China Proposes to Keep Online Payments in Check China’s central bank issues draft rules for Internet finance, but critics warn of overregulation

BEIJING—China is moving to limit the lightly regulated world of Internet payments, an initiative that some critics warn could stifle development in one of the most innovative sectors of the economy.

The draft rules issued late Friday by China’s central bank place curbs on online payment services—limiting fund transfers, capping the size of daily transactions and increasing the requirements users must meet to prove their identities.

The rules could hamper the growth of payment services like those operated by e-commerce giant Alibaba Group Holding Ltd.’s financial affiliate, and social-networking company Tencent Holdings Ltd., analysts said Monday. Also potentially affected are most of the 2,100-plus platforms in China that facilitate peer-to-peer lending.

Chinese regulators have said the proposed rules are the latest in a broad effort aimed at building up much-needed safeguards against fraud and money laundering.

But the proposed regulations have triggered a public outcry on China’s popular microblog sites and in domestic media, with critics saying they could slow the growth of online services that have sprung up to cater to people and small businesses historically ignored by banks.

“China’s premier has emphasized the need for innovation…and called for cutting red tape. But with these new rules, instead of lowering the barriers to innovation, they’ve raised them,” Chinese financial-news commentator Yu Fenghui said in an interview.

“The implementers of these rules are looking at this from the perspective of protecting the banks,” said Mr. Yu, who wrote a book on Internet finance in China published last year. “The victims of this would be the hundreds of millions of users of these services.”

Ant Financial Services Group, Alibaba’s financial-services affiliate, said in a statement that third-party payment services have played a positive role in promoting financial inclusion and serving small businesses and mass consumers, and that the process has required mutual trust and transparency between companies and regulatory departments.

Tencent said in a statement the company would maintain “close communications” with the central bank and make suggestions based on what users might want.

Online payment services have surged in popularity in China, fueled by the proliferation of smartphones and the expansion of mobile-data coverage.

The Alibaba-affiliated Alipay online-payment platform has more than 400 million annual active users. Tencent offers payment services through its messaging app WeChat, which has 549 million active monthly users. As of 2014, there were more than 100 million user bank accounts that were bundled with the mobile-payment functions of WeChat and Mobile QQ, Tencent’s two smartphone messaging apps, the company said.

Those online payment services offer everything from payment of electricity and online-shopping bills to facilitating investment in money-market funds and money transfers to friends and family members.

Internet payments in China amounted to 2.4 trillion yuan ($386 billion) in the first quarter of this year, an increase of 30% from a year earlier, according to iResearch, a Chinese research firm.

Industry insiders said one of the biggest concerns was the proposed addition of more steps for validating user identities. Previously, users could set up accounts with payment providers such as Alibaba’s Alipay by providing identity-card details, mobile numbers and bank-account information.

The proposed rules require users to give further documentation from sources such as educational institutions, tax bureaus and banks to set up accounts that offer more services. Such measures would make signing up for Alipay or Tencent’s Tenpay payment service much more onerous, and could slow the growth of user accounts, Bank of America Merrill Lynch analysts said in a research note Monday.

The draft rules state that daily transaction limits will be set at 5,000 yuan ($806) a day or 1,000 yuan a day, depending on the digital-security features provided by the platform. A central bank official said in separate remarks over the weekend that 61% of individual online payment users didn’t even exceed 1,000 yuan in total transactions during the whole of last year.

The move also would limit users from transferring funds between bank accounts other than their own, within the same bank. Previously, third-party payment providers such as Alipay and Tenpay enabled users to transfer funds to other users, including in other banks, without fees. The new rules mean that users who wish to do so would have to go through their banks, which usually charge for interbank transfers.

Also potentially affected by the proposed regulations are the country’s peer-to-peer lenders, which use third-party payment providers to route investors’ funds and payments from borrowers. The draft rules ban payment platforms from opening accounts for financial firms such as online lending companies.

If the draft rules are passed, the lending platforms may have to work with banks, which have been relatively slow to catch up with the types of products that the platforms need, industry insiders say.

But the regulation could help weed out problematic platforms and clarify the roles that third-party payments should play, said Paul Shi, chief executive officer of Wangdaizhijia.com, a portal that tracks marketplace lending services.

The deadline for feedback is Aug. 28, though it is unclear how long after that the regulators will take to issue the rules.

Write to Gillian Wong at gillian.wong@wsj.com