deposits for major Chinese
banks. As of July 2017, Yu’E Bao had around
260 million users18 with the market volume
of money-market funds in China reaching
a record-breaking CNY5.11trn ($770bn).19

Apparently, the fast expansion of Alipay
has eroded the deposit base, revenue and
profitability of China’s banking industry.

ALIPAY’S LEGAL AND REGULATORY
CHALLENGES

Seeking regulatory approvals
One main hurdle for fintech companies in
carrying out business is the large amount
of time and money to be spent on financial
regulation and compliance. Fintech companies
need to obtain regulatory approvals or
licences for the fintech corporate entity and
its relevant financial services. This remains an
acute issue for fintech conglomerates like Ant
Financial (Alipay) which provides a full range
of financial services through a single platform.
The current financial regulatory system in
China is largely sector-based, with the central
bank as monetary authority and three separate
financial regulators for banking, the securities
market and insurance. As Alipay’s business
involves payment, investment and banking, it
has to seek approvals from multiple regulators.
According to the ‘Administrative Measures
for the Payment Services Provided by Non-
Financial Institutions’ (PBOC Order No
2 [2010]), operating an electronic payment
system requires a licence (a Payment Business

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Permit) from the People’s Bank. Alipay
obtained a Payment Business Permit for five
years in 2011, and then renewed it in 2016 for
another five years. As Alipay also sells fund
products via its fintech platform to financial
consumers, it has been required to obtain a
Fund Sales Licence from the China Securities
Regulatory Commission. The difficulty is
that sometimes it is difficult to categorise
innovative fintech services into existing
financial sectors and services, resulting in
some uncertainty about which regulatory
regimes these fintech activities should be
subject to. The problem can be compounded
as Alipay is going global quickly, so it needs to
apply for licences in many jurisdictions with
in some cases, differing regulatory standards.
Also, some jurisdictions like the US and the
European Union have imposed strict rules on
foreign capital entering into key industries
such as the financial sector, creating extra
hurdles for Alipay’s global expansion. For
instance, Ant Financial is buying a US-based
money transfer company, MoneyGram, and
is currently awaiting the approval of the
Committee on Foreign Investment in the
United States (CFIUS).

Data security law
Big data is critical to the functioning of
fintech companies like Alipay. Clearly,
big data accumulated from Alibaba’s
e-commerce websites gives Alipay an obvious
competitive advantage over traditional
financial institutions. How to gather, process
and use consumers’ personal data remains
a controversial issue as well as primarily a
concern for financial regulators. According to
the State Council’s Administrative Regulation
of Credit Investigation Industry (2013 Order
No 631), to collect personal information,
the regulator is required to seek the consent
of data subjects; without such consent the
information may not be collected, except that
the information is required to be disclosed
under certain laws and administrative
regulations (Art 13.1). The Regulation requires
that any entities using personal information
must reach an agreement as to the purpose of
its use with the data subjects, the information
must not be used for purposes other than
as agreed and the information must not

be disclosed to third parties without the
permission of the data subjects (Art 20).
Despite the existence of strict rules regarding
personal digital data protection, the
implementation process is considered difficult,
as the flow of online information is extremely
hard to monitor and supervise.

Fund safety
The third regulatory concern surrounds
the protection of financial consumers’
money held by Alipay and other members
of Ant Financial. Depositors at traditional
financial institutions like banks and credit
co-operatives fall within the protection of
the national deposit insurance scheme. If a
depositor’s bank gets into financial difficulty,
the depositor’s money will be reimbursed
unconditionally by the state up to a certain
limit. According to China’s Deposit Insurance
Regulation ([2015] State Council Order
No 660), the maximum coverage of deposit
insurance is CNY500,000 (US$75,000)
per saver per bank (Art 5). However, as
an increasing number of depositors move
their money from bank accounts to fintech
e-wallets like Alipay and Yu’E Bao, they will
no longer be entitled to the official protection
over their money. Most depositors do not
realise this potential risk when using fintech
businesses, as they perceive Yu’E Bao as a
safe substitute for bank savings. Accordingly,
financial regulators and fintech companies
urgently need to educate their investors to give
financial consumers a better understanding
of the potential financial risks associated with
fintech services and products.

