Your description of financial services in China sounds like science fiction. How many years ahead of the US and European countries is China?
The speed of our new digital world makes it hard to give an exact number, but I would say that China is ahead of the West by a decade. For example, China’s new central bank digital currency (CBDC) will take about eight years to build, starting in 2014 to its presumed launch in 2022. While other countries may launch CBDCs more quickly, there is another crucial factor to consider that pushes China’s lead out many years. China has already completed the transition to using digital payments through the broadscale adoption of Alipay and WeChat Pay payment platforms. This means that both people and businesses have already migrated to digital payment platforms and made the cultural adjustment. As a result, digital payment in China is now considered perfectly normal, a gap with the West where it still retains a novelty factor and meets cultural resistance.
In “Cashless,” I refer to the existing payment platforms Alipay and WeChat Pay as Version 1.0 digital payment systems. China has nationwide adoption of these first-generation systems and is now moving to the second generation of payment through the digital yuan, which will allow for even deeper integration of digital payments within China. This is a point missed by many pundits who see China’s CBDC taking market share from the payment platforms rather than increasing the overall amount of digital payments in China. China is moving to its second generation of digital payment while the West is still tied to credit card-based systems, technology China surpassed with the shift to the payment platforms.
Another essential factor to consider is that the Chinese people are very receptive to digital innovation of all forms. This means that new digital products like the CBDC are generally welcomed and have fast adoption rates if they can show that they are more useful than existing payment methods. The challenge for China’s CBDC is that the existing payment systems are so good that the CBDC will need to show how it can improve users' overall experience. This is why I say that the launch of the digital yuan will be a bigger event in the West than it will be in China, where digital payment is already so well established.
You mentioned this famous 2019 EY Global Fintech Adoption Index in which we see China far ahead of countries like the United States or Japan, which nevertheless have the image of innovative countries. How do you explain this gap?
The gap is primarily due to the success of Alipay and WeChat Pay payment systems run by Alibaba and Tencent. These payment platforms are tremendously successful, and their rapid adoption following their mobile launch in 2014 fundamentally disrupted the payment market in China. At the heart of this change was a bold move by the then head of the People’s Bank of China (PBOC), Zhou Xiaochuan. Zhou is often referred to as the “father of China’s CBDC,” but in “Cashless,” I go one step further and call him the “father of fintech.”
Digital payments arose in China thanks to groundbreaking regulatory changes adopted by the PBOC. In 2013-14, the tech companies Alibaba, Baidu, and WeChat were explicitly granted online private banking licenses, even though their activities would potentially overlap with those of the state banks. To understand the magnitude of the decision, think about Google, Amazon, and Facebook (GAFA) being granted banking licenses in the United States or Europe. The repercussions in China were enormous, just as they would be if a GAFA company were to become both your payment provider and bank in the West.
The liberalization of regulations in favor of tech companies in the financial system was part of a much bigger plan and did not materialize out of a vacuum. China uses five-year plans to help guide the country’s long-term planning and development. China’s twelfth five-year plan (2011-2015) emphasized the creation of “next-generation information networks, mobile communication, and the Internet.” All digital services were ramping up at a remarkable speed in China during this period – not just fintech – because the government recognized that digital represented the best opportunity to provide services to a massive population.
What is funny in your book is that you constantly compare the perception of things in China and in Western countries. Can this difference put Western countries at risk in terms of competitiveness?
“Cashless” primarily targets Western readers, so it is critical to compare and contrast payment and financial systems in China and the West. As an author, I use these comparisons to help guide the reader to understand better how China’s digital payment system is fundamentally different, and in most cases, better than what they are using now. It makes the book real and compelling because it shows how China’s tech fits into the bigger picture. These comparisons also ensure that the reader comes away with the concept that China’s systems have a lot more in common with the systems the reader already uses than they may have thought. This is important since many believe that what happens in China can’t possibly be relevant in the West and then use this as a convenient excuse to dismiss China’s technology out of hand.
There is no ready measure of “competitiveness” that can show the effectiveness of China’s digital payment systems. Still, there is a measure of the digital economy relative to GDP, which may give us a clue. China’s digital economy accounted for 36.2% of China’s GDP in 2019 and made a 67.7% contribution to China’s growth rate. For comparison, the digital economy accounted for 9% of GDP for the US and 7.7% for the UK. So while digital adoption is certainly not the sole decisive factor in “competitiveness,” it certainly serves as an indicator of the critical role of digital, including payments, in shaping China’s economy. As I am fond of saying, “digital economies need digital payment to grow.” You can’t have one without the other.
Digital payments are so prevalent in China that in GDP terms, the US$ 52tn in digital payments for 2019 represents a bit less than four times the size of China’s total GDP of roughly US$ 14tn. This shows the tremendous impact of digital payment in China and, to a degree, how all products and services in China now have a digital component. In addition, digital payment is pushing the digitization of the entire economy, including the development of “smart logistics,” which is increasing efficiency and is a critical part of the nation’s infrastructure.
China is having great success in mobile payment and online credit. Isn't it time for Western countries to look at China as a model?
In “Cashless,” I say that “China is providing a blueprint or road map to our digital currency future.” China serves as a model on how digital payment changed payment, banks, and financial services, at just the time when these changes are likely coming to your country with the launching of CBDCs across the globe. China’s adoption of Version 1.0 payment systems profoundly impacted the country’s financial services, which can serve as a model for the changes that we will all soon experience.
