S&P: Chinese Digital Yuan May Compete with Payment Service Intermediaries
A report from S&P ratings saying that the emergence of Chinese digital yuan is likely to reduce transaction costs and lower the handling fee income of other payment service intermediaries.
China saw its efforts culminate last month when it successfully completed a pilot project where it distributed the currency to the residents of Shenzhen’s Luohu.
“Although the trial of China’s CBDC starts in a small scale, it will have a significant impact on the future of banking industry. If this trial is extended, we expect that the digital yuan will become a payment tool rather than a wealth storage tool.”
Said Hu Minrui, a global rating credit analyst at S&P, the digital yuan was unlikely to replace the savings function of bank deposits as it did not generate interest. However, digital yuan may provide a cheaper and more convenient payment method for retail goods, and will compete with payment services provided by payment companies and commercial banks in this field.
Because digital yuan can reduce the transaction cost of users, it may become a popular payment method among users. Because both the sender and receiver of the digital yuan benefit from the connection information line with China’s central bank, the settlement and clearing of digital yuan are more efficient, and a part of the intermediate service link is omitted.
S&P said Alipay and WeChat are the main players in retail electronic payment who will be more susceptible to the influence of the digital yuan than commercial banks. The dominance of commercial banks in the field of public electronic payment is unlikely to be shaken by digital money. In this pilot, digital yuan is only used for retail payment. Even so, given the relationship between these e-payment platforms and leading e-commerce and social media companies, it is expected that user stickiness will help these platforms maintain their distinct advantage over commercial banks in the field of retail electronic payment.
In addition, S&P expects that interest will not be charged in the initial stage of the digital yuan, because in its current system, digital currency is more like a substitute for paper money, designed to provide additional settlement channels.
Payment convenience and possibly more cost-effective trading methods may be attractive to users, while regulators may value more detailed transaction-level data for macro decision-making. The information collected in the application of digital yuan also helps to strengthen anti-money laundering and anti-terrorist financing measures.
On the other hand, as the central bank seems to have all the information about the payer, receiver and transaction amount, personal privacy issues may slow down the market’s acceptance of digital yuan.