Banking & Finance

No money, no problem

China is on track to develop the world’s largest cashless economy


Apple Pay has struggled in China

China has been credited as the place where paper money was invented, appearing first as unofficial IOUs written by Sichuanese merchants, and later as government-backed alternatives to metal coins. Today the Chinese are edging away from this much earlier financial innovation, and moving towards becoming one of the world’s foremost “cashless” societies.

In a report last month by French tech consultancy Capgemini it was predicted that China would be the international leader in digital payments by 2020, growing the volume of its virtual transactions by 36% over the next five years.

At the vanguard of this trend are mobile payments. The Financial Times reported that the volume of mobile payments in China last year was close to 50 times higher than in the US, which is still the global leader in non-cash payments thanks to its abundance of credit cards.

Foreign firms have been struggling to muscle in on the booming Chinese payments sector (see WiC356 for Apple Pay’s lacklustre effort). Ant Financial’s Alipay and Tencent’s WeChat Pay reign supreme, jointly controlling around 95% of the market. Their QR code-based payment systems are available across the country and are even accepted by street vendors and taxis. Notably Starbucks also agreed to roll out AliPay at all of its 2,800 China stores last month.

China’s “cashless society” is also increasingly driven by friends sending each other cash gifts, such as red packets at Chinese New Year (see WiC225) and fans sending “tips” to digital content producers (see WiC364). These peer-to-peer payments, according to iResearch, accounted for 60% of all China’s mobile transactions in 2016.

The uptake of digital payment is prompting the government to come up with new regulations for the sector.

In an op-ed for China Finance, two staffers at the People’s Bank of China wrote, “The development of non-cash payments and the decrease in the use of cash are an irreversible trend… The government and the central bank should… create a favourable environment for non-cash payments, accelerate the research and development of fiat cryptocurrencies, and reduce the use of physical cash.”

The authorities have already adopted some of these measures. The PBoC launched its own R&D centre for cryptocurrencies in June this year and it has cracked down on some of the more dubious digital currency products, such as Initial Coin Offerings (see WiC379).

Of course some raise concerns over the prospect of a cashless economy, such as the potential loss of consumer privacy.

However the report from Capgemini believes this is of less concern in China.

“Chinese shoppers are more willing to store their payment information on their smartphones and are also willing to experiment with alternative payment methods”, it suggests.

Perhaps that’s because it is no secret that the government has easy access to consumer data anyway. In September Tencent updated the terms of service for its messaging app WeChat, confirming that a significant amount of data is kept and disclosed in order to comply with “applicable laws or regulations”. Although there was some griping, WiC thinks it’s unlikely anyone deleted their account.

Earlier this year it was already made known that the government is devising a “social credit” scoring system, using data harvested by tech giants like Alibaba and Tencent to provide credit ratings that reflect how ‘good’ a citizen the consumer is, and rewarding those with higher scores (see WiC352).

For some consumers the financial benefits of a scheme like this might outweigh any concerns about their loss of privacy – given that those with better scores will receive greater privileges.

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