Finance issues and IPO
The final legal issue relating to the growing
fintech industry concerns fund raising and
corporate finance, such as how to draft best
funding arrangements in terms of private
equity, initial public offerings, and mergers
and acquisitions. Unsurprisingly, Alipay’s
bright prospects are helping it to attract
investor funding. In July 2015, Ant Financial
completed its A-round equity financing
and received billion-dollar investments
from China’s National Social Security
Fund, Guokai Finance, four major Chinese
insurers, Primavera Capital and Shanghai GP

Capital, putting the company at a valuation
of $45bn.20 In April 2016, Ant Financial
closed its B-round private equity financing
by raising another $4.5bn. Subsequently its
valuation climbed to $60bn.21 Most recently,
it completed a $3.5bn debt round to fund
Alipay’s international expansion.22 At the
time of writing, Ant Financial is planning an
IPO for late 2018, depending on approval
from Chinese financial authorities. In terms
of where to list, the relevant jurisdictional
listing rules as well as the regulatory
requirements of fintech businesses play a vital
role. In 2015, Alibaba Group chose the New
York Stock Exchange over Hong Kong for
its record-breaking $25bn listing, because
only the former agreed to accept a listed
company with a dual-class share structure.23

The corporate structures of many fintech
companies, such as Alipay, are expected to
be as complicated as that of tech businesses,
which will require legal practitioners and
investment bankers to advise on the most
suitable funding arrangements on cross-
border capital marks.

THE LATEST REGULATORY CHANGE IN
CHINA’S MOBILE PAYMENT SECTOR:
NETS UNION CLEARING CORP
As money keeps circulating within the
mobile payment system itself, it evades the
central bank’s clearing system designed for
commercial banks and bankcard payments
(eg China UnionPay), making it impossible
for financial regulators to track and monitor
the direction of fund movement and where
financial risks lie. It creates difficulties
in relation to anti-money laundering,
monetary policy adjustments and financial
data gathering and analysis (for regulatory
purposes). As a result, in August 2017, the
PBOC issued an order to urge all mobile
payment companies to operate their businesses
via a newly created centralised clearing house,
China Nets Union Clearing Corporation.24 It has
a registered capital of CNY2bn ($300m), and
its shareholders include some of the central
bank’s affiliated institutions, state agencies,
the State Administration of Foreign Exchange
(SAFE), and most mobile payment service
companies in China (see the chart opposite).
The new clearing corporation will be put under

42 January 2018 Butterworths Journal of International Banking and Financial Law

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Feature

close scrutiny by the central bank. However,
its establishment is said to disadvantage major
players like Alipay and Wechat Pay as they
now have to share payment data (which is
proprietary information) with other payment
service providers who are also members of the
Nets Union. n

1 The Economist, ‘The Age of the Appacus:
Fintech in China’ (25 February 2017), p 65.

2 Lulu Yilun Chen, ‘Jack Ma’s Finance Business

May Be Worth More Than Goldman Sachs’,

Bloomberg (20 September 2016), available
at https://www.bloomberg.com/news/

articles/2016-09-20/jack-ma-s-finance-

business-may-be-worth-more-than-goldman-

sachs, accessed

20 October 2017.

3 Alipay’s Official Website: https://ab.alipay.

com/i/dashiji.htm,

accessed 20 October 2017.

4 Mark Green et al., ‘The case study: How

Taobao bested eBay in China: Dealing with

a powerful new rival ’, Financial Times (13
March 2012), p 10.

5 Hogan Lovells, ‘Third Party Payment

Licences in China – Are They within The

Grasp of Foreign Investors?’ ( June 2014).

6 The Economist, ‘The Age of the Appacus:
Fintech in China’ (25 February 2017), p 65.

7 Leslie Hook and Gabriel Wildau, ‘China

mobile payments soar as US clings to plastic’,

Financial Times (14 February 2017), p 12.
8 Louise Lucas, ‘Tencent grabs mobile pay

share from Alibaba’, Financial Times
(2 May 2017), p 14.

9 Justina Crabtree, ‘How Alipay is helping

London stores cash in on China’s Golden

Week ’ CNBC (6 October 2016), available
at http://www.cnbc.com/2016/10/06/how-

alipay-is-helping-london-stores-cash-in-on-

chinas-golden-week.html, accessed

20 October 2017.

10 Helen H Wang, ‘Alipay Takes On Apple Pay

And PayPal On Their Home Turf ’, Forbes
(30 October 2016), available at https://www.

forbes.com/sites/helenwang/2016/10/30/

will-alipay-dominate-global-mobile-

payments/#578e65ba60af, accessed

20 October 2017.

11 Guo Kai, ‘China’s mobile payment era: Costs

and benefits’, China Daily (11 May 2017),
available at http://www.chinadaily.com.cn/

china/2017-05/11/content_29295024.htm,

accessed 20 October 2017.

