The Uneasy Entanglement Between Alipay, WeChat Pay and the New Chinese E-yuan

The Chinese government is stepping up on its push for a national digital payment system. The digital yuan project is designed to provide a global payment system that will help China to curtail the impact of US’ sanctions among other things.

However, it poses a threat to existing payments platforms, Alipay and WeChat Pay which control over 90% of digital payments in China.

The e-yuan, called Digital Currency Electronic Payment (DC/EP), will facilitate e-wallet payments in place of fiat, allowing citizens to carry out financial transactions digitally. The Chinese central bank is speeding the project up as it aims to develop a cashless economy.

Former IBM executive, Richard Turrin who is writing a book on China’s digital currency said “the time table has been sped up by the coronavirus and the realpolitik of US-China relations.”

But the development is posing existential challenges to both Alipay, WeChat Pay and by extension commercial banks. SCMP reported that Analysts and investors are assessing how the two payment companies will coexist with the central bank’s digital yuan. Ant Group’s Alipay said it is not clear how the digital yuan will impact existing structure.

“We do not have sufficient visibility as to the impact of the DC/EP on consumers’ payment behavior and the payment industry. It is not clear how the DC/EP will fit into or change the current digital payment industry landscape,” Ant said in IPO Prospectus.

Tencent and Alipay have 800 million and 700 million monthly users respectively, the biggest in number of users in any payment platform globally. SCMP said Tencent’s WeChat has a $49 trillion pay service market, which is almost 500 times bigger than in the United States.

China is pushing to become the first major country in the world capable of monitoring economic activity in real-time through digital currency, and the central bank governor, Yi Gang wants to learn real-time data management from the private sector to guide the growth.

Analysts believe the Chinese government has no plan to supplant financial institutions; its main aim is to create a total digital financial system that will help to eliminate tax evasion. Moreover, as SCMP noted; the digital yuan and the existing systems are not mutually exclusive. Alipay and WeChat Pay offer more than payment services; their services involve loans, asset management and money-market investments. The central bank is not considering adding any of these services which are of interest to users on existing platforms.

“We expect an immaterial impact of the digital currency on the core business of the internet companies in the near-term, as the design is still at an early stage with many uncertainties in technologies,” said Bank of America equity analyst, Sachin Salgaonkar.

Analysts said the millions of users onboard WeChat and Alipay’s platforms will give Tencent and Ant valuable insight into consumer behavior, which will give them advantage over rivals.

But the central bank has engaged the companies in its projects, which downplays any notion of rivalry and upholds the analysis that the Apex bank’s objective is to fine-tune monetary policy. Alipay has filed at least three patents in preparation for how it would theoretically facilitate a central bank digital currency, CBDC, according to South China Morning Post.

“We expect the leading payment companies like Tencent and Ant to be part of the research and design process led by the authorities, contributing technical and operating experience and know-how,” added Salgaonkar.

The Bank of International Settlements said CBDCs can coexist within a two-tiered payment system, allowing the central bank to focus on regulation, focusing on ensuring trust, stability and integrity in payments while the private sector is best placed to undertake the consumer-facing activity of CBDCs.

Alipay and WeChat Pay have combined 1.5 billion daily users, accounting for 96% of e-payment transactions in China. Analysts believe it’s time the central bank exercised some regulatory oversight and developed a contingency system for a possible failure in the e-payment system of Alipay and WeChat Pay.

The central bank’s move also suggests China is pushing to lead the global digital currency space. The death of Facebook’s Libra presented the South Asian giant with the opportunity to topple the United States in digital currency.

“China is positioning itself as a trailblazer when it comes to the future of money,” said Henri Arslanian, a cryptocurrency mogul and adviser to the central bank. “Libra was the catalyst, and COVID-19 has accelerated central bank activities.”

Meanwhile, the central has kept the details of the digital currency confidential since it started studying it in 2014, and appears not to be in a hurry to launch it. Developing a national digital currency involves complex technicalities that take time, and if done wrongly, would make users lose their money.

Moreover, the central bank is looking for a way to protect banks from the impact of the currency. The sustainability of commercial banks depends on having deposit money where they can give loans and derive interest from. Making all financial transactions digital will mean that many Chinese banks will be liquidated.

The PBOC told the IMF that the e-yuan will be likely limited to small retail transactions by setting maximum daily and yearly limits on payments and that it will only process large amounts by appointment. It added that it may apply charges for large sum or high-frequency transactions, and will not offer interest on accounts.