In China, digital payments — not cash — is king. This is one of the few bright spots in the world’s second largest, but stuttering economy, weighed down by deflation, a sliding yuan, record youth unemployment, and a real estate crisis.
China is almost a cashless society, with US$434 trillion being China’s annual volume of electronic transactions and over 80% of daily consumption transactions being conducted via mobile platforms, as per a report from Chinese card payment company UnionPay.
Home to the world’s biggest e-commerce market, China has taken the spotlight in the global digital payments arena by leapfrogging from cash and magnetic striped credit and debit cards to a digital payments system based on smartphones and scannable QR codes.
According to the World Bank’s Global Findex Database 2021 report, a striking 82% of Chinese adults made a digital merchant payment in the same year. That figure is more than double the global average and serves as a powerful reminder of China’s dominant position as a world leader in digital payments.
Factors that have propelled China to become the global leader in digital payments
A number of factors have contributed to the phenomenal growth of the Chinese digital payments industry:
- The rapid digitalization of the Chinese economy, including decisive investments by its companies in adopting and scaling digital technology to drive business transformation.
- The rise of the Chinese economy over the last decade, spurred by its growing middle class and their increasing disposable income.
- China’s global dominance in e-commerce and mobile commerce, prompted by increased innovation, internet usage, widespread smartphone adoption (China is truly a mobile-first country), and consumer discretionary spending.
- The total number of internet users in China totalled 1.079 billion in June 2023, with internet penetration reaching 76.4 percent, according to the report on China's Internet Development by the China Internet Network Information Center (CNNIC). The report revealed that about 82 percent of internet users are making online purchases, with the number reaching 884 million, an increase of 38.8 million from December 2022.
- Successful integration of digital payments into social networks and payment platforms.
- Substantial investments in mobile payments platforms and digital assets and processes.
- The explosion of fintechs in China over the last decade, showcasing one of the highest fintech adoption rates in the world, driven by its digitally active population.
- Significant scientific and technological investments and advances across various areas, ranging from 5G networks to renewable energy, big data to quantum computing, and high-speed rail to generative artificial intelligence.
- The Chinese government’s stringent COVID-19 pandemic restrictions further propelled the adoption of contactless and digital payments. As per World Bank, 100 million adults in China made their first digital payments after the start of the pandemic.
China digital payments: transaction value and CAGR
According to Statista, the total transaction value in the global digital payments market is projected to reach US$9 trillion in 2023. Of this, the Chinese digital payments market is expected to account for the world’s highest accumulated transaction value of $3,639 billion.
Between 2023 and 2027, the compound annual growth rate (CAGR) for the total transaction value of digital payments worldwide is predicted to be 14.66%, resulting in an estimated total amount of $15 trillion. Within the same period, the total transaction value of Chinese digital payments is projected to experience a CAGR of 7.7%, leading to an estimated total of $4,908 billion, as per Statista.
Key digital payments segments: digital commerce, mobile payments and digital remittances
Statista findings indicate that the Chinese digital payments market is primarily driven by two segments – first, digital commerce (consumer payments for products and services over the internet) and second, mobile point of sale (POS) payments via smartphone applications. The third segment is digital remittances (including online cross-border payments), which has a comparatively smaller share of the market.
Based on Statista research, digital commerce is taking the lead in the digital payments market segment, with an estimated total transaction value of $1,981 billion in 2023, followed by mobile POS payments ($1,649 billion) and digital remittances ($9.44 billion).
China’s digital payments primarily include card-based payments (UnionPay), direct debit, internet browser-based online purchases, credit transfers, buy now pay later (Ant Check Later), digital currency (digital yuan or e-CNY), mobile (prominent mobile wallets being JD Pay, Apple Pay, and Samsung Pay) and digital wallets (the most popular being Alipay, WeChat Pay, Tenpay, BestPay, Huawei Pay, Baidu Wallet, and PayPal China) that enable contactless payments. In fact, data from the Worldpay from FIS 2023 Global Payments Report reveals that in China, digital wallets accounted for 81% of e-commerce spending and 56% of POS spending in 2022.
The report also states that “Buy now pay later (BNPL) saw huge gains in China in 2022 from offerings that are embedded in the largest e-commerce platforms and super apps. Market leaders Ant Check Later (from Ant Group, an affiliate of Alibaba), Baitiao (from JD Finance for use on JD Mall, one of China’s largest e-commerce platforms), and Fen Fu (the installment payment function of WeChat Pay by Tencent) helped BNPL to account for 4% of China’s e-commerce transaction value in 2022.”
Alipay and WeChat dominate China’s QR-code-driven digital payment ecosystem
According to the Center for Strategic and International Studies (CSIS), Alibaba’s Alipay and Tencent’s WeChat Pay dominate the Chinese digital payments market with over one billion users each.
Behind the successful ascendancy of digital payments in China is “A viable alternative payments model where banks play a far less central role, and in the extreme, possibly none”, as elucidated by the American think tank, Brookings Institution.
Brookings further explains that “China’s system largely disintermediates banks from payment transactions, robbing banks of an important and long-standing source of revenue. It creates an alternative payment ecosystem with different incentives between merchants, consumers, and payment system providers.”
This alternative payment system built on QR-code-driven digital wallets runs through Alipay and WeChat Pay, which control a combined 92% of China’s digital payments market, according to payment processing company Adyen. However, the Chinese government exerts significant influence over the digital payments system, as it has a firm grip on Alipay and WeChat Pay.
Alipay and WeChat Pay were pioneers in new payments technology using QR codes. Their users can skip the process of signing into a stand-alone bank or payments application when making transactions. Instead, all they need to do is to press or tap the “pay” button within the main app of the ecosystem. This action generates a distinctive QR code linked to the user’s mobile or digital wallet, which the merchant can then scan to accept the payment.
Furthermore, since July, Alipay and WeChat Pay have allowed foreign tourists in China to link cards issued by Visa, Mastercard, JCB or Discover to their digital wallets for payment at tens of millions of merchants across the country to attract foreign investment and international travellers to bolster its stalling economy.
In addition, the development of sophisticated and innovative mobile payment technologies, along with a supportive digital payments regulatory framework, accompanied by continued investments to boost the digital infrastructure by the Chinese government, has helped catapult the country towards a cashless society.
China: trailing India in real-time payments, but leading the global race in digital currency
In China, real-time payments (RTPs) are conducted through the Internet Banking Payment System (IBPS), a project of the People’s Bank of China (PBOC) that was launched in 2010 as part of the Second Generation of China National Advanced Payment System (CNAPS II).
While China’s RTP market is strong and growing, research by ACI Worldwide shows that in 2022, India remained the undisputed leader in real-time payments (RTPs), with a staggering 89.5 billion transactions (46% of global real-time payment transactions) and a year-over-year (YoY) growth rate of 76.8%.
Brazil took the second place with 29.2 billion transactions, accounting for 15% of all global real-time transactions. Trailing India and Brazil is China (17.6 billion transactions in 2022).
To supplement RTPs, in 2015, China built its cross-border interbank payment system (CIPS) and Swift alternative to promote yuan internationalization.
CIPS is designed to help cross-border transactions in yuan (RMB or renminbi-denominated) as trade and investment with the rest of the world grows. It also serves as an alternative payment system for any country to bypass the Swift dollar-denominated payment and settlement system should they be cut off from Swift.
In line with China’s goal of furthering internationalization of the yuan, and to challenge the dollar’s hegemony, as well as facilitate cross-border payments, in 2020, the PBOC rolled out the pilot test of its central bank digital currency (CBDC known as digital yuan or e-CNY) across four large cities in China.
As per data released by the PBOC, by the end of August 2022, the cumulative number of digital yuan transactions in China was 360 million, reaching the milestone of 100.04 billion yuan ($13.9 billion) in terms of transaction value. By the end of June 2023, “Transactions using China’s digital yuan hit 1.8 trillion yuan ($249.33 billion)”, the country’s central bank governor Yi Gang said in an article published in Reuters.
China’s sovereign digital currency has so far primarily been used for domestic retail payments. Earlier this week, Mu Changchun, director of the Digital Currency Research Institute at PBOC, said that the digital yuan must be available as a payment option across all retail scenarios.
In this connection, WeChat Pay, Alipay and banking apps run by commercial banks are expected to implement QR codes for the Chinese CBDC in the short term while working on long-term upgrades to their payment tools.
With China preparing for a national rollout of the digital yuan, a significant push is expected to popularise the e-CNY as an attractive medium of payment for cross-border trade and finance and to challenge the dollar’s dominance.
China’s deployment of the digital yuan on a national scale and its unique position as the world’s largest exporter and the global leader in digital payments are important aspects expected to reshape the way global corporations think about cash and liquidity management. The homegrown digital yuan will enable concurrent and efficient payment and settlement with a reduced dependence on financial intermediaries, thereby helping lower the cost of corporate cash and liquidity management. Additionally, it can lead to significant cost savings in wholesale cross-border payments.
The efficiency, cost reduction and speed factors are cogent reasons that may push multinational corporations’ finance chiefs and treasurers in China to embrace the digital yuan, as is the added benefit that will come from reduced settlement layers and lowering friction in payment systems.
With its plans to also roll out the digital yuan internationally, China is working with various stakeholders on the mBridge project.
The Bank for International Settlements (BIS) is building project mBridge, a multi-CBDC (mCBDC) platform, to deliver real-time, cheaper, safer and more efficient cross-border payments and settlements.
The mBridge project is a cooperation between the BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority; the Bank of Thailand; the Central Bank of the United Arab Emirates; and the Digital Currency Institute of the People's Bank of China.
The purpose behind this CBDC project is to create a multilateral payment platform that can serve as an alternative to the complexities and inefficiencies of the correspondent banking system by following a single set of rules and adopting common technical standards and legal frameworks to connect national digital currencies in interoperable platforms. In essence, the mBridge project is focused on developing an interoperable platform for cross-border payments using multiple central banks’ CBDCs.
China’s involvement in the mBridge project, backed by its trading prowess, can augment its financial clout in the global arena and make it the key architect of a new payment system that facilitates more complete digitisation of money.
China’s transition to a mobile-first nation, its pursuit of a fully cashless economy, its fintech advancements, economic and digital transformation, and the pandemic-driven surge in mobile payments have all played an important role in catalysing a digital payments revolution within the country.
Looking ahead, the national and international roll out of the digital yuan, the focus on 6G network development, the acceleration of automatic payments triggered by internet of things (IoT) devices, the expansion of the facial recognition payment (FRP) technology, and the building of its parallel generative AI universe are all expected to provide a significant impetus to China’s position as the most advanced cross-border payments challenger and alternative to the US dollar, which is the most widely used currency for global trade and financial transactions.
Moreover, these developments will help China move beyond global digital payments pre-eminence and ramp up the drive for global technological supremacy, including the quest to establish itself as the world’s dominant player in AI.
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