The digital yuan, China's planned national virtual currency, would account for 15% of total consumption payments in ten years and help commercial banks gain more ground from fintech companies, according to a Nov. 17 report by Goldman Sachs shared with CoinDesk .
Electronic payment in digital currency (DC / EP) could be a more attractive alternative to existing digital payment services provided by fintech companies in a cashless environment, the 81-page report said. The anonymity provided by the separation of a bank account and the digital yuan wallet, offline payment and networking with various payment options was cited as an indication of the success of the digital yuan.
"In ten years we expect DC / EP to reach 1 billion addressable users, spend 1.6 trillion RMB (229 billion US dollars), 19 trillion RMB (2.7 trillion US dollars) in total annual payment value (TPV) and accounts for 15% of total consumption payments, "the report said.
Goldman Sachs said consumption payments – the transactions in which users make purchases through a digital payment platform – will take place where banks and fintechs are most aggressively competing.
“Consumption is the main source of income for 3PP (Third Party Payment) providers, as the income quota is higher than with transfers and financing. Therefore, consumption payments are viewed by payment institutions as “commercial payments”, ”the report said.
Level the playing field
The report came after China's leading financial regulators halted the Ant Group's record-breaking IPO. The company, the fintech subsidiary of Chinese IT giant Alibaba, has one of the most popular mobile apps for digital payments, Alipay. Beijing authorities also proposed a number of new anti-monopoly practices to curb fintech companies in the country.
The introduction of the digital yuan is likely to slow the rate banks ceded to fintech and even reverse market share losses in the long run as DC / EP gains popularity, the report said.
The report found that China Merchant Bank (CMB) and Ping An Bank (PAB) may be among the beneficiaries of the new digital payments ecosystem as third-party payment platforms would be more competitive in the long run.
"A 10% increase in banking app users would increase sales by 2 to 5%," the report said. "PAB and CMB are best placed to commercialize recurring app users because of their leading retail franchise, premium customer base, superior fintech capabilities, and strategic focus on retail financing."
Currently, Alipay and Tencent's digital payments arm, WeChat Pay, still dominates China’s digital payments industry. The two companies account for over 90% of mobile banking transactions in the last three months of 2019.
"Commercial banks will be the only institutes that are allowed to operate in the DC / EP exchange, since it is about the digitization of legal tender," the bank stated. "This will effectively level the playing field with fintech platforms and allow the banks to compete against each other again on consumption payments."
However, fintech companies will continue to focus on retail banking and will be a major contributor to the growth of the retail financial services market over the next five years as the central bank gradually increases adoption of the digital yuan.
"We expect fintech to grow revenue almost twice as fast as banks over the next five years as they continue to gain additional market share across the entire retail finance ecosystem," the bank said.
The report also notes that DC / EP would not disrupt commercial banks as virtual currency replaces cash rather than savings. In addition, the yuan digital wallet will not pay depositors interest and most transactions will be in small amounts, the report said.
According to the report, China has 900 million mobile internet users as of 2019, which is over 64% of its population. The country's M0 / M2 ratio is only 4%. This is one of the lowest cash usages among the major economies and is still falling. 96 percent of Chinese banking services are processed on electronic devices.
The bank projects a revenue pool of RMB 3 trillion ($ 428.6 billion) in retail finance by 2025 (excluding mortgages) as payments and retail lending growth slows but asset management and insurance agencies remain buoyant.
Read the full report below: