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China Payment U-Turn: Government Against Technology

 


China has been at the forefront of the technological revolution in payments, both in the private and public sectors. Chinese high-tech companies have succeeded in replacing the world of bank-based magnetic stripe cards with high-tech-based QR code systems. Then the People’s Bank of China (PBOC) launched the central bank’s digital currency, followed by a series of government actions that seemed to be designed to keep the Chinese system away from these tech companies. What’s happening in China’s payments is a fascinating battle between private sector innovation and government control, big tech and big banks, usually spotlighting the world of stable and boring payment systems with China. How it plays a global economic game. It also provides insights into how the Federal Reserve approaches digital payments in the United States.

China’s settlement war is in contrast to the standard analysis of world economic games. In the standard model, the United States is an advanced incumbent economy while China is catching up. At the same time, China is modernizing its domestic system, which resembles the Western economy, while integrating into a broader global financial system at various levels. The payment story begins with this general story. The United States creates and essentially dominates global retail payments through a magnetic stripe card-based interface that runs through a global banking system. This system originated from a series of inventions in New York about 50 years ago. It started as a set of solutions for restaurants and frequent customers who had no cash access over the weekend and were looking for an alternative to paper-based checks. Payment system. These Diners Cards eventually turned into a series of plastic cards, building a series of payment rails in the United States that processed more than 130 billion transactions annually. This is over 350 million transactions per day. Looking at it, it is estimated that the peak number of Bitcoin transactions per day is about 400,000.

Magnetic stripe cards have come to dominate the world of retail payments in developed countries. In the early days of economic development, China sought to emulate and port this system. Banks have introduced their own set of magnetic stripes and cards, including UnionPay, as the most prominent example. Founded in 2002, Union Pays’ penetration rate has skyrocketed, with more than 3.5 billion cards in circulation in just 10 years, about half of what Visa was processing in the mid-2010s.

The story is different from the Chinese tech companies WeChat and Alibaba, who valued the inefficiencies inherent in card-based systems: interchange fees, card and card reader design equipment, and the costs borne by merchants. Chinese merchants, especially small merchants, lacked interest in such expensive systems. Taking these opportunities, two technology companies have created a QR code digital wallet scan-based system. This is essentially a leap forward for debit magnetic cards. The new system is faster and more efficient than debit magnetic cards, and has brought many direct and indirect benefits not only to these two companies, but to the wider society. This innovation has allowed China to leap forward in the magnetic stripe card system, which dominates many of the retail payment systems in the western world.

China’s new payment system has exploded from start to control in less than a decade. With over a billion users on each platform, the power of network incentives has been unleashed. The new payment system has replaced cards and cash at cashiers, changed the way families give gifts, evolved the way beggars ask for money, and QR codes have replaced tin cups.

This is a strong example of China’s innovation, competition and adoption. At least to external observers, it appears to be very organic and internally driven, rather than the product of a central plan or committee. For example, the two companies diverged due to the origin of the payment system. WeChat Pay is based on a social media platform (I think Americans are Facebook) and is deeply involved in payments between individuals. WeChat Pay was first deployed around Chinese New Year 2014 as a service to promote personal funding in the form of red envelopes (traditional cash gifts). WeChat Pay has proposed to digitize this exchange. It was clearly synergistic. The popularity of the Red Envelope Exchange has provided many customers with initial funding for their WeChat Pay account. WeChat announced the idea of ​​Red Packet digital payments in 2014, sending 16 million packets. The following year, a billion packets were sent. By 2016, it had exceeded 8 billion, and in 2017 it had exceeded 46 billion.

The origin of Alipays is different. Alipay is a payment platform developed by Alibaba, a Chinese technology conglomerate with roots in digital commerce (think Amazon), so it is likely to be used for business purposes. Internet commerce requires an electronic payment system integrated with credit and debit cards. Due to the lack of such a system in China, Alibaba began to develop Alipay to support Taobao’s online shopping platform. UnionPay, Alipays’ major competitor, was just launched recently and hasn’t gained a lot of customers, so the payments market was wide open. Alibaba offers merchants an incentive to use Alipay for purchases across the platform. They provide both parties with free purchases, preferential placement on digital platforms for merchants, and ease of payment integration into business processing. These differences provide the economic benefits of low cost and potentially high volume of transactions that are not widely available in bifurcated credit / debit card systems.

This integration model has potential, such as no fees to provide the services customers want with payments such as interest-free grace periods, and anti-competitive concerns about integrating business and social networks with payment platforms. There are some drawbacks.

