The pilot of digital RMB is mysterious and low-key, but people can still get a sense of the grand pattern of it from various information. As a product with high fintech content of the central bank, digital RMB will become a heavyweight weapon to substantively promote the financial services for the real economy and control financial risks.
Below, we will explore Shenzhen digital RMB pilot, to see the impact of digital RMB on the future of the financial ecosystem.
The entry of digital government affairs
The choice of digital government affairs to promote pilot digital RMB is a masterstroke.
In October 2020, 1913,847 individuals in Shenzhen successfully completed the booking registration for Luohu Digital RMB red envelope pilot through the “I Shenzhen” system. 50,000 people shared 10 million yuan (E-CNY) airdrops, with a winning rate of 2.6%.
With the help of the government, the development of the digital RMB scene has also gone smoothly. In Luohu District of Shenzhen, 3,389 merchants supported digital RMB payment, which includes shopping malls and supermarkets, daily retail, food and beverage consumption, life services, etc. In Mixc, Walmart, KkMall and other places frequented by local people, digital RMB payment is supported.
Digital government affair controls the real-name high stickiness users of the local economy and high-frequency trading scene. The promotion of the pilot channel “I Shenzhen” APP is a powerful digital government affairs platform. It supports social security, health care, transportation, police security, life expenses, electronic certificate, booking, recreation and sports information, etc. Overall, it can deal with 212 digital e-government business online, and the number of its users is up to about 600000, and they are all very active.
Through the promotion of digital government affairs, digital RMB can more closely penetrate into the daily consumption of ordinary people. Go together, then go far. It is very smart to choose digital government affairs as the promotion channel, which simplifies the development of the scene, and it is easy to get customers and be closer to the real economy.
Apart from central banks and commercial Banks, will local governments become important entities for digital RMB operations in the future? The entry of digital government affairs will profoundly change the ecology of currency operation.
Withered Third-party payments
After looking at the Shenzhen pilot, the natural question is: is it possible to replace third-party payment services with digital RMB? Do we still need it?
First, there is plenty of room for the development of digital RMB. The digital RMB is positioned as M0, which means the currency in circulation. According to the data of the People’s Bank of China, the currency balance in circulation in January 2020 is 9.32 trillion. If the digital RMB replaces all the currency and cash in circulation, the scale will be very large. More importantly, it is illegal to refuse to accept digital yuan.
Secondly, as a payment method similar to mobile payment, digital RMB offline scanning payment has no obstacles in the promotion process. After more than ten years of cultivation and development by mobile payment institutions such as Alipay, WeChat and UnionPay, the offline code-scanning payment market has become quite mature. According to iResearch, in Q4 of 2019, the transaction scale of China’s offline code-scanning payment is about 9.6 trillion yuan, and ordinary people are quite familiar with code-scanning payment.
Jiangshan generation of talent out, leading the coquettishly for hundreds of years. Today’s giants may turn out to be yesterday’s; new forces are likely to rise and destroy; and the evolution of ecology will automatically choose something more advanced, not to mention something more advanced with national will.
Digital RMB wallet is a broad concept of account, which does not lock into a bank, and there is no need for a bank account, or binding a bank card, driver’s license, social security cards, ID cards or other things that can be marked as identity. It is very convenient for users to use and has very strong universal characteristics. The digital RMB is endorsed by the credit of the Central bank and managed, operated by it too. In terms of reliability and credibility, it is far superior to the third-party payment companies.
The digital RMB is more secure. According to the study of relevant patent documents, the users’ information of digital RMB trading is not visible at merchants, all transaction information is stored in the central bank’s digital currency system, which fully ensures the user’s anonymity. In this way, it can ensure the safety of personal information, which is highly important today. In addition, the entire issuance process of digital RMB from the People’s Bank of China to the designated operating institutions and then to the general public can be traced electronically, which can fully ensure the targeted use of funds and is conducive to the fight against terrorism, money laundering and fraud.
According to the information of the merchants, the digital RMB will be transferred to the clearing account opened by the merchants in the bank after receipt, and no handling fee will be charged for receipt. This is very tempting to merchants. It should be noted that for those merchants that own millions or tens of millions of transaction revenue a year, the operation cost will increase a lot if they use the payment and withdrawal function of traditional third-party payment.
