Business Implications of DCEP: Banks and Fintech Companies may be Reshaping

Yi Gang, the governor of PBC, said at the end of may this year, Digital Yuan system (DC/EP, or Digital Currency and Electronic Payment) adhere to be two-tier operation, cash(M0)replaceable and controllable anonymous, which basically completed the function of the top-level design, standards, research and development, the alignment test, etc.

Recently, Shenzhen has launched a digital Yuan giveaway through the lottery, and the winners can use the digital money at 3,389 shops in Luohu District that have completed the digital Yuan system renovation. Thus, the use of DCEP can be expected to unfold gradually.

There is no doubt that the introduction of DCEP will consolidate the infrastructure for the long-term development of China’s digital economy and enhance China’s competitiveness in the global competition of the fourth Industrial Revolution (digitalization). Of course, the launch of DCEP will bring many business opportunities and challenges to some sectors.

The changes brought to consumers

From consumers’ perspective, DCEP is likely to play an important role both in payments (transactions and media of circulation) and, in the future, the investments (storing purchasing power and wealth). Although most Chinese consumers have become accustomed to cashless transactions in recent years due to the rapid development of mobile payments on mobile phones, mobile payments are still based on cash in bank accounts, and the emergence of digital yuan may offer more options.

First, in the future, consumers will have a cashless option called DCEP when they receive and pay in RMB. Investment with DCEP is also possible as its popularity increases. But promoting it to consumers may still require a process, and its “convenience” or “other benefits” are particularly important, which requires further deliberation by Central Banks, commercial banks and others. For example, commercial banks compete with each other for deposits, and no depositors are willing to move their money from one bank to another if there are no additional benefits.

Second, to make consumers willing to choose DCEP for payment, the government, including the Central Bank, the Ministry of Finance, state-owned enterprises and other departments may need to provide policy facilities or preferences, as well as commercial banks to surrender part of the profits. For example, to facilitate cross-border use for residents, including the highway ETC, gas, water&electricity bills, medical insurance, retirement accounts, and all kinds of subsidies distributed by governments, and even wages. All of these can be paid in DCEP, which can prevent diminished, but also save costs and increase efficiency.

To make DCEP be accepted by users, commercial banks or other institutions need to invest huge resources in usage scenarios, marketing and market cultivation, that is, how to use internet thinking to operate digital currency. While the DCEP ecological chain may take some time to form, in the long run, consumers will eventually choose to hold some or most of their money in the form of DCEP as technological advances and the digital economy permeate all areas of life.

Whether this process can develop as rapidly as mobile payments are difficult to judge. The key is whether consumers and markets, including businesses and financial institutions, will accept it. If it is slow, it will be a gradual process.

DCEP will not affect the mobile payment pattern too much

Some market participants are concerned that the launch of DCEP may affect the current mobile payment pattern dominated by Alipay and WeChat payments. In response, Mu Changchun, director of the PBC Digital Currency Research Institute, said: “The Central Bank’s digital currency will not have a too big impact on current mobile payments, but will bring people more choices of payment tools to meet more payment demands.”

Essentially, DCEP is “money or currency,” while mobile payments are “a way to use money.” The relationship between the two may be compared to “fish” and “hook”, or “water” and “gourd ladle”, which are completely different in nature. But for the mobile payment, there is no difference between DCEP and bank account money, they are “water” and “ice”. And the amount of “ice”& “water” does not matter too much since they can be converted to each other at any time.

Moreover, for platform companies, the biggest value of the mobile payment business itself lies in the consumer derivative behaviors outside of payment and the value generated by its huge ecosystem. This is also true for consumers.

The success of Alipay or WeChat payment is inseparable from the strong strength and resources of its owners, especially as a powerful entrance to the electronic shopping mall and social scene. Leaving the huge platform or ecosystem, it is likely to be difficult to do it alone.

At present, mobile payment has entered the era where the third-party payment institutions cut off the mode of direct connection to banks, but access to network or UnionPay. Thus, it is of little significance for digital currency to replace it. But in the future, it may reshape the whole payment system, not only the mobile payment pattern. At present, there are about 8 payment systems in China, including large-sum, small-sum payment systems, NCC banks, the bill processing systems of commercial banks, etc. However, these functions are overlapping, and DCEP may have the opportunity to integrate these payment systems to form a unified one in the future.

Therefore, the impact of DCEP on the mobile payment landscape may not be obvious in the short term. However, in the medium to long term, it is still difficult to judge whether the “two giants” can form a “three giants” or a “group of rivals”, which may be caused by policy changes, reshaped business models, or challenged technological progress.

Influence on fintech and commercial banks

DCEP could provide innovative soil and important infrastructure for fintech companies, as well as business opportunities for commercial banks and other financial institutions, especially in digital transformation

First, for fintech companies, DCEP fundamentally digitizes the money, that is to say, the distribution, circulation, storage, investment, cross-border flows of all links of RMB can all be changed into “data”, which in turn opens the last mile for fintech companies to use big data, blockchain, artificial intelligence, cloud computing, and even the Internet of Things to link and process these data. Therefore, we expect that China’s fintech sector, which is already a global leader, will usher in a new historical development opportunity after the official launch of DCEP. DCEP has the potential to be a nascent sun for the industry, which will bring both light and energy.

Then turn to financial institutions such as commercial banks, it is clear that the central bank will not allow DCEP to impose new burdens on commercial banks. Fan Yifei, deputy governor of PBC, once wrote that the launch of DCEP would not constitute competition for deposit currencies of commercial banks, and it would not increase their reliance on the inter-bank lending market and affect their lending capacity. Thus, it will not lead to “financial disintermediation”.

Besides, DCEP could also bring revolutionary innovations for banks by turning all aspects of China’s currency into “data”. In the long run, commercial banks may be transformed into “credit data management companies”, such as using blockchain, biometrics and big data technologies to centralize the management of most of each customer’s financial information. In the future, the boundary between commercial banks and fintech companies may be harder to distinguish, or the two could be fully integrated or become a big trend.

Finally, there are also potential implications for other sectors. Although Central Bank said that DCEP started out as a replacement for cash(M0), the development and application of emerging technologies in the financial sector in recent years, especially digital technology, Internet and artificial intelligence, shows that in the long run, DCEP is likely to cause a “domino effect” and bring about changes in a number of industries or fields.

Take RMB internationalization and trade settlement as an example. With the gradual introduction of other countries CBDC, China’s currency internationalization reform may take the lead to carry out experiments with DCEP, or make “part” DCEP realize global free convertibility and circulation (which is technically feasible, due to its tractability advantages). In terms of international trade settlement, as China is the first major economy in the world to introduce digital currency, it can use its first-mover advantage to create a new global settlement system, or gradually get rid of its long-term dependence on the SWIFT payment system.

There are also huge business opportunities in the corporate customer payment market. For example, thanks to its programmable feature, DCEP can be used to make great achievements in supply chain finance and make up for the deficiency of second-generation payment system. On the government side, there are huge application scenarios, such as the distribution of subsidies (special funds), donations, etc.

At the same time, it can also improve China’s financial efficiency and optimize resource allocation. Compared with developed economies, the market-oriented allocation of financial resources in China still needs to be improved. The introduction of DCEP and its gradual popularization in the future will, on the one hand, save the cost of printing and circulation of paper currency and coins; On the other hand, the gradual transition to DCEP as the core of settlement and trading throughout the financial system will greatly enhance efficiency. The introduction of DCEP may become the new carrier for financial reform, if we can to promote the marketization of financial resources allocation, such as personal loans or borrow with DCEP account, then the probability of default will fell sharply because this kind of accounts is tied a lot of personal information or assets (blockchain technology application).

Digital economy has been one of the biggest drivers of China’s sustained and healthy economic development for many years in a row. According to a report by China Academy of Information and Communications Technology, the proportion of digital economy has accounted for 36% of China’s GDP and is expected to rise to over 50% by 2030, leading the way in the world. China’s Central bank took the lead in launching DCEP, which is a product of the rapid development of China’s digital economy, and it will also be a solid foundation and catalyst for the continuous improvement of this trend. It will certainly provide new historical opportunities for many fields and industries, including enterprises.

Article from Zhao Guangbin, senior economist of PWC

Translated & edited by Yang(Milian Tech)