China's digital Renminbi could hit payment platforms: S&P

November 16, 2020

HONG KONG -- The introduction of a digital currency in China could cut transaction costs, lowering fee revenue for payment service intermediaries, according to ratings agency Standard and Poors. It says that as the first G-20 country to trial a digital currency, China's success or failures could offer lessons to other aspiring nations.

"While the trial started small, it has large implications for the future of banking," says S&P Global Ratings credit analyst, Harry Hu. 

The People's Bank of China (PBoC) conducted the trial in October 2020 by distributing BRMB10 million (about US$1.5 million) in tokens of Digital Currency Electronic Payment (DCEP) to users in the city of Shenzhen. Users were able to make purchases at selected stores via a designated approved software app. After a transaction, the ownership title of the digital renminbi changed hands from the customer to the merchant and this was registered with the PBOC.

"Should this trial lead to broader adoption, we expect digital renminbi to predominately be a payment tool rather than a storage of wealth," says Hu.

"Given that DCEP does not bear interest, it would not likely replace bank deposits for savings. However, it may provide a cheaper and more convenient way of paying for retail items, and in this sphere will compete with payment services provided by payment companies and commercial banks.

"In our view, the direct link maintained between the central bank and the token digital renminbi (attached with the owner's information) is the key differentiator from paper and e-money (electronic forms of money such as bank deposits and surplus balances in payment companies)."

Hu says: "It differs from paper because digital renminbi has the owner's "name" on it. It's different from e-money due to the direct link with the PBOC rather than via a commercial banking intermediary or payment agency. Importantly, because ownership of the digital renminbi never transfers to the commercial bank, digital currencies are not deposits in our view, and do not sit on balance sheets of the commercial banks.

"DCEP remains a direct liability to the PBOC, the same as cash and coins."

S&P points out that, in China, retail e-payments are dominated by Alipay and WeChat Pay, which are in turn associated with two of China's biggest tech groups, Alibaba Group Holding and Tencent Holdings. "These types of platforms stand to be more disrupted by digital renminbi than commercial banks, whose dominance of big wholesale electronic payments will unlikely be harmed by a digital currency," it says.

"During trial, the digital renminbi was used only for retail purchases. That said, given the payment platforms' links to leading e-commerce and social media companies, we expect user stickiness to help the platforms maintain a clear lead over commercial banks in retail e-payments." (ATI).