It is worth mentioning that the third-party payment has its historical mission: to solve the transaction credibility in the e-commerce era, improve the payment experience of consumers, help the finance industrial chain to connect with banking institutions, and promote the integration of payment and scene. Nowadays, many backgrounds have changed, and third-party guarantee transactions have withdrawn from the historical stage. The experience of bank card payment and third-party payment companies are almost the same, and the emergence of Internet connection even deletes the necessity to connect payment convergence and banking institutions. What’s more, most of the personal business operations of banks are already free of charge. However, consumers still need to pay fees for credit card repayment, merchants still need to pay fees for receipt. Compared with bank payment, third-party payment has no advantage in cost.
In fact, it is not ordinary consumers who need digital RMB most at present, but retail merchants monopolized by the payment receiving institutions. Through digital RMB receipt, they can significantly reduce transaction fee costs and gain more bargaining power with the payment institutions. After the cancellation of reserve interest and the disconnection of direct connection, the pilot and promotion of digital RMB will surely bring profound changes to the third-party payment market.
The third-party payment institutions will embark on the journey of transformation again but to where? Or will it just walk away from history?
Intensified competition between banks
Under the two-tier operating system of digital RMB, commercial banks are responsible for the conversion service of digital RMB for consumers, but they cannot charge the transaction fee from them.
As we all know, commercial banks make money by interest on loans, commission fees and so on. Some commercial banks have also begun to assess the development of Internet channel members. Will the digital RMB bring any benefits to commercial banks?
In a scenario dominated by traditional payment companies, many commercial banks’ debit or credit cards are quick payment accounts tied to their payment accounts. Although consumers will choose which card to use for payment transactions, after the smart payment, payment companies can largely control this choice. In addition, the billing records obtained by commercial banks through the quick payment of payment companies are all general information similar to “consumer-XX Payment Company”, and the specific information of consumption orders cannot be obtained at all.
If there is one good advantage of the digital yuan, it is likely to be that it will give banks access to more data. Digital RMB is a kind of payment method in parallel with payment. Both personal and merchant digital RMB accounts of commercial banks can be directly connected with the transaction in the scene and without the intermediary of the payment cashier desk of the payment company. Commercial banks directly enter into the scene and obtain richer and more detailed data information under the scene, which can be used to draw a portrait of users’ consumption habits or generate a credit evaluation of users.
Payment institutions are free first to attract merchants, and then various fees will be charged to recover the costs paid in the past. Commercial banks are also commercial institutions, in the development of digital RMB in the long-term process, can it avoid this routine?
Digital RMB wallet is a super account beyond the existence of commercial banks. It does not depend on the existence of one commercial bank. Users can choose to bind an account of any commercial bank, but it is not required. Thus, this could lead to a very obvious competitive mechanism. If commercial banks only position themselves as a currency exchange intermediary, then it is difficult to form a comparative advantage in the digital RMB era. Digital RMB will force them to transform into higher value-added services and product innovation. In the digital RMB era, the degree of financial digitization is further deepened, and the Matthew Effect will be more obvious. Commercial banks, who own big cross-border advantages, more innovative services, and more valuable products, will be able to grab more users from the digital RMB ecology, while other banks with poor product innovation ability will find it more difficult to attract funds and customers.
In the digital RMB era, competition among commercial banks will intensify.
Rebalanced system of payment and clearing
The People’s Bank of China has five major payment and clearing systems, which are the financial arteries of China. Digital RMB is the currency circulating in this artery and will have a profound impact on this system.
HVPS can provide fast, efficient, safe and reliable clearing services for banking financial institutions and financial markets, which strongly supports the cross-border RMB payment business and realizes zero inter-bank fund clearing on the way.
BEPS can provide 24-hour payment services for the majority of enterprise institutions and individual citizens. Through this system, individual citizens can pay water, electricity, gas and other daily expenses, and enterprises and other public institutions may entrust their banks with the timely payment of salaries, pensions and other expenses to employees who have opened accounts in different regions and banks.
