What is the relationship between digital renminbi and third-party payments like Alipay?
Digital RMB and third-party payment are a relationship of "money" and "wallet," rather than a competitive relationship.This article was published on 01 Blockchain, authors: Zeling, Yulin.
On May 10, the topic of #Digital Renminbi and its relationship with WeChat and Alipay# topped the Weibo hot search list.
Mu Changchun, director of the Digital Currency Research Institute of the People's Bank of China, has stated that WeChat, Alipay, and the digital renminbi are not on the same dimension; WeChat and Alipay are wallets, while the digital renminbi is the money inside those wallets. Tencent and Ant Group's respective commercial banks belong to operating institutions, so there is no competitive relationship with the digital renminbi.
01 Blockchain has previously conducted an in-depth discussion on this topic, and we are republishing the relevant content to help readers better understand the digital renminbi.
At this stage, the research and pilot work for the digital renminbi (DC/EP) is steadily progressing. The digital renminbi is a digital form of legal currency and also an electronic payment method. Its issuance and promotion will have a profound impact on China's payment system, especially on third-party payment platforms represented by Alipay and WeChat Pay (Tenpay).
In essence, the digital renminbi does not conflict with third-party payments; the former is "money," a digital form of legal currency, while the latter is a "wallet," a facility and system for the operation of currency payments, serving the circulation of money. Therefore, strictly speaking, there is no competitive relationship between the digital renminbi and third-party payments like Alipay and Tenpay.
However, from the perspective of the pilot work for the digital renminbi, its use in retail payment scenarios overlaps with existing third-party payments in many aspects, whether in terms of the payment terminals used or the payment experience. At the same time, using the digital renminbi for payments has relative advantages over third-party payments in terms of security, convenience, and cost, with the cost advantage potentially becoming a key factor in impacting third-party payments, squeezing traffic from third-party payment platforms and further affecting their derivative businesses.
However, the specific extent of the impact will depend on the speed and intensity of the digital renminbi's promotion. Considering that the early focus of the digital renminbi's issuance and promotion is mainly on cultivating user habits and developing scenarios, the impact on third-party payments may not be immediately apparent. Additionally, the depth of participation of third-party payment institutions in the digital renminbi operating system introduces many variables regarding the related impact.
Nevertheless, while facing potential shocks from the digital renminbi, third-party payments may also find new opportunities in areas such as digital renminbi wallet development, user experience enhancement, and cross-border payment exploration, relying on their own technological strength and data accumulation.
I. Digital Renminbi vs. Third-Party Payments: "Money" and "Wallet," Non-Competitive Relationship
Digital Renminbi: An Electronic Payment Method as "Money"
The digital renminbi (DC/EP, full name: Digital Currency Electronic Payment) is a digital form of legal currency issued by the People's Bank of China and serves as an electronic payment method, primarily positioned as M0, i.e., cash in circulation; in practical use, it is mainly used in small, high-frequency retail scenarios. (For further understanding, see "Overview of Digital Renminbi: Attributes, Journey, Motivations, and Goals.")
The system design of the digital renminbi has the following five key points: [1]
- Uniformly issued by the People's Bank of China, adhering to centralized management;
- Adopts a "central bank------commercial bank" two-tier operating model;
- Based on a broad account system, supporting loosely coupled bank account functions;
- The digital renminbi is positioned as a public product provided by the central bank to the public, with no interest paid and no transaction fees charged;
- Supports controllable anonymity and dual offline payments.
Among the five design points mentioned above, the fourth point indicates that the digital renminbi is a public good provided by the central bank, functioning as "cash" without interest or transaction fees. Overall, the digital renminbi possesses high authority and security, while integrating the convenience of cash and existing electronic payment tools, achieving controllable anonymity and balancing user privacy protection.
Third-Party Payments: An Electronic Payment Channel as "Wallet"
According to the "Administrative Measures for Payment Services of Non-Financial Institutions" issued by the People's Bank of China in 2010, third-party payments refer to network payments, prepaid card issuance and acceptance, bank card acquiring, and other payment services provided by non-financial institutions as intermediaries for payers and payees.