It is essential to acknowledge that the changes in China with the broad adoption of digital payment will not be unique or restricted to China. Unfortunately, many are dismissive of China’s fintech accomplishments. In “Cashless,” I say that the two strawman arguments that are commonly used to downplay China’s fintech achievements include: 1) China copies and doesn’t innovate, 2) It’s different over there and not relevant to our experience in the West. Neither of these is true, but they are frequently used to deflect or derail a discussion about China’s fintech before it can even get going.
In “Cashless,” I make the case that CBDCs launched elsewhere in the world will manifest similar changes to those in China, even though technical aspects of the systems differ. What is critical is how digital payment changes people’s relationship to money, and the new paradigm for services that results from digitizing payments. China is a decade ahead in these transitions, and we would do well to observe what happened in China so that we can better prepare ourselves for the changes in our local markets.
Banks are afraid of being disintermediated by GAFAs and neobanks. Yet you show that despite competition from these new entrants, Chinese banks have survived. How?
If Chinese banks learned anything from the disruption of digital payment, it’s that their role is not as secure as they once thought. While many Western banking C-level executives live in a state of denial, even with GAFA companies entering into finance, their counterparts in China have no such luxury. They know the impact of digital disruption intimately and do not doubt Big Tech’s power to disrupt their market.
Their reaction was to not waste time and change their offerings in order to meet the digital threat head-on. According to the “2018 China Direct Banking White Paper,” 135 new online direct digital banks have opened since 2014, showing how traditional banks rose to meet the challenge by jumping on the digital bandwagon. These direct digital banks were run in parallel with existing brick and mortar operations and were promoted as a sleek, easy, digital direct way to bank, manage wealth, buy insurance, and get a loan. Clearly, not all were so diligent. Among China’s top six state-owned banks, only one, ICBC, was able to add a digital-only direct bank to their services during this period.
It’s fair to say that all Chinese banks have improved their digital offerings following the explosion of alternative digital payments, but not all have followed through with the profound transformation required to compete effectively with digital players. Some have delayed by resting on old laurels, knowing that even with the kneecapping of their payment operations, their other profit centers are intact and still producing good returns. In theory, some state-owned entities could perpetuate this delay indefinitely, though none will. The government’s push for nationwide digital transformation will not allow them to rest on bygone business practices.
Building the great national super app seems to be the goal of many banks now. Can a western bank become like WeChat in its country?
That’s the billion-dollar question! So far, it does not appear that Western incumbent banks have the digital skills to become the next super app like WeChat. Many are struggling to cope with providing basic services through “open banking” initiatives, so the concept of assembling and running a super app is simply asking too much from management teams and computer systems that hail from a different era.
What is unclear is how incumbent banks can attract an ecosystem of third parties to build a viable platform. Incumbent reluctance to embrace open banking flies in the face of what Alipay and WeChat Pay did through a technology called mini-programs, allowing third parties to build a small application that connects to the main app. This provided an open platform where the user of the super app could consume an extensive range of services, all from an ecosystem provided by the app. It’s unlikely that any Western bank can hope to achieve this level of technical mastery anytime soon, but more importantly, they still don’t see that their role is to partner with other services. The good news, or bad, depending on perspective, is that they are not the only ones with China’s superapps in mind.
Fintechs are digitally sophisticated and are eyeing the success of China’s superapps with great interest. Some are now offering an integrated suite of products that, while not yet “super,” are starting to look a bit like real digital platforms. Some of the better examples include PayPal, Klarna, Wise, and even Robinhood. They are all trying to provide integrated financial services from banking to loans to investment all on one platform. These, of course, are just the fintechs. We can never forget about giants like Amazon and Walmart, who have their eye on providing financial services to their clients and integrating the online shopping experience with financial services, just like Alibaba. So I think we might just see a superapp but it will come from any number of different players and not an incumbent bank.
You devote a part of your book to Ant and I would like to take this opportunity to talk about Jack Ma. There are so many quotes from Jack Ma on the internet and even in your book one gets the impression that he is like a fintech superhero. How is he seen in China?
That is an interesting question and would depend very much on who you ask. One thing that you need to acknowledge from the start is that China does not have quite the same national desire for superheroes that the West does. Steve Jobs, Jeff Bezos, and Bill Gates fill a societal role as modern-day mythological figures in the West. They promote the American dream as they all rose from humble origins to become modern-day titans.
While their rags to riches tales would also fit many of China’s tech CEOs, most Chinese CEOs do not seek to elevate their status and feel uncomfortable with this level of self-promotion. While Jack is undoubtedly a hero to many in China, he never attained the mythical status in China that his counterparts did in the West. His role as a superhero in the West is perhaps more prevalent than it is in China. Few in the West could name another CEO of a Chinese tech company, and they ascribe to Ma the same status as Jobs, Bezos, and Gates.
I use many quotes from Jack Ma in my book because, as the founder of both Alibaba and Ant Group, he was without question the most articulate promoter of digital payment and financial technology in China. His counterpart at Tencent “Pony Ma” was another great proponent of digital payment, but his relative silence on the topic made Jack infinitely more quotable. In the near term, all of big tech in China, not just Jack Ma, are going through a turbulent period of regulatory realignment, as is big tech in the West. Jack Ma is undoubtedly my hero, and he remains a hero to many in China, but I do not see him attaining the mythical status afforded to the icons of US big tech. That said, Jack Ma’s status as a visionary is secure and without parallel.