Alipay and WeChat Pay’s dominance of China’s retail payments was scripted over the past decade on the back of the humble quick recognition code. The same dotted squares could now start to undermine their moat.
Fan Yifei, a deputy governor of the People’s Bank of China, said at a recent forum on digital finance that it was necessary to standardize, among other things, the two-dimensional barcodes so that “merchants can support various payment tools without increasing costs.”
Before the pandemic, QR codes had spawned a 9.5 trillion yuan ($1.4 trillion) industry for settling bills in China. Other countries enthusiastically copied the model that was made wildly popular, starting in 2013, by Ant Group Co.’s Alipay and Tencent Holdings Ltd.’s WeChat Pay, the two tech giants controlling more than 90% of the mobile-payment market between them. But authorities in Beijing didn’t like the idea that funds — and the highly valuable customer data that came with them — flowed in two large, private closed loops.
Not knowing which app the customer would use, merchants had to be ready to offer both the QRs, as well as one from China UnionPay Co., the state-owned payment processor for banks. After the central bank recommended in August 2019 that the codes become interoperable, Tencent and UnionPay decided to allow each other’s customers access to their walled gardens.
That may have been just the start. Fan’s comments suggest that the tech industry’s lock may weaken further. Beijing will push for a unified QR code because it wants to give a leg-up to the digital yuan, or e-CNY, a paperless version of the fiat currency issued by the central bank. Pilots to promote the new instrument are both expanding and becoming more sophisticated: With smart contracts, or self-executing computer code, consumers can pay a business in advance, but e-CNY will only be released by their wallets when they receive the goods or services. In uncertain transactions like paying for under-construction homes, money with built-in rules could help establish trust between the buyer and the seller.
Still, smart money is of no use if people don’t also find it easy to spend. Therefore, the PBOC will ensure that merchants display a single QR to all customers, one that by default accepts e-CNY. Alipay, WeChat Pay and UnionPay wallets will have to accommodate the code to avoid rejection. This will make the digital yuan universal legal tender in China. The central bank’s liabilities, which have practically vanished from retail use, will make a comeback: Except they’ll return in electronic form, not as physical cash.
Ant and Tencent will have to work hard to retain customer loyalty, or they could lose their stranglehold on data. There’s little money in payments. The prize lies in gleaning insights into customer behavior; to score users’ creditworthiness and extend them loans. Once the payment QR code becomes a commodity, the wallet market will open up to new players.
It’s unlikely that e-CNY will become a serious rival to Big Tech overnight: The digital yuan is supposed to co-exist with private payment options, not wipe them out. But if it does take off, China’s data economy might see a recast. Chalk it up to what Columbia University economist Shang-Jin Wei terms as the currency’s “controlled anonymity.” The central bank will distribute it to the population via financial institutions. But once users take funds out of their accounts to top up their wallets, banks will lose track of the money — much like cash withdrawn from ATM machines.
That’s the anonymity feature. “The ‘controlled’ part, however, is that the PBOC sees the entire history of the movement” of the e-CNY, writes Wei, “and can choose whether or not to use or share the information.”
Even if banks don’t get access to customer data, they’ll still be happy if e-CNY adoption tilts the playing field away from tech firms. With paper money retreating further into the sunset where it was invented, lenders will get to consolidate physical branches and lower fees for end-users. As for Big Tech, e-CNY will diminish their network advantage and challenge their duopoly status, according to “A New Dawn for Digital Currency,” a research report by consulting firm Oliver Wyman.
One intention behind the digital yuan project is to cut the tech titans down to size by reducing their power to harness consumer data. A universal QR code system for all domestic payments should support that goal. The other, more ambitious, objective is to use the e-CNY to promote the Chinese currency in international transactions. This motivation has become only stronger since the US began to enforce a dollar squeeze on Russia over the war in Ukraine.
To buy insurance against any such Western retaliation, China will want to lure its trading partners to the digital yuan by leveraging its superior economics. For instance, lower transaction costs, cheaper liquidity and higher trading volumes from using the electronic Chinese currency could lead to savings of S$16 billion ($11.4 billion) to S$24 billion in China’s trade with Singapore, Oliver Wyman says. That’s a substantial 3% to 5% of Singapore’s gross domestic product, which could be shared between China and the Asian city-state. E-CNY’s strategic role overseas will see Beijing wielding all its power of rule-making to install it as the payment of choice at home. That’s one more reason why the duopoly of Alipay and WeChat Pay can’t last.