Figure: Classification of third-party payment businesses licensed by the central bank, source: "Administrative Measures for Payment Services of Non-Financial Institutions"
Third-party payment institutions primarily act as intermediaries in the payment system, with their main profit model being the collection of payment service fees and transaction fees. With their payment convenience and advantages in user experience and product innovation, third-party payments have become the dominant payment method in China's retail payment sector, especially mobile payments represented by Alipay and WeChat Pay, which have penetrated various aspects of consumers' daily lives, becoming important financial infrastructure in retail scenarios.
However, it is important to clarify that acting as a payment method is just one of the important functions of currency. Although various payment tools can be viewed as different carriers or manifestations of currency to some extent, there are significant differences between currency and payment tools in terms of credit support, payment immediacy, dependence on accounts, and legal tender status. To understand the digital renminbi, it is essential to recognize that it is fundamentally a type of currency, the digitalization of the renminbi, and a component of China's existing legal currency system.
In short, third-party payments are electronic payment channels/methods, equivalent to a "wallet," while the digital renminbi, as an electronic payment tool, is equivalent to the "money" inside the wallet. Essentially, there is no competitive or substitutive relationship between the two.
However, in terms of the payment terminals relied upon and the payment experience, there are many overlaps between the digital renminbi and existing third-party payments, which may still have various impacts on the current third-party payments.
II. Challenges: Cost Advantages May Be Key to Impacting Third-Party Payments
Mobile Payments Lead the Development of Third-Party Payments, Market Shows Oligopoly Pattern
Third-party payments have become a key part of China's payment system, especially the electronic payment system. In recent years, the transaction scale of third-party payments has shown a continuous growth trend.
Figure: Comprehensive payment transaction scale of third-party payments from 2013 to 2020 (unit: trillion yuan), source: China Industry Information Network
According to the "Overall Situation of Payment System Operation in 2019" released by the People's Bank of China, in 2019, banks processed a total of 223.388 billion electronic payment transactions, while non-bank payment institutions processed 719.998 billion network payment transactions.
With the rapid development of mobile internet, 4G, and 5G networks, as well as the popularity of smartphones, offline QR code payments, NFC, and other payment methods have begun to be promoted, leading to a significant increase in mobile payment scale, which has captured a large market share. By the end of 2019, the overall scale of mobile payment transactions had risen to 62.8%[2], becoming the main growth point of third-party payment businesses.
In the mobile payment market, Alipay and Tenpay (WeChat Pay) share a large portion of the market. Data shows that as of the second quarter of 2020, Alipay and Tenpay (WeChat Pay) accounted for 55.6% and 38.8% of the third-party mobile payment market share, respectively[3], together holding 94.4% of the mobile payment market share.
Comparative Advantages of the Digital Renminbi Payment System Relative to Existing Third-Party Payment Systems
Although, in essence, the digital renminbi ("money") and third-party payments ("wallet") are not comparable, the payment system built around the digital renminbi wallet can be compared with existing third-party payment systems.
Table: Comparison of Digital Renminbi Payments and Third-Party Payments, source: 01 Blockchain, Zero One Think Tank
Digital renminbi payments have certain comparative advantages over third-party payments in terms of security, convenience, and cost.
Security
This is mainly reflected in the credit level of the entities supporting the payment system and the protection of payment data privacy.
First, the credit level of the digital renminbi differs from that of existing third-party payment systems, which are supported by the commercial credit of the platforms, while the digital renminbi is supported by national credit.
Second, regarding the protection of payment data privacy, the digital renminbi achieves "controllable anonymity" through encryption technology, ensuring the security of user data and avoiding the leakage of sensitive information without compromising usability; it also manages the permissions for the use of related data, ensuring traceability under certain conditions, with only the central bank able to access the full user identity information and transaction records. In contrast, existing third-party payments require strong KYC based on payment accounts when providing services, allowing third-party payment institutions to collect and use user data under relevant legal regulations and user authorization.
Convenience
This includes the loosely coupled account settings and the convenience brought by various payment technologies, including dual offline payments.
The digital renminbi is based on a broad account system, achieving loosely coupled bank accounts, which eliminates many restrictions for the public who do not use third-party payment tools or do not have bank accounts. From this perspective, the digital renminbi can cover a broader population.
