By Hongmei Zhao and Heng Xie
HONG KONG/BEIJING (Reuters) - China's central bank demanded on Friday that payments made by scanning a bar code with mobile devices be halted, hitting the payment arms of Internet companies Tencent Holdings Ltd <0700.HK> and Alibaba Group Holding .
The People's Bank of China (PBOC) made its decision amid concerns about the security of verification procedures and asked both companies to provide detailed reports about their products.
The suspension affects the rollout of new virtual credit cards by Tencent and Alibaba as competition intensifies in China's e-commerce market.
Both companies announced this week they would launch cards, which can use QR bar codes scanned by smartphones to process payments, in partnership with China CITIC Bank Corp <601998.SS> <0998.HK>. Alibaba's card launch is planned for next week.
"We have received the letter on the respective payment business and are currently communicating with PBOC on this," Tencent said in a statement.
"We will fully cooperate with PBOC and submit the materials as required."
China's online and mobile payment transactions have been growing at a torrid pace, and consultancy McKinsey forecasts China will overtake the United States as the world's largest online retail economy this year.
Analysts say the halt of any new services is likely to be temporary, as the PBOC moves to assess how customer information is being secured.
The central bank's suspension also underscores the clash between China's finance sector and domestic Internet companies, which have pushed into the banks' territory by ramping up their own financial services, offering online payment services and wealth management products.
"This is a milestone in the innovation of China's Internet finance, said Yi Huanhuan, deputy director at Hong Yuan Securities Research. "The ways the Internet is used has already reached the 'meat' of the core business of traditional banking institutions."
China's three Internet giants, which also include Baidu Inc , have invested heavily in technologies and businesses that make use of scanning QR codes with mobile devices to cash in on China's 500 million smartphone and tablet users.
China's mobile payment market last year increased by more than 700 percent, to 1.22 trillion yuan in transactions.
QR codes, which can be scanned with mobile devices to transmit web addresses, payment details or other information, are expected to be a driving force in the mobile payment market this year, according to Beijing-based data firm iResearch.
But the growth of the QR code system has also sparked concern over its security, particularly for making payments.
Officials at Tencent, China's largest listed Internet company, and Alipay, the online payment arm of e-commerce firm Alibaba, confirmed to Reuters that they had received a notice from the People's Bank of China (PBOC) about the move, though they declined to be identified because they were not authorised to speak with media.
An Alipay spokeswoman declined to give official comment. A PBOC spokesman said the bank is asking the companies to submit detailed reports on their procedures.
"The notice was issued all of a sudden ... This notice had a great impact on our business," said an official from Alipay, Alibaba's online payment affiliate, who declined to be identified as they were not authorised to speak to the media.
The PBOC document was issued "in order to protect the payment service market, and prevent payment risks", a source who saw the notice told Reuters.
Shares of Tencent slid as much as 7 percent in Hong Kong before ending down 4 percent.
China CITIC Bank Corp <601998.SS> <0998.HK> suspended trading of its shares after the stock fell more than 8 percent in Shanghai and nearly 7 percent in Hong Kong. China CITIC Bank said on Thursday it will operate virtual credit cards with Tencent and Alibaba.
These virtual credit cards can also be used to make payments without a QR code on websites that support CITIC credit card payment and on Tencent's and Alibaba's own platforms.
China CITIC Bank told Reuters it had not received any document from the PBOC.
Analysts said other new offerings or technology could also be at risk.
"It is a negative sign to the market. The central government steps in to control a supposedly very free and innovative area of business. That means even if it is an innovative segment, it is not as free as we have anticipated," said Alex Wong, a director at Hong Kong-based brokerage Ample Finance Group.
In February, Alipay said it handled 900 billion yuan in mobile payment transactions from more than 100 million users last year, completing more mobile payments than U.S.-based PayPal and Square Inc combined.
The PBOC said in December it would closely monitor the development of online financial services to ensure companies do not cross any legal red lines.
"If the government is pushing back on the QR code thing, it's probably a temporary thing until the government figures out what is going on," said Michael Clendenin, managing director of Shanghai-based RedTech Advisors.
China's Internet companies have repeatedly clashed with entrenched interests in the finance sector, as companies such as Tencent, Alibaba and Baidu Inc push further into their territory.
In August, Chinese media reported that Alipay halted its offline point of sales service for small companies.
The move came after state-owned China UnionPay, the country's monopolistic credit card provider, put pressure on Alipay to route the service through UnionPay's system so it could increase its commission earnings on transactions.
Tencent and Alibaba said this week they are also applying for licences from the bank regulator to participate in a trial plan for privately-owned banks.
(Additional reporting by Paul Carsten and Alice Woodhouse in HONG KONG and; Pete Sweeney and Gabriel Wildau in SHANGHAI; Editing by Anne Marie Roantree & Kim Coghill)