31 minute read

THE CASHLESS ECONOMY

The Dominance of Electronic Payment Technology in China BY GARRETT WILLIAMS

In recent decades, technology has regularly transformed the ways in which we interact with each other in society. Technology defines our relationships with others by assisting, regulating, or hindering interactions with them. Recently, new apps and services have begun to transform the way we pay for goods and services. With the proliferation of apps such as Venmo, Paypal, and CashApp, and services such as Apple Pay, electronic payment technology has substantially impacted the nature of economic exchanges in America. The most significant effect is that electronic payment technology opens up the world economy by allowing individuals across the world to participate in markets because digital payment transcends geographical limitations. Additionally, electronic payment services allow individuals to better track their expenses, exchange money faster, and avoid dealing with inconvenient currency denominations.

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Although many Americans are swapping their print money for new digital payment services, they are still clinging onto debit and credit cards. It would be reasonable to assume that the United States leads the world in the adoption and usage of new technologies, but surprisingly, China is a massive trailblazer in the adoption of mobile payment apps. From 2012 to 2018, the total market share of mobile payments in China grew from 4.0 percent to 83.0 percent compared to non-mobile payment forms (Source 7). China’s widespread use of electronic payment is an interesting case study in the tradeoffs of switching to a cashless economy. However, in order to understand the rationale behind China’s acceptance of electronic payments technology, it is important to analyze the historical context.

China has a deep history of authoritarian rule by highly centralized governments, most recently under the rule of the Communist Party of China. Initially a communist economy under the rule of Mao Zedong, China’s economic system today is a form of state-run or state-sponsored capitalism, defined as a market economy with many industries managed or dominated by state-owned firms. Since initiating economic reforms in the late 1970s under Deng Xiaoping to privatize parts of its economy to cut inefficiency and spur economic development, China experienced the most rapid economic growth seen in modern history. Over 30 years of double-digit growth lifted 850 million people out of poverty (Source 5). Today, China is an economic powerhouse with the largest GDP in the world and the largest and fastest growing consumer middle class.

China’s authoritarian rule extends to its relationship with its citizens. Because of China’s desire to effectively control its massive population, the government has several methods through which it exercises extreme surveillance on its people. As one of their ways to control the populace, the Chinese government has constructed a sprawling system of over 170 million surveillance cameras equipped with facial recognition and artificial intelligence to maintain social order (source 1). Their surveillance even extends beyond

the physical world. In the digital sphere, China runs the world’s largest and most sophisticated online censorship operation, referred to as The Great Firewall.

The Great Firewall arose in the early 2000s as a response to citizens’ engagement with Western ideas and the increased risk of citizens’ dissent and critique of the government. While China’s internet censorship expanded in the early 2000s, American tech giants such as Amazon, Google, and Facebook were rapidly growing. The result of this disconnect between the rapidly developing internet of the West and the restricted Internet within China is that Chinese companies have filled the void that Western companies couldn’t. Today, for every major app or technology company in the West, there is a company in China that offers a very similar or even identical service to consumers in China. Chinese citizens effectively live in a digital sphere independent of the rest of the world. The services offered are nearly identical, but China is able to exercise substantial control over domestic firms.

Additionally, instead of each app performing one or two essential functions, most apps in China provide nearly every single service imaginable-- referred to as “super apps.” These super apps, namely Wechat and Alipay, are owned by the Chinese tech companies Tencent and Alibaba, respectively. Super apps seamlessly integrate social media, messaging, and mobile payment technology. Additionally, WeChat also offers mini-programs within the app that provide services akin to Western apps such as Uber, Bird, Grubhub, and Amazon. All of these services are connected to the same account, effectively linking nearly all of a user’s online activity to one central profile.

Electronic payment technology is part of a booming industry known as financial technology, dubbed “FinTech” for short, a name that symbolizes increasingly interconnected relationship between technology and financial services. Major FinTech categories include money transfer & payments, savings and investments, and insurance (Source 3). China’s economy is now defined by mobile payment services, and the citizens’ adoption of revolutionary financial technology extends past just mobile payment. According to Ernest & Young’s 2019 Global FinTech Adoption Index, Chinese consumers have the highest adoption rate of financial technology services in the world at 87%, compared to just 47% in the United States (Source 3).

