As trials continue, an ecosystem of hardware and software evolves around the e-CNY
Visitors use the e-CNY for digital payments during a trial at the 2021 China International Fair for Trade in Services in Beijing on Sept 4. Many banks, fintech firms and smart hardware companies showcased the progress made so far in the e-CNY. (CHEN XIAOGEN / FOR CHINA DAILY)
Even as the world comes to grips with COVID-savaged economies, technologies like nascent State-backed digital currencies such as China's e-CNY are fast coming to fruition unfazed.
In the process, they are spawning whole new ecosystems spanning both hardware and software. These spell an emerging industry with immense business potential and growth prospects not only for established enterprises but innovative startups.
Shenzhen, Guangdong province-listed Julong Co Ltd, a manufacturer of cash processing machines, typifies the trend.
In 2019, the People's Bank of China, the central bank, started closed-loop testing of the e-CNY, the digital form of China's fiat currency. The process involved businesses and nongovernmental institutions. The implication was clear: China was aiming to be among the global leaders in pioneering digital currency as legal tender.
Sensing new business opportunities, the nimble Julong promptly set up a special team in 2019 to develop different types of physical wallets for the e-CNY.
That marked a sort of diversification for Julong as it was already producing machines like cash sorters, cash strapping equipment and related software.
Now, "hardware wallets" of the e-CNY represented a breakthrough product for the company. As the e-CNY's research and testing progressed, Julong's executives realized the digital currency in the making heralds a huge market, said Liu Yongquan, chairman of Julong.
The company has developed mainly three types of hardware wallets: display card hardware wallet; specially shaped hardware wallet; and SIM (subscriber identification module) card-based film digital currency wallet.
Some of these wallets look like physical bank cards. They can store and transfer the e-CNY when users put a card close to a POS (point of sale) machine. The hardware wallet is different from the "software wallet", which usually means mobile payment apps.
These innovative products of Julong take advantage of blockchain and digital security technologies, in compliance with the central bank's technology standards.
Julong also developed systems for exchanging the e-CNY for paper banknotes, coins and foreign currencies. The various types of e-CNY equipment could satisfy clients in different payment scenarios, said Liu.
In a white paper issued by the PBOC in July, the structure of the e-CNY's operational system was introduced to the public for the first time.
In the system, the central bank lies at the center, or "tier one", and it is the only institution that is authorized by the State to issue the e-CNY.Commercial banks and other authorized commercial institutions are in "tier two", authorized to offer e-CNY exchange and payment services to the public.
An employee (right) of Tongren Hospital affiliated to the Shanghai Jiao Tong University School of Medicine uses a hardware wallet of the e-CNY to pay at the hospital canteen on Jan 5. (LIU YING / XINHUA)
Julong's hardware wallets and some e-CNY processing machines have been used in some e-CNY pilot cities. "We are cooperating closely with some State-owned commercial banks and jointly developing a platform, which is called the tier-2.5 platform, for processing regional exchanges between the e-CNY and cash," Liu told China Daily.
That platform can integrate various applications designed by different commercial banks, which would promote commercial banks to quickly develop sharing platforms for different application scenarios of the e-CNY, Liu said.
The PBOC's white paper stated the e-CNY hardware wallets can perform the functions of the e-CNY based on technologies like security chips, and will rely on integrated circuit cards, mobile phones, wearable devices and equipment of the internet of things to provide services to users.
The digital RMB enables "dual offline" transfer, it said, through near-field communication or NFC technology that does not need internet access.
The hardware wallet, which is based on a smart visual card, can benefit groups of people who may not be good at using mobile phones, like the elderly and residents of remote areas who cannot receive convenient financial services. As the hardware wallet supports offline payments, it can bridge the "digital gap" and allow more people to use the e-CNY, said experts.
According to Fan Yifei, deputy governor of the PBOC, China's six largest State-owned commercial banks have all joined the e-CNY trials so far. So have two private online banks－Tencent-backed WeBank and Alibaba-supported MYbank. China Merchants Bank has been approved recently to start e-CNY testing.
Although e-CNY testing continues and monetary authorities have not yet set the final launch date, enterprises in the e-CNY ecosystem are proactively exploring business relations with banks, not only the largest ones but joint-stock commercial banks and city and rural commercial banks.