Additionally, the digital renminbi will be able to integrate various existing electronic payment methods and technologies for payments, and based on its legal status as a national digital currency, it can break the current incompatibility among third-party payment channels. The implementation of dual offline payment functionality can also meet the demand for payment transactions in extreme environments (poor signal, no network).
Cost Advantage
In the existing third-party payment service system, merchants and consumers must go through third-party payment, network connections, and UnionPay as intermediary institutions during transaction payments, incurring corresponding fees. The digital renminbi system connects directly to the central bank, achieving payment and settlement simultaneously, eliminating intermediaries, and does not charge consumers any fees. For merchants, this means there is potential for reduced service fees, making it more attractive.
III. Focus: The Potential Cost Advantage of Digital Renminbi on Third-Party Payments
Changes in the Third-Party Industry After "Breaking Direct Connections"
In August 2017, the Payment and Settlement Department of the central bank issued a notice regarding the migration of non-bank payment institutions' network payment business from a direct connection model to a network platform, clearly stating that "from June 30, 2018, all network payment businesses involving bank accounts processed by payment institutions must be handled through the network platform," known as the "breaking direct connections" of third-party payments.
"Breaking direct connections" directly changed the direct connection structure, regulatory methods, profit models, and future development directions of the third-party payment industry. Before "breaking direct connections," third-party payment institutions could connect directly to commercial banks and often opened reserve accounts with multiple commercial banks. The reserve funds are the pre-collected funds that third-party payment institutions receive to handle customer-commissioned payment businesses. These funds belong to the users, stored in commercial banks under the name of the third-party payment institutions, which initiate fund transfer instructions to commercial banks. The interest on reserve funds theoretically belongs to the users, but in practice, it is generally owned by the third-party payment institutions, constituting an important source of income for them. Notably, a significant portion of the reserve funds is stored in commercial banks in the form of interbank agreement deposits, which have relatively high interest rates. Third-party payment institutions used these reserve accounts to handle interbank fund clearing, operating beyond their scope and effectively exercising the interbank clearing functions of the central bank or clearing organizations.
On June 29, 2018, the central bank issued an urgent document requiring that from July 9, 2018, the proportion of customer reserve funds concentrated by third-party payment institutions must be gradually increased monthly until achieving 100% concentration by January 14, 2019, further expanding the connotation of "breaking direct connections."
After "breaking direct connections," the revenue of third-party payments mainly comes from payment service fees and derivative businesses based on traffic advantages. For third-party payment institutions, their current moat lies in traffic, scenarios, and ecosystems.
Potential Changes: The Impact of the Digital Renminbi Payment System
The payment system formed around the digital renminbi is most likely to impact and erode the traffic and scenarios of third-party payments, which in turn will affect their service fee income and derivative businesses. The digital renminbi, as an electronic payment method, poses potential impacts and shocks to third-party payments that cannot be ignored.
- Traffic Occupation and Reduction of Intermediary Service Fee Income
The digital renminbi is a liability of the central bank, directly connected to the central bank's clearing and settlement system. Since it does not rely on accounts, completing the transfer of monetary ownership can complete the entire payment process, thus possessing the characteristic of "payment equals settlement." Additionally, as a public good, the issuance and circulation of the digital renminbi can be free, which increases efficiency while lowering user transaction costs. Currently, third-party payment institutions cannot synchronize information flow and capital flow instantaneously during payments; they can only complete the accounting process first and then complete the fund transfer through clearing and settlement. Although users do not feel the time difference when using it, there is still an efficiency gap compared to the "payment equals settlement" feature of the digital renminbi. As a commercial service, the payment services provided by third-party payments are charged, and the main source of income for these institutions comes from the service fees charged for providing payment intermediary services.
From the recent pilot of digital renminbi red packets in Luohu District, Shenzhen, merchants can instantly transfer the digital renminbi they receive into their associated settlement accounts for free. This is equivalent to directly converting the digital renminbi, as cash, into deposits in bank cards. It not only saves the time previously spent running to the bank to deposit cash but also saves the withdrawal fees from Alipay and WeChat Pay, thus providing a strong incentive for merchants to adopt digital renminbi payment services. If more and more merchants begin to support digital renminbi, the promotion and use of digital renminbi in various application scenarios may erode the traffic of third-party payment platforms, leading to a decline in the payment service fee income of third-party payment institutions.
- Derivative Businesses Based on Digital Renminbi May Become Key to Seizing Payment Heights
From the existing third-party payment business model, third-party payment platforms often obtain additional income by providing derivative services based on the traffic, data, and scenario advantages brought by payment businesses.
These derivative services can be divided into two main categories: one is financial services, including lending, wealth management, etc. This type of business mainly relies on the traffic advantages of third-party payment platforms and collaborates with relevant financial institutions to serve as a channel for directing traffic, earning profit sharing from it. The other category includes credit, risk control, and other related businesses derived from the big data of user payment behavior accumulated by the payment platform, such as the Sesame Credit score launched by Alipay for users and the risk control service product "Ant Shield" promoted by Ant Group.
The issuance and promotion of the digital renminbi will require some time to accumulate in application scenario exploration and user base, so it may not have a significant impact on third-party payments in the short term. However, as the user base of some digital renminbi operating entities (mainly commercial banks) increases and application scenarios deepen, expanding derivative businesses based on this may become key to seizing the "heights" of the payment industry.
- Unclear Management Path of Operational Data Related to Digital Renminbi Becomes an Important Variable
Currently, detailed data from payments made through third-party payment platforms are generally retained and managed by the platforms, serving as an important basis for targeted customer service. However, how the circulation data related to the digital renminbi will be managed among operating institutions remains unclear, making the unclear data management path of the digital renminbi an important variable for operating institutions to achieve differentiated competition in the payment field.
However, based on the information currently known, first, the central bank holds all data and can make corresponding policy adjustments based on the operational data of the digital renminbi; second, operating institutions (mostly commercial banks) may retain circulation data related to the digital renminbi, or they may not retain data but only serve as a transit for data transmission, with the data ultimately needing to connect with the central bank.
As long as data can be retained at the operating institutions, even if encrypted transmission and retention methods are used, it does not affect the personalized services that operating institutions can provide. However, the central bank has revealed little information about how data related to the digital renminbi will be managed, so we can only consider this as the current uncertainty regarding whether operating institutions can achieve differentiated competition in the payment market.
IV. Opportunities for the Third-Party Payment Industry Amid Changes
Although the issuance of the digital renminbi may bring many uncertainties to the third-party payment industry, third-party payment service providers can still seize numerous opportunities based on their long-term accumulation amid these changes.
First, third-party payment institutions can leverage their technological accumulation to provide wallet development services for the digital renminbi. The exchange, payment, and management of the digital renminbi all require the support of digital wallets, placing wallets at the core of the digital renminbi payment system. With a grasp of the digital renminbi wallet development standards, third-party payment institutions can leverage their technological accumulation in payment account development for technical migration, providing technical support for their own digital renminbi operations and also offering wallet technology support to other digital renminbi operating institutions.
Second, third-party payment institutions can focus on enhancing user experience based on the user data they have accumulated (especially user behavior data). One of the key aspects of the early promotion of the digital renminbi is user experience; if third-party payment institutions can excel in the user experience of the digital renminbi, they can still retain a considerable number of users on their platforms.
Third, third-party payment institutions have advantages in scenario coverage, and the early promotion of the digital renminbi may still require the scenario support of these institutions. In the future, third-party payment institutions need to manage their cooperation and differentiated competition with other digital renminbi operating institutions effectively.
Finally, some third-party payment institutions have already gained considerable experience in the field of cross-border payments. Although the current pilot work of the digital renminbi does not involve cross-border payments, it cannot be ruled out that future explorations may be needed for the internationalization of the renminbi. Third-party payment institutions can prepare for this based on their relevant experience.
Notes
[1] Fan Yifei: Analysis of the Policy Implications of the Digital Renminbi M0 Positioning, China Financial News Network
[2] Data source: Guosheng Securities
[3] Data source: iResearch Consulting
