China’s Central Bank Digital Currency Will Strengthen Alipay And WeChat Pay, Not Replace Them

China has been exploring the idea of a Central Bank Digital Currency (CBDC) since 2014. Six years later, it launched a pilot version. The official Digital Currency Electronic Payments (DCEP) platform currently looks set to launch within a year. 

 

Some media observers have suggested that Beijing is launching the DCEP to wrest control from the digital incumbents: Alipay and WeChat Pay. The two fintech giants control about 90% of China's digital payments market, and between 20-25% of retail spend across China, not to mention the distribution of many other financial products and services such as wealth management and lending.

 

Given that these two platforms are the bedrock of China's digital financial ecosystem, anything that challenged their preeminence would be, to put it bluntly, a big deal. But Beijing is not looking to replace Alipay and WeChat Pay with the DCEP. Rather, Alipay and WeChat Pay will likely be integrated with the DCEP, which will cement their positions in the digital finance space.

 

The future is digital

 

China's financial future is digital, and Alipay and WeChat Pay will only become stronger as the payment channels of choice, especially as the DCEP starts replacing cash transactions. Over time, the two platforms will also be critical tools for the government to accelerate China's cashless transformation.

 

We could also see the use of DCEP expand beyond China’s borders through the mobile wallets as well. Alipay and WeChat both have millions of merchants outside of China that accept payments on the two platforms predominantly catering to Chinese tourists abroad. Conceivably, those could all end up being points of distribution for the DCEP including for the merchants who may be happy being paid in DCEP as opposed to Euros or USD. Similarly, the DCEP could facilitate payments along China’s Belt and Road Initiative (BRI). As the majority of BRI funding is in Chinese Yuan, a switch to DCEP would be relatively straightforward.

 

A larger role for Alipay and WeChat Pay in China could be beneficial for the financial system. In most global payment segments, such as credit cards, there are only a few payment service providers that have scaled enough to dominate the market and must markets still function well with that scenario. Further, as we have seen in the past, Beijing is undoubtedly sitting on top of the tech giants to make sure they don’t get too large. China did start as the world’s biggest fintech sandbox, but the regulators have reigned in the industry and are now partnered closely with the two companies, and all signs are that Alipay and WeChat Pay will be a critical part of that DCEP vision.