Chinese billionaires Jack Ma and Pony Ma, who built their online finance empires by dominating the country’s online payments industry, are facing what could be the strongest competitor yet: the central bank.
The People’s Bank of China is set to provide its own electronic version of the yuan soon, potentially the first major central bank in the world to issue a digital national currency. In doing so, the PBOC is throwing down the gauntlet to Ant Financial’s Alipay and Tencent Holdings Ltd.’s WeChat Pay for a share of China’s $27 trillion payments industry.
In China, smart-phone-based electronic payments are ubiquitous, used for everything from bus-rides and convenience stores to vegetables at the local market -- and 94% of those transactions are controlled by the two firms. Yet private-sector primacy in a critical industry is becoming a rarity in China under President Xi Jinping, spelling tougher times ahead for the tech giants. A central bank-backed digital wallet could severely undermine the payments services that are the beating heart of Ant’s and Tencent’s businesses.
“The central bank is trying to regain the power it lost, as it simply can’t allow private companies to dominate payments which lie at the heart of the finance system,” said Zhu Chen, the founder of Wisburg, a Shanghai-based financial and research consultancy. He forecasts that the PBOC could take as much as a third of the payments business. “Expect some big blows to WeChat Pay and Alipay,” he said.
Much remains unclear about the threat that the digital yuan will pose to the existing businesses, including the extent to which the public will be willing or required to take it up. Executives from both companies have also not commented on it in public, though Ant Financial has worked with the regulator on it.
The PBOC has yet to set a time-line or plan of implementation, but official speeches suggest it could work something like this: Consumers and businesses would download a digital wallet on their mobile phone and load the token from their account at a commercial bank -- similar to going to an ATM. They then use that like cash to make and receive payments.
That’s subtly different from the existing mobile payments function, which are essentially processing claims on a bank account much like a debit or credit card. But the state token, if it gains acceptance, would help Chinese regulators maintain a better grasp of the country’s money supply.
Mobile payments for consumption represent 16% of gross domestic product in China, compared with less than 1% in the U.S. and U.K. where credit cards are more popular. As the nation becomes essentially cashless, the authorities have been paying ever more attention to the companies that operate the financial plumbing.
“Those big tech companies bring to us a lot of challenges and financial risks,” Yi Gang, China’s central bank governor, said during a conference earlier this year. “You see in this game, winners take all, so monopolies are a challenge.”
Zhu reasons that if Chinese regulators see payments as a sector of vital strategic importance, then the state will target at least one third of market share to achieve control. The usefulness of a payment function to the general public has proven to be so great that both Tencent and Alipay have been willing to pour billions into the business just to win market share. Even though they are inherently loss making -- free to the user but incurring fees from banks -- payment services are a key way to keep nearly a billion people using the apps and available to buy other finance services.
Already Chinese regulators have curbed one of Alipay and WeChat Pay’s most lucrative businesses – the interest they gain from escrow funds. The PBOC has also reclaimed its authority in the clearing and settlements service, requiring all third party payment systems to connect to a company called Nets Union Clearing Corp. that links with the central bank. That’s effectively stopped the duo playing the role of what Yi described as a “second central bank.”
China’s ruling party is adamant about the state controlling key sectors that pose systemic risk -- finance being one of the most important. “We have to have the borderline between central bank and big tech companies,” said Yi.
Ant Financial, owner of Alipay, and Tencent declined to comment for this story. The PBOC didn’t respond to a fax seeking comment on their digital currency plans.
It won’t be easy to uproot the mighty incumbents though. For years, users have linked their bank saving cards to the apps, which also include a wide range of other useful services, to pay for daily outlays. Alipay and WeChat Pay each have more than 900 million active users in the country.
The simple part of the plan is that the token could replace existing cash -- part of an effort to prevent money laundering -- but if the PBOC wants to win more payment share, it will have to build a network where merchants are willing to accept the token directly. That would require a lot of work, said Ryan Zheng, co-founder of RiverPay, which helps Alipay and WeChat Pay connect with merchants.
The risk for the PBOC is that adoption is weak, undermining the institution’s reputation. That’s a concern on the minds of many central banks around the world also grappling with the impact of digital payments and currencies.
To listen to PBOC officials though makes it clear that these are just practical considerations beside the bigger themes at stake.
“Currency means interest, power, global politics and diplomacy,” said Wang In, director of the People’s Bank of China research bureau, during a conference this year. “If a payments tool can provide the function of a currency, then it will definitely have impact on legal tender, and affect how a country manages its currency and financial system.”