China’s Central Bank Digital Currency Will Strengthen Alipay And WeChat Pay, Not Replace Them

China has been exploring the idea of a Central Bank Digital Currency (CBDC) since 2014. Six years later, it launched a pilot version. The official Digital Currency Electronic Payments (DCEP) platform currently looks set to launch within a year.  

Some media observers have suggested that Beijing is launching the DCEP to wrest control from the digital incumbents: Alipay and WeChat Pay. The two fintech giants control about 90% of China’s digital payments market, and between 20-25% of retail spend across China, not to mention the distribution of many other financial products and services such as wealth management and lending.

Given that these two platforms are the bedrock of China’s digital financial ecosystem, anything that challenged their preeminence would be, to put it bluntly, a big deal. But Beijing is not looking to replace Alipay and WeChat Pay with the DCEP. Rather, Alipay and WeChat Pay will likely be integrated with the DCEP, which will cement their positions in the digital finance space.

Working with us

Ant Financial and Tencent, the parent companies of the two payment platforms, have long cooperated with the government. In 2015, the People’s Bank of China (PBOC) tapped several technology companies, including Ant Financial, to set up credit scoring platforms. Ant Financial very quickly launched Sesame Credit, and Tencent, although providing credit scoring in the background, launched a competing platform earlier in 2020.

In 2016, Ant and Tencent also started working with the regulators on the Nets Union platform, which was launched in 2018. The private-public Nets Union initiative was specifically designed to give the PBOC better visibility into digital payment transactions. Nets Union has become the primary digital payment clearing platform in China.

Ant Financial’s MyBank and Tencent’s WeBank, the two largest digital banks in China, have also been working closely with the country’s traditional banks in the lending space. Today, if a retail or SME customer wants to borrow money on one of the two digital banking platforms, a traditional bank usually funds most of the underlying loan.

Thus, despite their reputation as disruptors, Ant Financial and Tencent often work within China’s existing financial system. To extent that they have shaken up the existing order – by launching neobanks, for instance – it has been with explicit regulatory approval. With that in mind, it is likely the two firms have also been involved in the development of China’s DCEP. They are well qualified for the job: Tencent filed for the most blockchain patents globally in 2019. Alipay itself has processed more than 120,000 transactions per second (TPS), roughly double what Visa and Mastercard MA are capable of processing.

Super apps are super sticky

The interface of Alipay and WeChat Pay is even more important than the underlying technology. As payment platforms, each is equally paramount in China. But WeChat is in a class by itself: It is China’s only super app, used by hundreds of millions of Chinese daily to chat, bank, shop, book taxis, read news and watch videos. Both Alipay and WeChat are lifestyle apps that have become an integral part of Chinese popular culture, like Google GOOGL and Facebook in the United States.  

That stickiness is part of the reason that other competing QR code platforms never really caught on. China’s domestic banks tried launching competing QR code payment solutions, but they were clunky, and merchant acceptance was low. Even Quick Pass, Union Pay’s QR code platform, has struggled to capture much market share despite nearly every merchant in China accepting Union Pay cards.

The challenge is that they are destination apps insofar that you only use them when you pay, but you may be already using Alipay or WeChat Pay to book a car or order food; if you can pay in the same app, why would you switch?

It is unclear yet if the PBOC will distribute DCEP through Alipay or WeChat Pay directly, but both platforms will support a DCEP wallet. With the ubiquity of Alipay and WeChat Pay use, consumers may not see much of a difference as they will merely move from the current ‘digitized’ currency to a fully digital one.

The future is digital

China’s financial future is digital, and Alipay and WeChat Pay will only become stronger as the payment channels of choice, especially as the DCEP starts replacing cash transactions. Over time, the two platforms will also be critical tools for the government to accelerate China’s cashless transformation.

We could also see the use of DCEP expand beyond China’s borders through the mobile wallets as well. Alipay and WeChat both have millions of merchants outside of China that accept payments on the two platforms predominantly catering to Chinese tourists abroad. Conceivably, those could all end up being points of distribution for the DCEP including for the merchants who may be happy being paid in DCEP as opposed to Euros or USD. Similarly, the DCEP could facilitate payments along China’s Belt and Road Initiative (BRI). As the majority of BRI funding is in Chinese Yuan, a switch to DCEP would be relatively straightforward.

A larger role for Alipay and WeChat Pay in China could be beneficial for the financial system. In most global payment segments, such as credit cards, there are only a few payment service providers that have scaled enough to dominate the market and must markets still function well with that scenario. Further, as we have seen in the past, Beijing is undoubtedly sitting on top of the tech giants to make sure they don’t get too large. China did start as the world’s biggest fintech sandbox, but the regulators have reigned in the industry and are now partnered closely with the two companies, and all signs are that Alipay and WeChat Pay will be a critical part of that DCEP vision.

Source: Forbes – Money