Rich Turrin is the author of the best-selling “Innovation Lab Excellence” and soon to be published “China’s Digital Currency Revolution.” He previously headed IBM’s Fintech Innovation Lab in Singapore and IBM’s banking risk technology team in China after a 20 year career in banking.
In an interview with China Banking News Rich Turrin said that a range of factors including China’s pragmatic approach to fintech innovation set the stage for a revolution in digital payments led by tech giants Alibaba and Tencent.
As a long-term resident of Shanghai Turrin witnessed this revolution in cashless payments first-hand when it kicked off just half a decade ago, with the launch of QR code-based mobile payments systems by Alipay and WeChat Pay.
“I call 2014 the ground zero for Chinese payments,” said Turrin to China Banking News. “It was the year when WeChat Pay went live, and led to the revolutionary use of digital technology on such a scale that it’s difficult for us in the West to imagine.
“Taking Shanghai as a microcosm for the whole country, a population of around 25 – 28 million went predominately digital and cash free in roughly two years from 2014 to 2016.
“It was mind-blowing – we haven’t seen something like this since we landed on the Moon.”
Beijing sparked digital transformation by giving tech giants banking licenses
The term “state capitalism” is often used to describe China’s development model, positing a form of market economy that operates beneath the mantle of heavy government control.
Turrin points out, however, that the revolution in Chinese digital payments was in fact the result of regulators giving greater leeway to huge non-government companies to do business.
In a bid to bring financial services to a greater swathe of China’s regional population, Chinese regulators took the bold move of allowing tech giants Alibaba and Tencent to enter the banking sphere, with the hope that they would find innovative means of improving financial inclusion.
“China liberalised the banking rules and gave both Alibaba and Tencent – the rough equivalent of Facebook and Amazon, banking licenses,” said Turrin.
“It was a bold and smart move to allow tech providers to become banks, and came at the expense of their own state-owned lenders.
“China had done a fair job of disseminating the traditional financial system, but there are so many rural villages and the country is so big that they just couldn’t do it through conventional means.
“The state-owned banks never wanted to or never were able to reach out to all the regions, as this would have involved putting branches in, hiring tellers, collecting money, and having armoured cars going back and forth.
“So the Chinese government was highly pragmatic in turning to digital to reach out to their unbanked population.”
Once Alibaba and Tencent obtained banking licenses, it was up to them to independently develop their own fintech innovations that could survive the rigours of market competition.
“The concept that the Chinese government then pushed Alibaba and Tencent to succeed, which is what I have read repeatedly, is completely false,” said Turrin.
“They were already established tech giants who compete against each other to the death, while finance was ripe for digitisation, and there was a need to bring financial services to the masses.
“The Chinese government simply liberalised regulations, and after that it was the greatness of the technology and their own ability to market it and push it out that really made the apps revolutionary.
“It was never the Chinese government saying that everyone has to use Alipay or WeChat Pay.”
Alipay and WeChat Pay turn to pragmatic solutions for digital payment
Alipay and WeChat Pay themselves demonstrated a limpid pragmatism in their adoption of the comparatively low-tech solution of QR codes to expedite digital payments. The very simplicity of this solution is what fostered its rapid and widespread adoption across huge swathes of the Chinese market.
Turrin contrasts this with the more sophisticated solution favoured by American tech giants around the same time, which failed to produce similar results stateside because the more advanced and costly technology served as a roadblock to adoption.
“2014 was year zero for China payments, and in that year in the US we were rolling out Google Pay and Apple Pay,” said Turrin.
“Apple and Google were both fixated with near field communication technology, so if you wanted to use Apple Pay or Google Pay you probably had to buy a new phone, because not all existing handsets had NFC technology on them.
“If you were a merchant you needed to buy a new point of sales system to accept the new phones because your existing system couldn’t process it.
“By contrast the designers over at WeChat and Alipay in China said we have a problem – we have a whole country that at best owns a the most basic android phone.
“So they decided to use QR codes as their base, because virtually any cheap base level android phone can run the software, and has a camera that can take a picture of the code and use it.”
The QR-code solution also made it very easy for vendors to plug into the system, as unlike the NFC solution it did not require the purchase of new point-of-sales hardware.
“If you wanted to accept payment using the WeChat Pay or Alipay system, all you had to do was print out a QR code and stick it on the side of your noodle stall – in fact you could receive digital payment without having any digital assets at your disposal,” said Turrin.
“All you needed was for someone else to scan your QR code, put the money in, and it was done.
“WeChat and Alipay both used the existing technology network to make it so that everyone could use digital payments overnight, as soon as they downloaded the software.
“That was the breaking point – it was really a fascinating transition to be around.
“China is above all things very pragmatic, and there was a certain amount of pragmatism that went into building the system that made it tremendously successful.”
Modern Chinese culture embraces digital technology
Turrin also highlights another key factor in facilitating the success of digital payments in China – a cultural shift which has led to the embrace of new technology by the Chinese which Turrin finds reminiscent of the United States during the 50’s and 60’s.
“There’s low resistance to people using technology – I think that’s unique to China in this time and place,” he said.
“What’s interesting is that you could have found a similar love of technology in the US for example during the Space Race – late 50s early 60’s, when science was considered the saviour of America.
“There was a cultural emphasis to make scientists and engineers back then, and that’s what you’re seeing in China today.
“This cultural emphasis is partially government sponsored, but also partially brought about by the great Internet companies and the changes that people can actually see.
“People see their lives getting better – they like mobile and digital, they’re seeing it bring them new capabilities, leading to a cultural upwelling of digital that has penetrated every corner.
“I have old people who live in my apartment building and I see them using apps on their phone all the time – they’re really trying because there’s a cultural imperative to do it, with their kids and their grandkids all using the technology.”
China’s laissez-faire approach to fintech made P2P the evil twin of digital payments
While the combination of cultural acceptance and light-touch regulation of tech companies worked outstandingly well for digital payments, Turrin says that not all of China’s experiments with the widespread deployment of fintech have proved a success, pointing in particular to the country’s now ailing P2P sector.
“I like to call P2P the evil twin of digital payments in China,” he said. “That was an example of fintech gone wrong.”
“It was technology that China copied from the United States, which the United States found didn’t work quite as well as they’d hoped, and prompted the US government to put regulations around it.
“While the US was regulating the P2P market China was allowing the P2P market to explode – for anyone who thinks the Chinese government has tight control over everything, you only need to look at the Chinese P2P market for an example laissez-faire Chinese government policies.”
Following an initial boom period endemic fraud soon spread throughout the sector, triggering a government crackdown and a mass cull of Chinese P2P lending platforms, which fell from a peak of 6000 to under 600 by October 2019.
“This shows that digital can solve many problems as well as create problems” said Turrin. “You’ve got two remarkably effective technologies, one for good and one for bad, and they’re both shown readily in the Chinese market.
“It’s also clear that the Chinese government was willing to place big bets on fintech, and adopt a laissez-fair approach by letting these things just shake out.”
Chinese government will work with tech giants on digital currency
Turrin says that the digital payments revolution fostered by Alipay and WeChat Pay also marks the incipient development of digital currency in the Chinese economy.
“You really have to look at what WeChat and Alipay have done in China as digital currency 1.0 – the first generation of digital currency,” Turrin said.
“With this first generation you haven’t really digitised the cash yet – the cash still sits in your bank as a bank balance sheet entry, or it sits on your WeChat or Alipay wallet as a balance sheet entry.”
Given the pivotal role that Alipay and WeChat have played in this development Turrin says that the Chinese government probably took more than a few notes from these tech giants when working on its central bank digital currency (CBDC).
“How could the Chinese government not work with Ant Financial and Tencent’s fintech teams to figure out what version 2.0 should look like when they were responsible for version 1.0?
“Version 2.0 will involve the actual digitization of cash itself, instead of just the digital transference of cash. It will longer be an entry on a bank balance sheet, you’re talking about cash you may have on your phone itself.
“So when you say you have 200 RMB on your phone, it’s literally a digital representation of 200 RMB you have on your phone itself, not on a balance sheet somewhere.”
Central bank digital currency could shake Alipay and WeChat Pay’s dominance
While Alipay and WeChat Pay have played a key role in paving the way for a statutory digital currency, Turrin expects their dominant market position as payment providers to be compromised as a result of the imminent launch of the CBDC, as it will undermine their own presently indispensable position.
“Alipay and WeChat Pay will certainly lose some of their business and market dominance, because you’ll be able to go without using these payments platforms,” said Turrin.
“Right now if I want to make a digital payment I probably need to go through Alipay or WeChat, given their 90% market dominance.
“Once we have digital currency, if I want to make a digital payment I don’t need WeChat or Alipay – I can send it to you directly via SMS message or wallet to wallet, or whatever method they come up with.”
Turrin also points out that the launch of a CBDC will also give some power back to Chinese banks, who have ceded a tremendous amount of business as a result of China’s digital payments transformation.
“The banks lost the entire payments war – even if people in China keep their assets in the bank, the way they pay is through the front end of WeChat Pay or Alipay,” he said.
“This comes out of business the banks would have enjoyed via UnionPay or another clearing company with consumers using debit cards.
“The next generation of digital money empowers the banks, and mildly disempowers Alipay and WeChat, because once you are no longer forced to use those platforms you can choose to use a bank or other digital storage options.
Turrin nonetheless expects this impact to be limited given the sheer dominance and reach of Tencent and Alibaba’s tech platforms.
“It’s going to be hard for banks to tip the scales back to the old days when they controlled payments, because these tech platforms are so useful that people are addicted to them – they really like to use them because they’re great technology.”
Rich Turrin can be reached at his website: https://richturrin.com/chinas-digital-currency-revolution/