For years, Zhou Kejia has been giving prepaid cards as gifts to friends, clients and relatives during the holidays.

This year, however, the manager of a small business consulting company in Shanghai ran into some confusion about the rules governing two of the most popular cards sold in the city - Lianhua OK and SmartPass.

"The salesperson said that customers could not buy the Lianhua OK card at the supermarket until its issuer, Bailian, obtained a third-party payment license," Zhou told the Global Times. "But strangely, the SmartPass card has remained available even though its issuer has no license."

Prepaid cards in China are like gift cards on steroids. They are available from numerous issuers in almost any amount and can be used to purchase goods or services from a network of merchants, including supermarkets, restaurants and entertainment establishments, such as karaoke clubs.

As the popularity of these cards has grown, so have the central government's efforts to regulate the third-party payment industry. On the last day of 2011, the People's Bank of China (PBC) issued 61 new licenses to companies in the industry, 34 of which were issuers of prepaid cards.

While most of the well-known domestic issuers of prepaid cards, such as Bailian E-commerce Co Ltd and Shanghai SandPay E-commerce Service Co Ltd, got the green light to continue their third-party payment business, not a single foreign-invested firm has been granted a license.

To be clear, the lack of a license has not stopped most foreign-invested firms from issuing prepaid cards. However, experts said the regulatory uncertainty will likely give domestically-owned issuers an advantage over competitors that are either partially or wholly foreign-owned.

The stakes are large. Third-party payment companies issued 96.5 billion yuan ($15.34 billion) in prepaid cards in 2010 and the market is expected to exceed 300 billion yuan by 2013, according to a 2011 report on China's prepaid card industry released by the consulting firm iResearch.

Pending regulations

The Chinese government didn't start regulating the third-party payment industry until June 2010, when the central bank promulgated the Administrative Measures for Payment Services of Non-financial Institutions. The regulations weren't limited to prepaid cards, but all money transfer services between payees and payers, including online payments companies, bankcard payment and other payment services overseen by the PBC.

Under the regulations, starting from September 1, 2011, a company that failed to obtain a "Payment Business License" is prohibited from operating in the third-party payment business. For example, Bailian had to partially suspend the third-party payment usage of its popular Lianhua OK card until it received its license on the last day of 2011. Although consumers could still use the card at merchants within Bailian Group, China's largest retail company, the failure to get a license before the September deadline caused it to take substantial losses in the following quarter, according to a China Business News report. Bailian's prepaid card sales in the fourth quarter of 2011 fell more than 20 percent year-on-year.

Nevertheless, the regulations have left some wiggle room for foreign-invested payment services. They stipulated that the PBC must promulgate additional rules for such companies, which the State Council would subsequently have to approve. Because the PBC has not yet worked out these new regulations, it appears that the PBC is allowing foreign-invested companies to stay in the business after the deadline.

The impact of uncertainty

The regulatory uncertainty has been met with different reactions from different overseas-invested firms. Beijing Gaohuitong Business Management Co Ltd, a wholly-owned subsidiary of a Hong Kong company, for example, has decided to abandon its prepaid card business, according to a notice on the company's website.

On the contrary, Shanghai Smart Service Co Ltd, the joint venture of Australia's Oncard International Ltd and Shanghai Sand Bankcard-Link Information & Service Co Ltd, has chosen to continue its service.

"We already applied for license, but haven't heard anything from the PBC," a SmartPass hot line saleswoman told the Global Times. "As long as the PBC doesn't ask us to stop, business will just go on as usual."

However, the fact that most of the powerful domestically-owned issuers have obtained licenses will eventually put their foreign-invested competitors at a disadvantage, said Wang Weidong, an industry analyst for iResearch.

"Most consumers don't know much about the licensing issue, so it will take time for the authorities and companies with licenses to convey the message to their customers," Wang told the Global Times. "Foreign-invested companies may feel the impact in the long run if customers begin to worry about the longevity of cards issued by unlicensed companies."

The PBC has not ruled out the possibility of granting a license to companies with foreign investment. Wang said the current regulation only suggests that it may take more time because such applications need the approval of not only the central bank but also the State Council.

"But the uncertainty stems from the fact that no one knows when it might happen," he added.

The next round

Although China Business News recently cited an anonymous source who said that the central bank will issue its fourth round of licenses not long after the Spring Festival holiday, Wang is skeptical that it will happen so soon.

"The central bank issued 27 licenses in May in the first round, 13 in the second round in August and 61 for the third round in December. By that schedule, the fourth round won't come until March or April and there won't be many licenses issued," Wang said.

PBC statistics show that there were 243 non-financial institutions that issued prepaid cards in 2010. Because only one-third of card issuers are licensed, plus the anticipated market growth, it is widely expected that more licenses will be given, increasing the chances that foreign-invested companies will get the regulatory go-ahead.

On the other hand, Liu Shiyu, vice governor of the PBC, said in a recent meeting that the central bank won't grant too many licenses to prepaid card companies in order to encourage consolidation in the industry, according to a Beijing Times report.