The subject made the front page of the Wall Street Journal: “The Cashless Society Has Arrived--In China.”
“Though the U. S. saw $112 billion of mobile payments in 2016, by a Forrester Research estimate, such payments in China totaled $9 trillion, according to iResearch Consulting group, a Chinese firm.”
Could electronic banking be the vehicle that allows China to claw its way to the top, globally, in the world of finance and bring the renminbi, the Chinese currency, into full competition with the U. S. dollar?
China has thirsted after recognition for its currency, has worked hard to get it approved as a reserve currency, and has achieved price stability for the currency in world markets. As a part of its efforts to improve its place in global finance and economics, China has moved to work within the rules and regulations that have governed banking and trade.
China, under the guidance of its president Xi Jinping, has moved to become the leader in world globalization. At the Davos get together in Switzerland in 2017, Mr. Jinping declared that China was stepping up to fill the void in globalization that was apparently being vacated by the new leadership in the United States.
Over the past year, China’s strategy for achieving the leadership in globalization has become clearer. I believe that this strategy has two main components. First, China is moving to assist and become friendlier with more and more countries throughout the world. This assistance has included money, but it has also included technological help among other things.
Second, China has focused on achieving world leadership in the areas of science and technology and is making available many of these advances to the other nations it is working with. Now, the advancements in science and technology may not be so important for nations in the developed world, but they can become very important in countries that do not have the resources, financially or educationally, to achieve these advancements by themselves.
Furthermore, these emerging- or less-developed-countries, in an effort to catch up with the rest of the world cannot go through all the transitional stages to reach current levels of innovative possibilities. China, working with these countries, can help these nations move from where they are now to more up-to-date operations. And, working together in this way just ties the two countries closer together and creates opportunities for other possible cooperation.
If China is making such advancements in moving to an economy that operates through mobile payments, we see how this could be a tremendous opportunity for the Chinese to help advance the payments systems in the emerging- or less-developed- world.
For one, the Chinese have not gone through the transition period experienced by the United States or other developed countries in the field of credit cards.
As Alyssa Abkowitz writes in the Wall Street Journal article cited in the first paragraph of this post, a major reason why the current payments system has gained such traction is that “credit cards never caught on in a big way” in China. Ms. Abkowitz argues that the Chinese were unable to engage in discretionary spending until just recently, had an aversion to debt, and the government made it difficult for companies like Visa, Inc. and Mastercard Inc., to “set up shop.”
Consequently, China, in essence, experienced a “missing market” in terms of the use of credit cards. The door was open for Chinese firms like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. to advance their mobile payments apps.
But, this is not unlike the situation in many emerging- or less-developed-countries. In fact, I have written several times before about the situation in Africa where credit cards are not in use, and, additionally, there are many problems relating to the distance between payers and payees that are being filled by other payment alternatives that are electronically based.
Areas like these are wide open to help in developing their payments, banking, and financial systems. And, working with China on these initiatives would also allow countries to internationally tie into the Chinese currency and Chinese finance.
One can see how this is already happening. Ms. Abkowitz writes, “Tencent and Ant Financial Services, the Alibaba affiliate that operates Alipay, are forming partnerships with payment processing companies across Europe and investing in mobile payment firms in India, Thailand and other countries.”
Ant Financial had been seeking to buy MoneyGram International, Inc. in the United States. Yesterday, however, the two parties announced that they were scrapping the deal because they could not persuade the U.S. Committee on Foreign Investment to approve of the transaction. There was too much concern that too much information on private U.S. citizens would be available to the Chinese if such a deal were struck.
One does not expect Ant Financial and its parent, the e-commerce giant Alibaba, headed up by Jack Ma to recede from the scene. They still want to be an international network that extends to all ends of the financial scene.
But, the failed transaction brings up the question about the role of the United States in this movement. America is behind and reporters like Ms. Abkowitz fails to see them catching up any time soon. She writes, “Many Americans don’t see the need for mobile payments, since their plastic cards and cash are welcome and some merchants still accept checks.”
And, the United States does have its payments alternatives with Apple Pay, PayPal, and Amazon Pay. However, as Ms. Abkowitz argues, Americans and American banks just do not seem to feel the urgency that is being felt in China - and in many other parts of the world.
In April 2017, MIT held a conference on Financial Technology and a substantial part of the discussions held at the meeting related to the fact that U.S. financial institutions seemed to be behind the technology curve. I wrote a post about this and made the comment that some participants:
talked about "banking" in very derogatory tones. One VC panelist stated that the "banking" industry was now very much like where drug companies were around the end of the twentieth century, the "banks" are outsourcing all the R&D to startups and early stage companies, the "banks" are doing little or no R&D on their own. None of the major financial institutions are anywhere near to taking a leadership role in this area.
Elsewhere, I wrote that U.S. bankers should even take a little more notice of what was happening to the American retailers. This is why some analysts are looking beyond the banking system to someone like Amazon to “creatively destroy” the banking system as it now stands. I followed this post up here and here.
The fundamental issue that must be faced, however, is that China is moving in the area of technology and finance and plans to lead the global economy into the future based on the new platforms and networks being created. The United States will have to deal with this fact eventually if much of the world is tied together through the information community created by the Chinese.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.