China’s digital payments revolution
China is leading the new revolution in digital payments. In the past decade, China has leapfrogged magnetic cards, moving to a system based on smartphones and QR codes (two-dimensional bar codes), and runs through their own big tech firms: Alipay running through Alibaba (China’s version of Amazon) and WeChat Pay running through Tencent (China’s version of Facebook).
It creates an alternative payment ecosystem with different incentives between merchants, consumers, and payment system providers. It challenges the long-standing placement of payments on the side of banking as opposed to commerce.
China’s new payment system exploded in under a decade, growing from inception to dominance. With over a billion users on each platform, the power of network incentives has been unleashed.
The new payment system has replaced cards and cash at registers, how families give gifts, and even how beggars ask for money, with QR codes replacing tin cups.
Yet new financial technology and its application in China have created a viable alternative payments model where banks play a far less central role, and in the extreme, possibly none. This new payment form requires greater analysis to appreciate the benefits, costs, and implications from a new model.
What does this mean for the future of China’s payment?
- It will continue to grow domestically and globally, following Chinese travelers and consumers abroad.
- New technology makes possible the movement of the payment system away from banking and into technology and social networking. This means that technology and social network firms with sources of data on which to base financial decisions such as providing credit will be able to provide alternative underwriting that is likely to follow.
- The incentives created by moving the payment system from banking to technology firms are substantial and potentially concerning. The potential for anti-competitive behavior and privacy concerns by tech platforms by using the payment system and data generated from it are real.