China mulls over Tencent payments overhaul, licence rule

BEIJING • The Chinese authorities are considering requiring Tencent Holdings to include WeChat Pay in a newly created financial holding company, part of an overhaul that may necessitate a new licence for the ubiquitous mobile payments service, according to people familiar with the matter.

The potential move would present a fresh hurdle for Tencent, which along with other Internet firms was told last year to cordon off financial services from its main business.

Similar to requirements imposed on billionaire Jack Ma's Ant Group, Tencent needs to fold its banking, securities, insurance and credit-scoring services into a financial holding company that can be regulated like a traditional bank, the people said.

Regulators are now weighing whether WeChat Pay should be included in that holding company and operate separately from the main social media arm, the people said, asking not to be named discussing private deliberations.

While investors have long anticipated the financial services overhaul, details of how that impacts WeChat Pay - which handles billions of dollars daily but is a transactional platform rather than a lender - have until now proven elusive.

Including WeChat Pay in the financial entity adds a new layer of uncertainty to the restructuring because it is an integral feature of the WeChat super app used by a billion-plus people, relying on backend support from different divisions. Any move that reduces the convenience of the service in Tencent's mobile offerings risks chipping away at the one-stop-shop appeal that turned the Chinese firm into one of the world's most valuable companies.

It might also revive investor angst about Beijing's crackdown on technology companies. Speculation that the nearly two-year campaign is nearing an end has helped stocks including Tencent's rebound from multi-year lows this week.

In addition, having WeChat Pay in the financial holding company would subject the service - and the vast reams of user data it generates daily - to the direct scrutiny of new regulatory bodies like the central bank, with uncertain ramifications.

Ant's estimated valuation has dropped to as low as US$63 billion (S$85.4 billion) from more than US$300 billion at its peak, in part because of the stricter regulations that come with being a financial holding company.

The mechanics of ring-fencing Tencent's financial business - including interoperability between different platforms - still needs to be ironed out and arrangements could change, the people said.

One certainty is that a financial holding company would mean additional capital requirements and tighter regulatory scrutiny.

The Wall Street Journal reported this week that Tencent faces a record fine after the Chinese authorities found that WeChat Pay had violated anti-money laundering rules.

Tencent is expected to maintain control of the new finance arm, but one question is whether services accessed through WeChat must in future offer equal ease of access to Ant's rival Alipay.

Regulators considered Tencent's current payments licence owned by its TenPay unit, the back-end provider of wallet services on WeChat and QQ, as insufficient to cover WeChat Pay's services, the people said.

The requests to Tencent are similar to those imposed on Ant, which regulators said earlier this month has yet to complete its own overhaul. Executives have said that such a move should have minimal impact on operations.

Tencent management, including chief strategy officer James Mitchell, stressed during the company's May earnings call that its bread and butter in the finance business was payments, which has lower risks.

But WeChat Pay is at the heart of the social media giant's businesses, handling an estimated 40 per cent of China's mobile payments as at last year, second only to Alipay. Tencent's complex web of internal connections could complicate its separation from the rest of the company.

Tencent's fintech and business division - which includes cloud computing - is its fastest growth engine, contributing roughly 30 per cent of its total sales, the biggest revenue source after gaming.

Yet the services are supervised by different business groups - unlike Ant, which consolidates all of its fintech operations into a single entity.

BLOOMBERG