China’s central bank digital currency (CBDC) is currently in the test phase, with screenshots recently circulated. There’s been some discussion in the Chinese press about how the digital yuan might impact the two dominant wallets WeChat Pay and Alipay.
To give a sense of just how substantial these players are, Tencent, the parent of WeChat Pay, recently published its annual results. In 2019 Tencent’s FinTech division processed an average of one billion payment transactions PER DAY, had 800 million active users and 50 million active merchants.
It’s also thought that both WeChat Pay and Alipay are involved at the distribution end of the digital renminbi. The digital currency has a two tier structure in that the currency is issued by the central bank to the major commercial banks, much like happens with cash. The banks then distribute the digital yuan and from there on, the currency will circulate and can even be transferred p2p offline.
Also known as the digital currency / electronic payment (DCEP), we speculate the currency would sit in the Alipay and WeChat Pay wallet alongside other balances.
So the question is, how or why could this negatively impact the two big wallet providers?
If it’s free for merchants to accept the DCEP, whereas Alipay and WeChat Pay charge merchants a fee, then merchants could favor the DCEP, according to a report today in the China Securities Journal.
This was the view of Peng Wensheng chief economist at China Everbright Securities. If that’s the case, at checkout, we speculate it’s possible that merchants might provide a discount if users pay with the digital yuan. Some small shops still do that with conventional cash, but it’s not widespread.
Wensheng observed that a rapid expansion of the digital currency is based on network effects and application scenarios. And of course, Alipay and WeChat Pay have existing network effects and apps.
Our observation is that creating competition for Alipay and WeChat Pay was one of the purposes of the CBDC. Governments around the world are not keen to cede control over payment systems to private player monopoly or duopolies, which is also a motivator behind Sweden’s digital currency experiments.
But competitors have numerous disadvantages. Apart from the two big wallet providers being a dominant duopoly and well capitalized, if competitors cannot earn merchant fees, then they will have to find alternative sources of revenues.
And even for Alipay and WeChat Pay, if a user pays with their wallet and then selects to use the digital yuan, will there be merchant fees or not. That’s not clear at this stage.
In order for the digital currency to be used for retail checkouts, which will be tested at some Chinese McDonald’s and Starbucks branches, there needs to be some benefit for consumers to dissuade them from using the incumbents. The more likely early adoption of the digital yuan will be if state institutions give travel subsidies, like the first announced use case. Or if salaries get paid with the digital currency.
Perhaps a better question is how will China’s digital currency compete with Alipay and WeChat Pay?