[LINK] The Chinese Digital Renminbi (E-CNY)

[Stephen Loosley]

“How will the digital RMB change the financial ecology?”

2020-10-21 17:09 Author: Sun Yang  Source: Suning Financial Research Institute (Google Translation) (c)
http://www.cb.com.cn/index/show/zk/cv/cv13450241184


The digital RMB (E-CNY) pilot is very mysterious and low-key, but people can still feel the grand pattern of the digital RMB from various information.

As a product with a high financial technology content of the central bank, the digital renminbi will become a heavyweight that substantially promotes financial services to the real economy and manages financial risks.

Using digital renminbi to pay is very simple. In Wal-Mart supermarkets that have opened digital renminbi payment, consumers can operate on self-service cashier terminal devices and choose digital renminbi payment among four payment methods - WeChat face payment, WeChat payment, electronic gift card payment and digital renminbi method, and then open the digital RMB APP to scan the QR code to pay.

With the assistance of the government, the development of the digital renminbi scenario is also very smooth.

There are 3389 merchants in Luohu District, Shenzhen that support digital renminbi payment and consumption. The types of merchants include shopping malls and supermarkets, daily retail, catering consumption, and life services. Places frequently visited by local people, such as Vientiane City, Wal-Mart, and kkmall, support digital RMB payment.

Digital government affairs control the real-name, high-sticky users and high-frequency trading scenarios of the local economy. The promotion channel "iShenzhen" APP of this pilot is a powerful digital government affairs platform, which supports social security, medical health, transportation, police safety, life payment, electronic certification, play appointments, cultural and sports information, etc. This digital government business has about 600,000 daily active users, which is very sticky.

The promotion of digital renminbi through digital government affairs in various places can allow digital renminbi to penetrate more closely into the daily consumption of ordinary people. Walk together, only to go far. Digital RMB is very clever in choosing digital government as a promotion channel, which makes it easier to develop scenarios, to acquire customers, and to get closer to the real economy.

In addition to 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.

Third-party payment fades

After watching the Shenzhen pilot, we naturally asked a question: Is it possible for digital RMB to replace third-party payment services? What else do third-party payment institutions do?

First, there is enough room for the development of digital RMB. The digital renminbi is positioned as M0, which is the currency in circulation. According to the People's Bank of China, the currency balance in circulation in January 2020 is 9.32 trillion. If the digital renminbi replaces all the currency and cash in circulation, the scale is very large. More importantly, it is illegal to refuse digital renminbi. Refusing to accept Renminbi violates Article 16 of Chapter 3 of the Law of the People’s Republic of China on the People’s Bank of China-"The legal currency of the People’s Republic of China is Renminbi. The Renminbi is used to pay all public and private debts within the territory of the People’s Republic of China. Any unit and individuals shall not refuse."

Secondly, as a payment method similar to mobile payment, offline digital renminbi scan code payment has no obstacles in the promotion process. The offline scan code payment market has become quite mature after more than ten years of cultivation and development by mobile payment institutions such as Alipay, WeChat, and UnionPay. According to the data of iResearch Consulting, in Q4 of 2019, the scale of offline QR code payment transactions in China was about 9.6 trillion yuan, and the people are already familiar with QR code payment.

There are talents from generation to generation, and each has led the way for hundreds of years. Today's giants may become yesterday's yellow flowers. The rise of new powers is likely to be devastating. The ecology will automatically choose more advanced things in the evolution, not to mention this advanced thing with national will.

The digital renminbi wallet is a broad account concept.  It is not locked to a bank, does not need to go to the bank to open an account, and does not need to bind a bank card. Driver's license, social security card, ID card, etc. can be used as an account, which is very convenient for users to use , Has a very strong universal feature. The digital renminbi is endorsed by the central bank's credit, managed and operated uniformly by the central bank, and far exceeds third-party payment companies in terms of reliability and credibility.

Digital RMB is more secure. According to research on related patent documents, some user information of digital RMB transactions is not visible at merchants, and all transaction information is only stored in the digital currency system of the central bank, which fully guarantees the anonymity of users and helps ensure the security of personal information This is crucial today when data privacy is highly important. In addition, the entire issuance process of digital renminbi from the People’s Bank of China to designated operating institutions, and from operating institutions to ordinary people, is electronically traceable, which can fully ensure the targeted use of funds and help counter-terrorism and anti-money laundering. And anti-fraud.

