China is the biggest payments market in the world, by every relevant measurement ; be it the rate of innovation and adoption, size and diversity of the payments ecosystem with banking and non banking institutions. These are both domestic and increasingly foreign along with a diverse user base spread across the world and just the sheer volume and value of payment transactions are unmatched.
China holds 32.5% of world’s “Tier 1 capital” at $3.38 Trillion, and about 30% of the worlds assets under management at $41.5 trillion, these are double that of the US banks. “Tier 1 capital” is the core measure of a bank’s financial strength from a regulator’s point of view as defined by Basel III Accord.
Besides its banking industry, over the last decade China has seen unprecedented growth in “non banking institutions”, which in the context of payments are also referred to as “payment institutions”.
There are about 115 payment institutions in China, with the just the top two combined; Ant Group and Tencent representing a valuation of $600 billion (across all businesses). These institutions have been driving growth for China’s payments and extended financial industry for more than a decade now.
Growth of mobile payments and its support infrastructure has given China a template for growth and scale. Payments initiated via barcodes first saw adoption at scale in China and presented a major challenge for the magnetic strip based card technology. This is being adopted globally, with countries like India taking its use to unprecedented numbers.
It is estimated that the numbers of internet users in China reached 1 Billion and are growing ! The country needs a resilient and scalable payments infrastructure to support these users in their endeavors to explore the fruits of the internet (with web3, that need goes to another level, but topic for another time).
According to People’s Bank of China (central bank), the country has 13.664 billion bank accounts and in 2021 the payment ecosystem in the country processed about 2 trillion payment transactions electronically. These represented a staggering value of $2500 trillion across varied modes like cards, payment systems, mobile payments and the new digital Yuan, China’s retail central bank digital currency sometimes referred to as DC/EP, digital currency/electronic payments pilot.
Most of these numbers are growing at double digits rates. They have a very direct and powerful impact on economic growth of country, which is growing more than 8% annually, and is highest amongst the major economies. Considering these numbers, it would be accurate to say that payments is a serious business for the Chinese government.
Payments infrastructure in China is robust, very well placed to support growth of the payments ecosystem and the wider financial industry. People’s Bank of China (PBOC) leverages both public and private institutions to build, run and maintain this infrastructure.
As categories of payment origination methods grow, so does this infrastructure. Account to account, cards, barcode (eventually a version of account based), and the new digital Yuan pilot. Domestic infrastructure is supported by China National Automatic Payment System (CNAPS) that runs the RTGS(HVPS), ACH(BEPS) and instant payments(IBPS) services.
China Domestic Foreign Currency Payment System (CDFCPS) manages domestic transaction with international currencies, 8 different currencies are supported.
Cross-Border Interbank Payment System (CIPS) is perceived as a counter to US controlled cross border messaging network SWIFT. CIPS is a settlement system for China’s domestic currency RMB, whereas SWIFT was built for financial messaging across the globe. Can CIPS be used to work around SWIFT ? may be, but that intent involves more than using an alternate network, it involves moving away from the “petro” dollar, which I believe, even with all the noise isn’t likely happen anytime soon.
UnionPay is the home grown cards network, that has international reach. So dependence on Visa and Mastercard is reduced. NetsUnion (with Mastercard) runs the payment systems for the payment institutions (third party services providers) for online business via accounts.
DC/EP (digital currency/electronic payments) pilot has seen the move to the next step in central bank issued currency, which has seen huge adoption with 150 million users leveraging it currently.
What is changing ? Well payment institutions are facing stricter regulations and control is being moved back to the state owned banks.
In the last decade of so, innovation and growth took center stage. The likes of Alibaba (Ant group) and Tencent with their then disruptive business models transcended China as the poster child for digital growth. The services started with mobile payments and ended up offering everything from insurance to loans to investments. Around 115 third party payment institutions in China strive to be the financial super apps, some are already there and some will reach eventually, but the Chinese consumer is spoiled for options, which is a good thing, well most of the time, as long as the consumer base and its infinite information is not misused. Thus enter regulations.
PBOC in the recent years has tried to tame the growth and ego’s of the biggest non banking financial institutions in China. The launch of NetsUnion(backed by Mastercard) clearing for online payments transaction via bank accounts is one of the major change. Most of the 115 institutions serving online customers are connected to NetsUnion. A centralized depository for consumer funds at PBOC, which were earlier held with the payments institution would have been a major impact on the liquidity access. The blocking of Ant’s IPO is now the stuff of legends.
The digital Yuan pilot (with about 150 million users) represents a major shift, and when launched at scale can change the payments landscape in China forever, and potentially the world, as China usually represents what is possible.
My views on Digital Yuan in the below article.
https://www.linkedin.com/pulse/retail-cdbc-china-doing-again-ajay-singh-pundir/
PBOC’s regulations are making use of customers personal information more difficult, and pushing for boundaries between payments business other financial services business for the non banking financial institutions. As web3, decentralized finance, gaming and metaverse become popular (if they ever do), these regulations will have to become stringent and inclusive.
So does this mean government over technology ? Or regulations over growth ? Well I think it is more complicated than that. I believe controlled growth is sustainable than uncontrolled growth, consumer protection should not be taken lightly. But does this make startups anxious, I guess it would, but it would also make them more responsible about the ecosystem and its stakeholders.
In the short term these regulations might slow the growth, but in the long term this type of growth will be far better for the economy. The recent crash of the crypto market is an example of what is possible if things are left unchecked (more on this in the below article).
https://www.linkedin.com/feed/update/urn:li:activity:6950189545015369728/
The perception of China’s growth in the world is complicated to say the least, but its impact cannot be questioned. Whatever happens in China’s payments industry over the next decade will dictate how the world sees possibilities in payments, the most fundamental element of the financial industry. The growth will not stop, but the roles of the player will change, for good for bad this is where China is.