Last week Oliver Wyman published a paper on the digital yuan entitled, “A new dawn for digital currency. Why China’s eCNY will change the way money flows forever.” The document acknowledges that the central bank digital currency (CBDC) will focus on domestic applications in the near term. But it gets interesting when looking beyond that to cross border flows and B2B payments.
A key benefit introduced by the eCNY is the standardization and interoperability of payment networks. This challenges Ant’s Alipay and Tencent’s WeChat Pay duopoly status with their closed-loop networks and has a knock-on effect on merchant acquirers already impacted by the duopoly. Transaction fees will be squeezed further.
Most of the domestic benefits explored are ones that the Chinese state has already outlined, but it’s Oliver Wyman’s views on cross border payments that are worth exploring.
eCNY for cross border
Despite reports of the expansion of trials with Hong Kong, Oliver Wyman expects the digital yuan’s short-term impact to be limited for cross border payment. But longer term, if the digital RMB can be used for trade settlement, it estimates that “5-10% of HK GDP could be generated from more efficient clearing and settlement”. That figure translates to US$18-36 billion.
The consultants envision adoption by Belt and Road Initiative participants, and particularly programmable money “allows better oversight by the Chinese government while allowing a higher degree of liberalization.”
One of the most significant negative impacts will be on cross border payment service providers, which have benefited from complexity and a lack of interoperability. It’s also conceivable that foreign banks could be squeezed out of cross border business. Oliver Wyman doesn’t mention any banks by name.
And then there’s the impact on SWIFT. “Shifts to eCNY away from global rails means SWIFT potentially loses and foreign banks who lack onshore depth will have little eCNY to support cross-border potentially being squeezed.”
Meanwhile, Alipay is starting a rollout of the digital yuan to a subset of users and the number of people involved in trials has ramped up by ten times. There’s an anonymous version of the eCNY, but it’s become clear that it only has limited use for retail payments.