According to the information of the merchants participating in the digital renminbi pilot program in Shenzhen, the digital renminbi will be transferred to the settlement account opened by the merchant at the bank for free after the digital renminbi is acquired, and no transaction fee will be charged. This is a great temptation for merchants. You should know that for merchants with millions or tens of millions of transactions a year, if you use the paid cash withdrawal function of traditional third-party payment, operating costs will increase a lot.

It is worth mentioning that third-party payment has its historical mission: to solve the credibility of transactions in the e-commerce era, to improve the payment experience of consumers, to help the industry chain finance to connect with banking institutions, and to promote the integration of payment and scenarios. Nowadays, many backgrounds have changed. Third-party secured transactions have withdrawn from the stage of history. The bank card payment experience is almost the same as that of third-party payment companies. The emergence of the network makes the need for payment convergence to connect with banking institutions. What's more, most of the bank's personal business operations are already free, but consumers have to pay for credit card repayments through third-party payment, and merchants have to pay for bills, transfers, and withdrawals. Compared with bank payment, payment has no advantage in cost.

In fact, it is not ordinary consumers who need digital renminbi the most, but retail merchants monopolized by payment acquirers. Through digital renminbi acquiring, they can significantly reduce transaction fee costs and obtain more bargaining with payment institutions. ability. Following the cancellation of reserve interest and disconnection of direct connections, the pilot and promotion of digital renminbi will definitely bring about profound changes in the third-party payment market.

Third-party payment institutions are about to embark on a transformation journey again, but where do they transform? Or just withdraw from the stage of history?

Increased competition among banks

Under the two-tier operation system of digital renminbi, commercial banks are responsible for consumer-oriented digital renminbi exchange services, but they cannot charge consumers the commission for redemption.

Commercial banks make money from loan interest and intermediary business fees. Some commercial banks have also begun to assess the development of Internet channel members. Can digital renminbi bring any benefits to commercial banks?

In scenarios controlled by traditional payment companies, the debit or credit cards of many commercial banks are quick payment accounts bound to payment accounts. Although consumers will choose which card to use for payment transactions, after payment is made intelligent, payment companies can largely influence this choice. In addition, the bill records obtained by commercial banks through the payment company's quick payment are all similar to "consumption-XX payment company", and no specific information about consumer orders can be obtained.

If the digital renminbi can bring any benefits, it may be that it will enable banking institutions to obtain more data. Digital renminbi is a payment method that is parallel to payment. Both personal and merchant digital renminbi accounts of commercial banks can be directly connected with transactions in the scenario without the payment of the company's payment cash register as an intermediary. Commercial banks have entered the scene directly, and can obtain richer and more detailed data information under the scene, which can be used to portray users' consumption habits or generate credit evaluations for users.

Payment institutions first enter the merchant circle for free, and then various fees are used to recover all the costs paid in the past. Commercial banks are also commercial institutions. Can they avoid this routine in the long-term development of digital renminbi?

The digital renminbi wallet is a super account that surpasses the existence of commercial banks. It does not depend on the existence of a commercial bank. Users can choose to bind to the account of a commercial bank, but it is not necessary. This may bring about a very obvious competition mechanism. If commercial banks only position themselves as an intermediary for currency exchange, it will be difficult to form a comparative advantage in the digital renminbi era. The digital renminbi will force commercial banks to transform to higher value-added services and product innovation. In the digital renminbi era, the degree of financial digitization is further deepened, and the Matthew effect will become more obvious. Commercial banks with large cross-border advantages, more innovative services, and more valuable products will be able to capture more users from the digital RMB ecosystem, and commercial banks with poor product innovation capabilities will have more difficulty in absorbing funds and customers.

In the digital renminbi era, competition from commercial banks will intensify.

Payment and clearing system rebalance

The People's Bank of China has five major payment and clearing systems. They are China's financial artery. The digital renminbi is the currency circulating in this artery. It will also have a profound impact on the system of this artery.

The large real-time payment system (HVPS) can provide fast, efficient, safe and reliable clearing services for banking financial institutions and financial markets. It strongly supports the RMB cross-border payment business and realizes zero cross-bank fund clearing in transit.

The Small Batch Payment System (BEPS) provides 24/7 uninterrupted payment services for the majority of enterprises, institutions and residents. Individuals can make daily payment for water, electricity, gas, etc. through the system. Enterprises and institutions can entrust the bank to open the account in time Pay wages and pensions to employees who have opened accounts in different regions and different banks.