With this technological advance, China has many elements needed to challenge existing retail payment systems, and global payments are in desperate need of progress from the seemingly disastrous 50-year-old plastic cards. It seemed ready to dive into the contest. It’s out of place in a digital environment.

However, China has not selected this and instead seems to be making a U-turn and heading in the opposite direction. China is slowing down tech companies, strengthening government roles, and in some cases banking payments, rather than aggressively expanding the system and opening it up to a wider network like the US card-based system. Central system.

The Chinese government has intervened in the creation of a central bank’s digital currency. This digital source uses much of the same infrastructure as Ali and WeChat payment systems. Digital wallets, QR codes, scanners, etc. Just this month, PBOC Governor Yi Gang announced the goal of interoperability with existing digital payment tools.

Digital Yuan is currently running in more than 10 regions of China and has more than 150 million users. It was first launched in Shenzhen, home of Tencent (the company that runs WeChat Pay). A skilled US-China international diplomat with a keen understanding of history is not needed to understand that deciding to deploy a digital source in the home of the payment giant sends a clear message. If the US government launches its own online bookstore / retailer and happens to choose the city of Seattle, the message will be clear worldwide.

Combining this with Alibabas closes the initial public offering of financial sector Ant and a series of issues raised by government officials and regulators, temporarily opening the possibility for China to expand its Alipay and WeChat payment systems globally. There is a message that it is stopped. On the contrary, it seems hoped that China’s internal systems will be reoriented rather than exporting China-based digital wallets in the hope of becoming ubiquitous like the current Visa, MasterCard, and American Express networks. is. Focused on central bank digital currencies executed through digital wallets directly tied to the Chinese banking system.

Now, it is plausible that this change will eventually set the digital source using a tech rail that is very similar to the QR code. Initially piloted by Ali and WeChat, it’s actually akin to repeating history. The original American charge card, Diners Club, was coordinated between restaurants (merchant) and consumers, not banks. This model eventually lost the race. MasterCard itself is a consortium of financial institutions that started out as Visa from Bank of America and a closed-loop payment system and has a completely different history than American Express, which is now part of a bank holding company.

Previously, we thought that Alipay’s digital wallet or digital wallet linked to the WeChat network could be a global phenomenon that extends far beyond China on the phones and pockets of billions of people around the world. Was being done. Now I feel it is very unlikely. Instead, digital Chinese wallets through Chinese banks will appear where China is heading. The model seems to be a mode that is unlikely to promote international commerce across Europe and even Africa, not to mention challenging the United States for domestic market share. Alipay and WeChat are accepted by US retailers, but most of the time they are used exclusively by Chinese, not Americans.

This raises questions: As China makes technological advances in globally competitive industries such as payments, China’s ultimate goal is to export this technology and create a network for global commerce. mosquito? Or is it ultimately an internal process where profits and costs are felt by the Chinese people and maintained by the Chinese government? Gunpowder was invited to China for centuries before the ceremony came to Europe.

From an American point of view, there is a little relief as China has built better mousetraps in many respects. It’s also a shot of the Federal Reserve’s weapons, which have spent a great deal of resources considering launching its own central bank digital currency. China is not the only country promoting the Federal Reserve. Facebook’s first announcement of a digital currency (then called Libra, now known as Diem) was another important moment in urging the Fed to consider alternatives. The federal government’s review of central bank digital currencies was heavily influenced by the payment behavior proposed by both China and Facebook. This is the same federation that could not adopt real-time payments in the United States, despite the European Union, the United Kingdom, Japan, Mexico, and many countries that adopted such a system years and decades ago. Create a new central bank digital currency that will help explain how the Fed is currently receiving a lot of attention. Whether the Fed will announce a new digital currency is years away. Meanwhile, low-income consumers still pay billions of dollars as a result of the federal government’s failure to modernize its payment system. My estimation is that more than $ 100 billion has already been spent as a result of the federal government’s inaction when the UK moved more than a decade ago. It represents one of the biggest policy failures in my life that contributes to American income inequality and unnecessary inequality.

In conclusion, it is currently unclear whether the Federal Reserve will launch a central bank digital currency, but China seems to be working on the digital yuan path. Such moves could also favor moving payments back to the banking system more broadly, away from the two tech companies. However, the QR code and digital wallet technology system seems likely to remain in China, regardless of who operates the system.

The Brookings Institution is funded through the support of various foundations, businesses, governments, individuals, and endowments. A list of donors can be found in the annual report published online. The findings, interpretations, and conclusions of this report are those of its author and are not affected by donations.

Sources

1/ https://Google.com/

2/ https://www.brookings.edu/research/chinas-payments-u-turn-government-over-technology/

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