The rise of multiple payment wallets in each market has been made possible by their focusing on specific niches or business cases – otherwise there would not be a need for more than one or two.
The one point in common among e-wallet players is they are all working to make cash obsolete. But what do these business models look like if a central-bank digital currency (CBDC) comes into existence?
China has been piloting its eRMB for several years but the existing conveniences of Alipay and WeChat Pay have hobbled adoption. As of December 2022, only Rmb100 billion ($14 billion) of eRMB was in circulation.
The government aims to use free yuan plus mandating some public services be conducted in eRMB. But citizens aren’t naturally gravitating to eRMB. The eRMB may solve a problem for the government but it doesn’t solve a problem for Chinese consumers or merchants. Nonetheless, other countries are evaluating whether to launch a CBDC, and in what form.
Hong Kong’s example
China’s payments landscape is unique, in that it is so heavily dominated by its two commercial superapps. (This duopoly is a big reason for China to want to have the eRMB.) In other places, the landscape is fragmented, and cash remains in wide circulation.
And Hong Kong, although part of the People’s Republic of China, has a domestic landscape that looks more like the rest of the world than the mainland. It’s got a cash-legacy economy and a fragmented digital-wallet market.
But it is also working on a CBDC, the eHKD, with the possibility that one day it will interoperate with the eRMB. So this makes Hong Kong a unique testbed for what a CBDC could mean for e-wallet providers everywhere.
The key to success for a diverse market of wallets is differentiation: dominate a niche and then grow from there. Alipay Hong Kong provides the closest thing to a superapp, embedded in lifestyles with a bundle of services, such as bill payments. Octopus is central to transportation, from which it has built an offline-to-online commerce business. PayMe (launched by HSBC) leads the market for peer-to-peer consumer payments and is now in the merchant acquirer space. Hongkong Telecom is however the merchant-acquirer leader with its Tap’n’Go wallet.
Once a wallet player starts to expand beyond its base, competition becomes all about its ecosystem. Alipay is the leader when it comes to pulling together all kinds of services within its app: its Hong Kong version doesn’t have the same dominance as its parent in the mainland, but Alipay HK boasts a formidable collection of partner services. While Alipay’s parent, Alibaba, is behind many services, Alipay HK can’t do it all, particularly in financial services, which require licensing. So it works with other banks or insurers for protection policies or buy-now, pay-later lending.
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Other ecosystems are more closely linked to the operator’s core business. Octopus dominates public transportation in Hong Kong, so it began to expand to merchants with a presence in metro stations, for example. But some connections are easier to forge than others. PayMe, for example, is only loosely tied to HSBC. It is used by non-HSBC customers, and the bank is unable for regulatory reasons to integrate PayMe with its other apps, for wealth, consumer banking, and so on.
Ecosystems compete based on a smooth user experience supported by tight API integration with partners. But ecosystems are just the start of how wallet operators compete. If they’re not careful, the ecosystem becomes mere aggregation of services, which can end up looking like a mess. Operators are therefore leveraging user behavior and big-data analytics to personalize offers.
Wallet providers are experimenting with artificial intelligence to make this customization even more powerful. It’s not clear how they will balance the opportunities to use tech such as ChatGPT-style language-learning models to personalize an offering, versus the risks this could introduce. Wallet operators aren’t licensed to provide financial advice. Nor is it clear who bears liability for a machine’s decisions that can impact a merchant or a customer – or themselves.
But whatever degree of personalization emerges, the likely conduit of upselling and cross=selling will come from reward points and loyalty schemes. Superapps such as Alipay have been using rewards for a long time. But even wallets backed by a financial institution, such as PayMe, are looking to use these as incentives to connect users to other parts of HSBC. Rewards are useful tools in personalization, and in knitting together different services, especially when licensing prevents outright selling.
As wallet operators dive more deeply into competitive niches, ecosystems, personalization, and rewards, the one thing they are not doing is working towards interoperability. That would mean a user could use money in one wallet (which is an account, either as a stored value facility, or a bank account) to make purchases in another wallet.