The online payment inter-bank clearing system (IBPS) allows users to handle multiple services such as inter-bank account management, fund transfer, and fund collection without leaving their homes, and to obtain business processing results online in real time.

The domestic foreign currency payment system (CXFPS) acts as an agent for payment business settlements in 8 currencies including Hong Kong dollar, British pound, Euro, Japanese yen, Canadian dollar, Australian dollar, Swiss franc and US dollar through the correspondent bank designated by the People's Bank of China.

Central Bank Accounting Data Centralized System (ACS), responsible for reserve management, refinancing, rediscounting, cash and issuance of funds, and other central bank operations, including central bank accounting, post-event supervision, statistical analysis, accounting file management, and customer review Accounts and other functions. All types of accounts opened by financial institutions in the central bank are managed by the central bank’s accounting data centralized system.

There are also clearing institutions authorized by the People's Bank of China to be responsible for financial clearing in vertical fields, such as intermediary institutions such as city bank clearing, rural credit bank fund clearing, online clearing, and UnionPay. These intermediary institutions constitute a distributed network of information exchange among various financial institutions. Because the digital renminbi accounts are set up in the central bank, these institutions have to operate and clear based on the central bank’s digital renminbi accounts, and it is a mode of payment that is clearing, and to take a step back, it is also a daily clearing mode. It is a centralized way. If things go on like this, in the digital renminbi business, the payment and settlement function of intermediaries will weaken. In the future, the status of inter-bank and inter-system clearing institutions will be threatened, but some systems that use special scenario payment functions will not be affected.

The traceability of digital renminbi requires the payment and settlement system to be able to report every institution, individual, and clearing gate that the digital renminbi passes through in the circulation and clearing process, so that the digital renminbi has a central record in the central bank’s clearing system and covers the digital renminbi. The log system that records the entire life cycle poses a great challenge to the payment and settlement system, and many changes are needed to establish a connection between the payment and settlement systems and the central bank's 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 national e-commerce system. A high degree of automation of the payment and settlement system must be realized to meet the traceability requirements of the digital RMB.

The disclosure of digital renminbi transactions to the central bank means that the future payment and settlement system for digital renminbi information retention is limited to the issuer level, and personal level data will be collected by the central bank, and currency circulation information will further rise. Digital currency will enable the central bank to better implement the central government's targeted monetary policy, and to achieve accurate fund placement and flow monitoring. The payment and settlement system will match the monetary policy of the central government more intelligently.

Digital RMB will promote the automation of cross-border payment scenarios. According to World Bank data, the scale of international remittances in the global cross-border payment market continues to grow at a rate of 5% per year, and the cost of cross-border payments remains high, reaching 7.68% of the transfer amount. Blockchain-based cross-border payments can provide reliable, safe, and uninterrupted services, reduce manual processing links, shorten clearing and settlement time, and will significantly increase transaction speed. At the same time, due to the costs of payment processing, receiving, financial operations, and reconciliation in the traditional cross-overseas payment model, the application of blockchain technology will weaken the role of intermediaries in the transaction process and improve the liquidity of funds. Realized real-time confirmation and monitoring, which can effectively reduce the direct and indirect costs in the transaction link. For banks, it can improve capital structure and increase profitability, and for financial consumers, it can reduce fees and increase transfer speed, thereby improving service satisfaction. In the future, in scenarios such as cross-border trade and cross-border transfers, it is expected that the digital RMB will have a lot of room for development.

Supply chain financial capital flow reengineering

Now we say that the supply chain finance of various blockchains is not as big as the digital renminbi on the supply chain finance. The digital renminbi will be able to recreate the flow of funds and make the flow of funds credible and worthy of credit.

The full traceability of the digital renminbi is particularly useful for supply chain finance. The most important point of supply chain finance is to be able to confirm the authenticity of the transaction background and the authenticity of both parties to the transaction. The digital renminbi naturally has a full history log. Every time a core enterprise and a supplier or distributor conduct a digital renminbi settlement, the settlement log is automatically reported and stored in the central bank. This log can be used to confirm the rights of various assets in supply chain finance. Realize the verification of the supply chain financial business.

In addition, digital renminbi can be superimposed with smart technology similar to smart contracts in the future to realize automatic payment settlement based on scenarios and specific conditions, such as settlement of accounts payable by core enterprises and suppliers, fund settlement between different distributors, distributors and consumption Refunds between employees, subcontractors and migrant workers’ salary settlement based on accounts payable, etc. Digital RMB will be able to promote the development of a credible financial Internet.

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