China’s payments duopoly may struggle to survive

Alipay and WeChat Pay’s dominance over China’s retail payments has been written over the past decade on the back of the humble quick recognition code. The same dotted squares could now begin to undermine their moats.

Fan Yifei, vice-governor of the People’s Bank of China, said at a recent digital finance forum that there is a need to standardize, among other things, two-dimensional barcodes so that “merchants can support various payment tools without increasing costs”. ”

Before the pandemic, QR codes had spawned a 9.5 trillion yuan ($1.4 trillion) industry for paying bills in China. Other countries have enthusiastically copied the model that was made very popular, starting in 2013, by Ant Group Co.’s Alipay and Tencent Holdings Ltd.’s WeChat Pay, with the two tech giants controlling more than 90% of the mobile payment market between their. But authorities in Beijing didn’t like the idea that the funds — and the highly valuable customer data that came with them — were circulating in two large private closed loops.

Not knowing which app the customer would use, merchants had to be prepared to offer both QRs, as well as that of China UnionPay Co., the public payment processor for banks. After the central bank recommended in August 2019 that the codes become interoperable, Tencent and UnionPay decided to allow each other’s customers access to their walled gardens.

Maybe that was just the beginning. Fan feedback suggests the tech industry lockdown could weaken further. Beijing will push for a unified QR code as it wants to boost the digital yuan, or e-CNY, a paperless version of central bank-issued fiat currency. The pilots to promote the new instrument are growing and becoming more sophisticated: with smart contracts or self-executing computer code, consumers can pay a company in advance, but the e-CNY will only be released by their wallet when they receive the goods or services. In uncertain transactions like paying for houses under construction, money with built-in rules could help build trust between buyer and seller.

Yet smart money is useless if people don’t find it easy to spend. Therefore, the PBOC will ensure that merchants display only one QR to all customers, the one that accepts e-CNY by default. Alipay, WeChat Pay and UnionPay wallets will need to accept the code to avoid rejection. This will make the digital yuan a universal legal tender in China. Central bank liabilities, which have all but disappeared from retail use, will make a comeback: except they will come back in electronic form, not physical cash.

Ant and Tencent will have to work hard to retain customers or they could lose their grip on data. There is little money in the payments. The price is to glean information about customer behavior; assess the creditworthiness of users and grant them loans. Once the payment QR code becomes a commodity, the wallet market will open up to new players.

e-CNY is unlikely to become a serious competitor to Big Tech overnight: the digital yuan is meant to co-exist with private payment options, not eliminate them. But if that takes off, China’s data economy could see an overhaul. Put it down to what Columbia University economist Shang-Jin Wei calls the “controlled anonymity” of money. The central bank will distribute it to the population through financial institutions. But once users withdraw funds from their accounts to top up their wallets, banks will lose track of the money, much like money withdrawn from ATMs.

This is the anonymity function. “The ‘controlled’ part, however, is that the PBOC sees the whole history of the movement” of the e-CNY, Wei writes, “and can choose whether or not to use or share the information.”

Even if banks don’t have access to customer data, they will still be happy if the adoption of e-CNY takes the rules of the game away from tech companies. With paper money retreating further into the twilight it was invented, lenders will be able to consolidate physical branches and lower fees for end users. As for Big Tech, e-CNY will diminish their network advantage and challenge their duopoly status, according to “A New Dawn for Digital Currency,” a research report by consulting firm Oliver Wyman.

One of the intentions of the digital yuan project is to shrink the size of tech titans by reducing their ability to exploit consumer data. A universal QR code system for all national payments should support this objective. The other, more ambitious objective is to use the e-CNY to promote the Chinese currency in international transactions. This motivation has only grown stronger since the United States began to impose a dollar squeeze on Russia because of the war in Ukraine.

To buy insurance against such Western retaliation, China will want to lure its trading partners to the digital yuan by leveraging its economic superiority. For example, lower transaction costs, cheaper liquidity and higher transaction volumes through the use of Chinese e-money could result in savings of 16 billion Singapore dollars ($11.4 billion) to S$24 billion in China’s trade with Singapore, Oliver Wyman said. This represents 3-5% of Singapore’s gross domestic product, which could be split between China and the Asian city-state. E-CNY’s strategic role overseas will see Beijing wield all of its rule-making power to install it as the payment method of choice at home. This is one more reason why the duopoly of Alipay and WeChat Pay cannot last.

More from Bloomberg Opinion:

• Does your country really need digital money? :Andy Mukherjee

• The post-SWIFT era must begin: Andy Mukherjee

• Chinese tech companies get a reprieve, not a pardon: Tim Culpan

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.

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