In theory this would encourage digital payments and grow the pie for everyone, or at least any operator with a sound business model and good tech skills. But to pursue this unilaterally, without reciprocity, is a non-starter.
But a CBDC could upend this equation. A retail CBDC, unlike a wholesale version, puts digital cash in consumers’ e-wallets. It represents a claim by the individual on the central bank, even if indirectly through the government’s chosen intermediaries (such as a telecom company or a commercial bank).
In theory, in mainland China the advent of the eRMB forces AliPay and WeChat Pay’s payments protocols to interoperate. These companies aren’t going to disappear, of course, because they bring the value of their respective ecosystems. But a big part of their commercial success has been keeping money in their closed-loop worlds: the only way to take money out of Alipay to use on a WeChat service would be via extra steps with a bank. Now this money is fungible.
The example of FPS
Wallet operators elsewhere have dealt before with similar changes. The advent in many markets of domestic faster-payment systems represented a similar change.
In Hong Kong’s case, the Hong Kong Monetary Authority required all commercial banks and stored-value facilities (that is, standalone ewallet operators) to fund and develop a local Faster Payment System (FPS). This allowed anyone with a mobile bank account to transfer money to peers, to merchants, or to government services, with nothing more than the recipient’s mobile number or email address.
The advent of FPS did not derail Hong Kong’s e-wallet system: mobile wallet companies continue to grow, aided in part by a government consumer voucher scheme to support the economy during the Covid pandemic. But FPS was not designed with merchants in mind, so they have not adopted it; FPS remains a consumer peer-to-peer service.
For most of Hong Kong’s wallet operators, FPS was good news. It provided an easy source of cheap funding, by making it easy for deposits to flow their way. It brought competing systems closer together, which encourages people to use digital payments instead of cash. Even PayMe has grown, even though FPS competed most directly with its peer-to-peer core business: today it has over 2.9 million users.
A CBDC would probably have a similar impact, as a “super connector” among e-wallets. But the difference is that FPS is infrastructure and a CBDC is a central denominator of money – a translation service, making money fungible among systems, so that a user could switch among wallets, banks, or merchants without having to deliberately cash out of an ecosystem. In this context, it becomes the common measure for rewards and scheme points.
There could be some wallets that win from a CBDC and others that lose, but the overall impact is likely to accelerate payments and digital economies.
That assumes, however, on the design of a retail CBDC. In mainland China, the fact that authorities are relying on handing out yuan suggests consumers don’t feel the eRMB addresses a need that Alipay and WeChat Pay do not.
There is also a question of political control. Wallet operators can see the benefit of a CBDC that broadens the scope for digital payments. But they don’t want to be put under the thumb of a CBDC that is programmable by the government. Nor do they want the possibility that government policies use CBDCs to favor certain players over others. Data privacy is a third consideration: Hong Kong has different rules than mainland China, and its people need to trust eHKD if they are to use it.
Mobile wallets and CBDCs
But the essential thing is utility. In Hong Kong’s case, one use case for wallet providers to support CBDC adoption could be to help people navigate among eHKD and stablecoins.
Hong Kong over the past few months has swung into overdrive to become a global center of liquidity for blockchain-based finance. There may not be a retail need for eHKD, but there could be strong demand for HKD-pegged stablecoins. But how to connect these worlds? The eHKD would be the lingua franca of money.
In this context, CBDCs could become a useful funding channel for wallet operators. Users would operate in eHKD or eCNY (as Hong Kong is a big hub for offshore renminbi), rather than connecting their wallet to a bank account.
No one knows whether the mass market takes up stablecoins or eHKD-based services for everyday payments. The use cases have yet to be developed. A successful CBDC must be popular and widely adopted by merchants.
There’s a chicken-and-egg situation when it comes to CBDC versus crypto adoption, but the mobile wallet operators will play an important role in mediating that balance of interests. They are the ones, after all, who bring both the consumers and the merchants to the table. And what all of these elements have in common is a commercial drive to go cashless.