How Will China’s Digital Currency Electronic Payment System Influence Financial Institution
China announced its own Digital Currency Electronic Payment system, or DCEP, that it had been researching for five years. Further updates on the project have made no attempt to hide the scale of China’s ambition. The article would like to predict the impact of DCEP on financial institutions.
DCEP is positioned to replace MO (cash in circulation), which will first have an impact on our common third-party payment institutions like Alipay and WeChat.
The core business of third-party payment institutions is payment services. According to the public information, China’s digital currency is positioned to replace MO, and the carrier of DCEP is SIM card, app. the user experience is very similar to the third-party payment, and DCEP can realize dual offline payment with higher convenience. So the convenience advantage of DCEP will surpass third-party payment.
It is expected that after DCEP’s launch, payment methods like bank card, App (Alipay, WeChat) and NFC (near field communication) will be integrated by DCEP. And DCEP will be directly endorsed by the central bank, which eliminates the enterprise credit risk in the course of e-payment.
After the implementation of DCEP, due to the design requirements of the controllable anonymity of the central bank’s digital currency, the transaction bookkeeping qualification and data information are obtained by the central bank, and after the third-party payment institution loses the data information, its credit investigation business will be affected.
For C-end consumers, the user experience of DCEP and traditional e-payment may keep the same, but the technology behind the two payment systems is quite different. The traditional electronic payment introduces the third party as the credit intermediary to complete the payment by constructing the virtual account based on the third party; the settlement needs to pass the bank reserve account and the three-China’s party organization reserve account.
In DCEP’s system, transaction payment is based on the “token” system, that is, “payment is settlement”, which only requires to send the digital currency in the payer’s digital wallet to the payee’s digital wallet.
After the promotion of the central bank’s digital currency, residents may convert the bank’s demand deposits into DCEP and deposit some funds into the digital wallet. As DCEP is a liability of the central bank, not that of the bank, the expansion of DCEP will cause “money disintermediation” to some extent.
In order to stabilize demand deposits, the interest rate on the liability side may go up. If the interest rate on the liability side goes up and the interest rate marketization process in China is superimposed, the return on the asset side will decrease and the net interest margin of the bank will decrease.
Based on the two-layer operation mode of DCEP, commercial banks will undertake the specific functions of currency issuance and circulation services. The new generation of bank core system is about to be updated, and the financial IT industry is expected to benefit.
After DCEP is officially launched, digital wallet, ATM, POS and other terminals will cater to the demand of module component update, and a new large market is expected to appear in the payment terminal industry.