A research team led by Michael Taylor, a managing director and chief credit officer of Moody's Investors Service, said in a report that if the e-CNY's adoption is widespread, it will have the potential to shake up the country's e-payments industry, possibly leading to a redistribution of market share between banks and technology companies.
In China, the significant market share of technology companies in e-payments has had spillover effects on banks as the e-payments industry expanded rapidly over the past decade.
For commercial banks, the e-CNY will likely support growth of their customer bases in the e-payments industry by leveraging existing banking infrastructure, the report said. "It is likely to reinforce banks' role in the payment system," although they are lagging behind technology companies in fintech infrastructure and innovation.
But the e-CNY may reduce financial consumers' dependence on commercial banks, as they can more freely choose financial services and financial institutions, said Li Lihui, former president of Bank of China and head of the blockchain research working group at the National Internet Finance Association of China.
A visitor to the 2021 China International Fair for Trade in Services in Beijing makes a payment using the e-CNY at a vending machine on Sept 3. (CHEN YEHUA / XINHUA)
Technically, the e-CNY can be transferred offline and without opening bank accounts, and linkage with bank accounts is not necessary to open e-CNY wallets for a limited number of transactions.
The competition will be fiercer between banks and nonbank service providers in the future, said Li. "Financial institutions, which used to rely on large-scale operations to obtain the advantages of lower costs and customer acquisition ability, will largely depend on the ability of digital technology innovation and application."
Bloomberg Intelligence forecast that the e-CNY's share of China's digital payments market may reach 9 percent by 2025, and will increase to 15 percent by 2030. The two largest e-payments companies－Alipay and WeChat Pay, which jointly command over 90 percent of the market－could lose some share to the e-CNY.
Some third-party payment service providers have seen big opportunities in the huge market, extending their footprint in e-CNY scenarios as early as possible. Analysts believe that the next big chance for agile entrepreneurs will be the 2022 Beijing Winter Olympic Games, and retail sponsors of the Games will be the leading group in the domestic use of the e-CNY.
Lakala Payment Co Ltd, a third-party payment service provider established in 2005 in Beijing, has participated in all the e-CNY pilot areas so far, including the development of the digital currency applications to be used during the 2022 Winter Games.
The company, which is also listed on the Shenzhen Stock Exchange, has developed products for e-CNY aggregate payments, digital wallets and digital bracelets. The main business of Lakala is to provide services in the area of the currency's circulation, including the expansion of e-CNY application scenarios, business training, equipment layout, system operation and maintenance.
"The upgrading and transformation of various types of machines and devices in our company have been completed, which all support the use of the digital RMB," said Tang Ling, senior vice-president of Lakala.
The company established a special department for digital payment services, and is one of the two payment institutions with which the PBOC has strategic cooperation agreements, Tang said.
By promoting the e-CNY via pilot programs, Lakala has created for itself a presence in the industrial supply chain, large supermarket chains, tourism, medical treatment and other industries that it had never entered before.
"We have completed the system docking with the Digital Currency Research Institute of the PBOC and six other major institutions engaged in e-CNY operations," Tang said. The company innovates technologies, including blockchain and hardware wallets, in different scenarios of e-CNY use.
Innovative uses of the e-CNY are under testing on the premises of the Beijing Organizing Committee for the 2022 Games, located in Shijingshan district of Beijing. These include unmanned vending carts, automated vending machines and unmanned supermarkets, said PBOC Deputy Governor Fan.
Wearable devices were developed for the Winter Games, such as gloves, badges and Olympic uniforms with payment functions. "Most users participating in the pilot tests agree that the e-CNY can help improve payment efficiency and reduce costs," said Fan.
Tang from Lakala said he believed e-CNY trials signify a new era in China's payments industry, following two decades of development based on information technology and mobile payments.
"The broad use of the e-CNY in China will bring great development opportunities to the payments industry, which may also change the structure of the industry."
Tang said Lakala will continually focus on innovations of the hardware wallet and supply chain services for e-CNY users and operators.
Lakala, Tang said, expects the digital RMB will help it to obtain a larger market share and win more long-term clients in the payments market.
