By In China, smartphone app payments such as Alipay and WeChat Pay are replacing traditional payment methods and, as a result, merchants are accepting cash, less and less. According to Connie Chan, a partner at Andreessen Horowitz, this apparent cashless revolution has resulted in the creation of new business models built from this software-based system of value exchange.
An app driven payment system allows merchants to provide a variety of new services to their customers that are charged as micropayments, which incur lower costs between customers and different service providers. This novel payment system has created a new digital economy, where billions of users can transact easily and efficiently without incurring intermediation costs.
For example, KuGou, the largest online music app in China with more than 450 million active monthly users, provides song coins as rewards to its users based on their level of engagement with the app. Traditionally, these song coins could be used for in-app purchases, however, with an integrated digital economy they can also now be converted into renminbi (RMB), the local fiat currency.
Relevance for Crypto-Enthusiasts
The relevance of this new digital economy is that software-driven payment platforms have opened the door for an entirely new class of services and business models to be built. At the moment, however, as there is no cross-currency facility for this cashless revolution, it is limited to the Chinese market. The reason for this is that WeChat Pay, Alipay and other digital payment systems in China are built and supported solely on the Chinese banking system. The benefit for digital payment providers is that Chinese banks do not charge the same kind of excessive interchange fees to Chinese merchants as is done in the US and other countries. The downside is that Chinese banks operate, almost exclusively, in the local fiat currency. This provides Chinese merchants with more flexible micropayment models, however, these models operate only within the local economy.
Furthermore, government policies instruct and inform the Chinese banking system and four of the biggest Chinese banks are mostly government-owned. As such, bank operations are directly controlled and carefully managed by government monetary policies which, for example, set and impose capital controls and interest rates. Alipay’s Ant Financial and WeChat Pay’s Tencent are therefore subject to the same policy framework as that of the banking system. Although these policies provide cost-effective banking and payment services, they are engineered to achieve the government’s goal of unified economic growth and will forever be bound by the agenda of the government.
A Gap for Development
In the future, China may relax its interest rate and capital controls in a bid to make its currency more internationally acceptable. However, this change may undermine the banks’ profit margins and, as a result, banks may no longer wish to subsidize the digital payments economy. In the event that China does not attempt to broaden its digital payments economy, this cashless revolution will be exercised solely with its borders.
As very few governments around the world have managed to emulate China’s success in strictly controlling its banking system, it is doubtful that other centralized digital payments economies will emerge. There is, therefore, a potential opportunity for cryptocurrency and blockchain-based protocols to develop such a platform and further incite a global cashless revolution.
Do you believe your country will ever go cashless like China? Or can a digital payment system be successful without the support of banking infrastructure? Give us your thoughts in the comments below.
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