// . //  Insights //  A New Dawn For Digital Currency

As a country that invented the banknote in the seventh century, China led the way money moves and is used in everyday life. And now it’s at it again. By introducing a central bank digital currency (CBDC), money is going fully digital, setting the standard for the way money flows globally.

The currency - known as eCNY - will be a recognized legal tender like the paper Yuan. While the Chinese payment ecosystem is already highly digitized, with RMB 8 trillion of banknotes still in circulation, the potential of going fully digital remains enormous, bringing a new dawn for digital currency.

To understand the implications of eCNY, we have looked at key payment flows driving innovation in China. Representing trillions of the Renminbi, any potential changes in these flows could reshape the competitive landscape completely.

Business-to-Consumer (B2C) flows

B2C is at the frontier of innovation, with 90% already happening digitally and big tech players dominating. In the immediate term, we expect eCNY to accelerate the disruption that is already happening with the interoperability of QR codes. eCNY has the potential to massively level the playing field between banks and big techs while further squeezing merchant acquiring businesses. It also opens up opportunities for corporates looking to work with licensed providers and provide banking services to the end supply chain participants and end consumers, more commonly known as banking-as-a-service (BaaS).

Cross-border flows

Cross-border is an area of excitement given China is one of the most prominent players in global trade and a leading provider of foreign direct investment (FDI). Business-to-business (B2B) sectors generate significant volumes (a mix of low and high value) with considerable investments in digitalization and is highly bank dominated. In the near term, we expect little change given the market structure and PBOC’s focus on consumer sectors. However, we expect change to accelerate in the longer term, especially in areas such as the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) - which is already a hotbed of innovation - and increasing integration with on-and-offshore markets. We expect the payment infrastructure integration to start, beginning with retail but quickly moving into B2B.

Consumer to Financial Institutions (C2F)

C2F captures the cross-border investment flows where ongoing liberalization is to foster innovation across connect programs. Most efforts to date have focused on greater market access, such as on-and-offshore flows via connect programs and removing legacy caps on cross-border investment flows for individual and institutional customers. In the longer term, we expect further disruption when eCNY is in place, with several players squeezed with domestic banks and securities houses likely to be the big winners.

Key strategic considerations for banking industry players

Digital players

It is crucial for digital players to evolve their merchant acquiring business while the core service is commoditized, as well as work out how to capture opportunities from a more open and interoperable eWallet and payment space. For example, should they build, partner, or buy/sell the business? What role could sector-tailored propositions play (for example, Food & Beverage), and what type of value-added service (VAS) will create compelling propositions (for example, B2C analytics) to help merchants grow and run their business?

Big techs

Technology companies will need to work out how to defend their existing market dominance in eWallet and payments space, especially given the significantly lowered barrier to entry. Other considerations include how would eCNY affect the current monetization model, or the path towards one, and whether they should compete or partner with potential entrants to the eWallet market. If the market does become more fragmented in eWallet, what will their role be in the new ecosystem?

Domestic banks

The decision on whether to launch an eWallet proposition on the back of eCNY is something domestic banks will need to consider, as well as how important it would be for creating incremental revenues versus defending existing shares. Banks also need to consider their corporate clients, as eCNY means they can develop a new proposition such as BaaS for their corporate clients to enable them to offer their own eWallet services.

The trajectory towards a cashless society and what it will look like should be top of mind. For example, how would an acceleration to a cashless society impact a bank’s legacy infrastructure, including its hardware, software, and people? Banks should also be asking whether the adoption of eCNY will get traction in the cross-border B2B space and assess how fast that might happen.

Foreign banks

How to leverage the adoption of eCNY (such as by launching their own wallet proposition) will be a key consideration for foreign banks and could help them get a foothold in the domestic market. It is also crucial to assess innovative approaches to achieve scale more quickly, such as establishing a partnership with a corporate or customer loyalty platform.

Finally, foreign banks will need to consider how the use of eCNY in cross-border B2B payments could potentially erode their competitive advantage in this space. Therefore, how they hedge the downside risk while at the same time creating growth in their cross-border business will need to be carefully considered.