12 Leslie Hook and Gabriel Wildau, ‘China

mobile payments soar as US clings to plastic’,

Financial Times (14 February 2017), p 12.
13 Yuan Yang, ‘Alibaba and Tencent open new

front in red envelope war’, Financial Times
(30 January 2017), p 16.

14 China Daily, “About 14% people carry no
cash in China” (6 September 2017), available

at http://www.chinadaily.com.cn/bizchina/

tech/2017-09/06/content_31633683.htm,

accessed 20 October 2017.

15 Ibid.

16 Gabriel Wildau, ‘Alipay bypasses China

Unionpay on fees’ (1 August 2016), p 14.

17 Ibid.

18 Alipay’s Official Website: https://bao.alipay.

com/yeb/index.htm, accessed 20 October 2017.

19 Xinhua, ‘Outstanding Balance of Yu’ebao
surpassed merchant bank ’s personal

deposits (5 July 2017), available at http://

news.xinhuanet.com/finance/2017-

07/05/c_1121264650.htm, accessed

20 October 2017.

20 Sina Finance, ‘Ant Financial Completed
A-Round Finance with Valuation over $45bn’

(6 July 2015), available at http://finance.sina.

com.cn/roll/20150706/030722596271.shtml,

accessed 20 October 2017.

21 Gabriel Wildau, ‘Ant Financial raises $4.5bn

in record fintech private placement’, Financial
Times (26 April 2016), available at https://www.

ft.com/content/366490b4-0b7d-11e6-9cd4-

2be898308be3, accessed 20 October 2017.

22 Arjun Kharpal, ‘Exclusive: Ant Financial

close to closing a bigger-than-expected

$3.5 billion debt round for international

expansion’, CNBC (17 May 2017), available
at http://www.cnbc.com/2017/05/17/ant-

financial-debt-financing-round.html, accessed

20 October 2017.

23 Jennifer Hughes and Josh Noble, ‘Hong Kong

exchange gives up on dual-class share plan’,

Financial Times (5 October 2015), available at
https://www.ft.com/content/0bc597ee-6b42-

11e5-aca9-d87542bf8673, accessed

20 October 2017.

24 Gabriel Wildau, ‘China targets mobile

payments oligopoly with clearing mandate’,

Financial Times (9 August 2017), available at
https://www.ft.com/content/3bcb5150-7cce-

11e7-9108-edda0bcbc928, accessed

20 October 2017.

Further Reading:

�� Mobile banking: problems of regulatory
enforcement (2011) 7 JIBFL 413.
�� Outcome of the FCA’s Thematic

Review into mobile banking and
payments (2015) 5 JIBFL 301.
�� LexisPSL: Banking & Finance Practice

note: Fundamentals of microfinance.

Biog box
Dr Lerong Lu is a Teaching Fellow in Financial Law at King’s College London.
Email: lerong.lu@kcl.ac.uk

DIAGRAM 1
Shareholding Structure Of China Nets Union Corp

Entities Relating to
PBOC
18%

State Agencies
12%

Entities Relating to
SAFE
10%

Tenpay (Tencent)
9%

Alipay
10%

ChinaBank Payments
(JD Group)

5%

Other 35 Third-Party
Payment Institutions

36%

43

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Butterworths Journal of International Banking and Financial Law January 2018

Assignment 2 (please submit the journal article as well)

Pick a recently published (up to 2015) journal article (with an impact factor 1 or above) related to your research area and fill out the following:

1. Abstract (10 pts)

Are the purpose and findings of the study properly addressed? Explain briefly

Are the materials and methods applied in the study mentioned in the abstract? Explain briefly

2. Keywords (5pts)

How many keywords did they assign? Do you think they are all related to the article?

Are you able to find the article when you enter all the keywords on Google Scholar?

3. Introduction (10 pts)

Does the Introduction explain the construct of interest/focus, the issues and theories being addressed?

Is the structure of the paper clearly stated? Explain briefly

4. Literature Review (20 pts)

Is it in the Introduction or a separate section?

Is there a graphical representation of the research methodology?

Is the literature survey up to date?

Is the gap in the existing literature clearly stated? Explain briefly

4. Materials and Methods (20 pts)

What materials and methods are used? Explain briefly

Did the authors develop a new methodology? Explain briefly

Is it an applied research or a theoretical research? Explain briefly

5. Results (10 pts)

What are the findings? Explain briefly

6. Conclusions and Discussion (15 pts)

What is the contribution of the study? Explain briefly

What are the limitations of the study? Are they mentioned?

What is the direction for future research? Explain briefly

7. References (5 pts)

How many articles are cited? What citation format is used?

8. Appendix (5 pts)

Is there an Appendix section? If yes, what is presented?