IBPS enables users to handle inter-bank account management, fund transfer, fund collection and other services without leaving the home, and obtain the processing results of the services online in real-time.
CXFPS is used for payment and settlement of 8 currencies including Hong Kong dollar, British pound, Euro, Japanese yen, Canadian dollar, Australian dollar, Swiss franc and US dollar through the agent bank designated by the People’s Bank of China.
ACS is responsible for various central bank operations such as reserve fund management, re-lending, re-discount, cash and issuing funds, including central bank accounting, post-supervision, statistical analysis, accounting file management, customer reconciliation and other functions. All kinds of accounts opened by financial institutions at the central bank are managed by the central bank’s accounting data centralization system.
In addition, the clearing institutions authorized by the People’s Bank of China are responsible for the financial clearing business in the vertical field, such as urban bank clearing, Rural Credit Union clearing, online union clearing, UnionPay and other intermediary institutions. These intermediaries constitute a distributed network of information exchange among various financial institutions. Since the digital RMB account is set up in the central bank, these institutions have to operate and clear based on the central bank’s digital RMB account. Moreover, it is a mode of payment as well as clearing, to say the least, it is also a mode of the daily clearing. Generally speaking, it is a centralized way. In the long run, the payment and clearing function of intermediary institutions will be weakened in the field of digital RMB business. The status of inter-bank and inter-system clearing institutions will be threatened, but some systems that perform special scenario-payment functions will not be affected.
The traceability of digital RMB would require payment and settlement system must be able to report its addition in the process of liquidation after each institution, individuals, and liquidation ports. In this way, digital RMB would have a central record in the bank clearing system. This challenge is great, it needs a lot of reform for payment and settlement systems to set up the connection of the digital currency system. Especially when the scale of digital RMB transactions reaches hundreds of billions or even trillions, the log records will far exceed the data scale of the e-commerce system in China. The payment and clearing system must be highly automated to meet the traceability needs of the digital RMB.
The disclosure of digital RMB transactions to the central bank means that the information retention of digital RMB in the future payment and clearing system is limited to the level of issuing institutions, and the data at the individual level will be collected by the central bank, and the currency circulation information will rise further. Digital currency will enable the central bank to better implement the central government’s targeted monetary policy, precise fund delivery and flow monitor. The payment and clearing system would match the central government’s monetary policy more intelligently.
Recreate Supply chain financial funds flow
Compared to all kinds of blockchain supply-chain finance, digital RMB has more impact on it. Digital RMB will be able to recreate capital flow and make it credible.
The most important point of supply chain finance is to be able to confirm the authenticity of the transaction background, as well as the authenticity of both sides. Digital RMB naturally has a whole-course historical log. Every time when core enterprises and suppliers or distributors conduct digital RMB settlement, the settlement log is automatically reported and kept in the central bank. This log can be used to confirm various assets of supply chain finance, so as to realize the verification of supply chain finance business. In this way, the full traceability of the digital RMB is particularly useful for supply chain finance.
In addition, digital currency in the future can overlay with smart technologies like smart contracts, to realize automatic payment settlement based on the scenario and specific conditions, such as the core enterprise and suppliers to settle accounts payable, fund settlement between different distributors, distributors and consumers of a refund, subcontractors, and migrant workers based on wages and settlement of accounts payable, etc. The digital RMB will be able to drive the development of a credible financial Internet.
Conclusion
It is impossible to have a good plan for the present without any long-term strategy. It is impossible to handle the current situation without any overall planning.
The People’s Bank of China has invested in specialized companies to research and established specialized research institutions to study digital RMB. The pilot cooperation institutions and scenarios are the most excellent. The PBOC also said it would develop special regulatory policies to supervise the digital RMB.
Digital RMB is not only a red envelope but also a method of payment. It has emerged from observing the rise and fall of many other so-called “digital currencies” and “virtual currencies”. It has accumulated a lot of cutting-edge technologies and governance concepts and has grown into an intelligent digital currency.
We may not be able to see far and clearly enough, but the impact of the digital RMB on the future is already here.
Article from Sun Yang, a senior research fellow at Suning Financial Research Institute
Translated by Yang(Milian Tech)