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Digital yuan poses threat to Alipay-WeChat online payments duopoly

China's plan for a centralized digital currency could open up the country's "walled-garden" online retail payments ecosystem, but analysts believe it may not immediately change the way shoppers transact with Alibaba Group Holding Ltd.-affiliated Alipay and Tencent Holdings Ltd.'s WeChat Pay, which powers payments on the WeChat super-app.

Major Chinese e-commerce players now operate in a closed environment, allowing their preferred digital payment providers and often blocking rival services. For instance, JD.com Inc. does not allow payments from Alipay, owned by Alibaba-backed Ant Group Co. Ltd., while WeChat Pay and Union Pay are not accepted on Alibaba and its related platforms.

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Six years in the making, the digital yuan, also known as Digital Currency Electronic Payment, or DCEP, is set to be issued by China's central bank to replace cash in circulation. However, the official launch date is unknown. The move is designed to improve interoperability among various payment platforms and could potentially allow a consumer to use the currency from an Alipay wallet to pay for items on rival platforms like JD.com or WeChat, analysts said.

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Alipay homepage
Source: Ant Group

The industry is divided on the degree of openness that the digital currency will bring to the online payment systems.

Being essentially digital cash, DCEP should be able to flow across retail and internet ecosystems seamlessly, but some believe that complete openness at the level of digital wallets is less likely during the initial rollout.

Customers could be tempted to move to an alternative wallet that is accepted by all e-commerce platforms to circumvent the restrictive policies of Alipay and WeChat Pay, which control most of the digital transactions in China. The digital yuan is likely to open up opportunities for retailers and banks to offer wallets that claim greater flexibility, analysts said.

"Some of these walled gardens will remain, at least initially. That might give some edge to the banks or some other wallets that may claim greater operability," said Richard Turrin, a former IBM executive and author of the upcoming book Cashless-China's Digital Currency Revolution.

JD.com, which so far relied on a partnership with Tencent for its payment needs, has teamed up with People's Bank of China through its fintech arm JD Digits to develop blockchain platforms and a wallet to support the digital currency. Pinduoduo Inc., which accepts payments from both WeChat Pay and Alipay, is planning its own payment system. TikTok owner Beijing Byte Dance Telecommunications Co. Ltd. has acquired third-party payment service UIPay to grow the payment capacity of its Chinese short video platform Douyin.

"So all of these big players, in terms of their own payment capability or partnering with some of the strategic investors, there is a huge focus on payment because having a frictionless payment layer is really what drives consumer engagement and adoption," said James Lloyd, Asia-Pacific fintech leader at EY.

Consumers could end up benefiting the most as their cash would have "greater transportability than it ever had before," Turrin said.

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What is at stake

Industry observers were unanimous on how the digital yuan stands to benefit consumers but not equally optimistic about the rollout's impact on the market leader Alipay.

Ant Group, which is gearing up for one of the biggest IPOs in recent years, sees the move as a threat to its business. In its prospectus, the company said initiatives by the Chinese government like DCEP and the interoperability of the QR code could pose an adverse risk to its business.

Ant Group has diversified into consumer credit and wealth management products in recent years, but a big chunk of its revenue still comes from payments. Mobile payments emerged as the top activity for super apps in the 2020 edition of the Asia Consumer Insights survey from Kagan, an offering of S&P Global Market Intelligence.

Details of the blockchain-based digital currency are still lacking. But what is certain is that digital payment leaders like Ant and Tencent stand to lose transactions and merchant fees if consumers transact with DCEP, albeit marginally, analysts said. Alipay and WeChat Pay may have little choice but to adopt the digital currency if it replaces cash one day, said Zennon Kapron, director of fintech and digital payment consultancy Kapronasia.

But more than the revenue loss, Alibaba, which owns 33% of Ant, and Tencent are likely more concerned over the potential loss of valuable consumer data to DCEP. It is more important to these companies that consumers continue using Alipay or WeChat Pay wallets even if they are transacting with DCEP, said Turrin.

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Nevertheless, some analysts are not entirely convinced that the digital yuan will significantly hurt the dominance of Alipay and WeChat Pay, which are intrinsic to the daily lives of Chinese costumers.

Most Chinese consumers transact with both Alipay and WeChat Pay. These platforms strive to be more than just payment and cash transfer services by offering mini-applications from food ordering and grocery shopping to movie and train ticket purchases. WeChat Pay, in particular, has a captive user base as it is embedded within the popular WeChat short messaging app.

Ecosystem stickiness and other factors, including online spending credit offered and poor usability of existing digital wallets by banks, will keep consumers loyal to Alipay and WeChat Pay wallets even when they are transacting with digital yuan, they said.

"When all these payment options are completely open, then you know your desire to buy something from them may go up," said Kapron.

Moreover, the central bank's move is not just to take back control of the currency from Alipay and WeChat Pay but also to shake up how online shopping is done in China, increase online penetration, and create a global currency, they said.

"It's the precursor of a global digital trade platform that is going to make buying from China as easy as buying from Amazon.com [Inc.]," Turrin said.