The main difference between WeChat and Alipay versus American mobile payment services like Venmo and Apple Pay is that they aren’t restricted to peer-to-peer transactions; they’re almost universally accepted by vendors. Customers scan a Quick Response (QR) code at a vendor that accepts mobile payments, and the money is transferred instantaneously. WeChat and Alipay also allow users to pay for larger expenses such as rent and utility bills. The adoption of mobile payment is so widespread that even beggars in urban cores like Shanghai have scannable QR codes (source 2). Many Chinese men and women no longer carry wallets or purses; they just carry their phone.

A leading explanation for China’s widespread adoption of mobile payment services is due to China’s rapid economic growth, allowing the country to effectively bypass transitional stages of technology. For instance, China effectively circumvented debit and credit card technology and went straight from physical currency to mobile payment technology. This possibly wouldn’t have happened if American companies like Visa and MasterCard were able to access the Chinese market. Although many domestic firms in China were created to replace American tech giants that weren’t able to access the market, there is not much competition in the debit and credit card industry. More than 90% of the market is controlled by the state-owned bank card UnionPay (Source 8). China opened the door for American card companies to apply for licenses to operate in the country in 2017, but the applications are still under government review, and are unlikely to go through any time soon given the ongoing trade dispute between China and the United States (Source 8).

The Chinese government continues to protect its domestic firms through protectionist policies that prevent foreign competitors from gaining market share within the country. Due to China’s status as a developing economy since the early 2000s from the World Trade Organization, they have been able to continue protecting domestic firms through high regulation of foreign competition (Source 9). As domestic firms flourished in an economy alienated from the large technology companies of the west, the assumption of the international community was that China’s trade barriers and government aid to domestic firms would erode as seen in other industrialized nations. However, China never refrained from supporting its domestic firms, prompting the rise of trade disputes such as the current trade war between the United States and China.

The rise of mobile payment technology poses a threat to the government’s once-unilateral control over the economy. China’s government knows the risk this poses all too well. Just a few years ago, China had a booming peer-to-peer lending industry with over $1 trillion yuan in capital flows. Over time, excess debt accumulated and created a bubble that the government sought to pop, but their efforts to correct the industry led to the collapse of hundreds of lenders (Source 4). Mobile payment technology is superior to other forms of payment in terms of speed and convenience, which means that the speed of capital flows increase. The higher volume and speed of capital flows coupled with the government’s lack of control over these flows may lead to higher price volatility in the near future.

Overall, China is a case study of the effects of society switching to mobile payment technology. It is a story of a history of authoritarian rule and protectionist policies, unprecedented economic growth, the adoption of new technologies, and the relationship between a government and its citizens. Given China’s position as a global leader in FinTech, they stand on the precipice of innovation in the industry, but their global role will be limited if they continue their protectionist regulation and trade policies.

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Comes at a Cost to States.” National Public Radio, 15 March 2019. https://www.npr. org/2019/03/15/703687071/tampon-tax-repeal-benefits-women-but-comes-at-a-costto-states Georgia Legislature. House. Sales and use tax; certain menstrual products; create exemptions.

HB 8. 155th Georgia General Assembly, 1st sess. Introduced in House January 15, 2019. http://www.legis.ga.gov/Legislation/en-US/display/20192020/HB/8 North, Anna. “Nevada just got rid of its “tampon tax:” Advocates argue that the sales tax on tampons and pads was unfair to women.” Vox, 7 November 2018. https://www.vox. com/2018/11/7/18056648/nevada-question-2-tampon-tax-results Recht, Hannah. “What Life Would Look Like Without the Tampon Tax.” Bloomberg, 20 October 2018. https://www.bloomberg.com/graphics/2018-tampon-cost/ “Women in State Legislatures for 2019.” National Conference of State Legislatures, 25 July 2019. http://www.ncsl.org/legislators-staff/legislators/womens-legislative-network/women-instate-legislatures-for-2019.aspx Zhou, Li. “12 charts that explain the record-breaking year women have had in politics: It’s the year of the women in more ways than one.” Vox, 6 November 2018. https://www.vox. com/2018/11/6/18019234/women-record-breaking-midterms COLLEGE ATHLETES

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