Digital payments allow people to access goods and services while in quarantine or social distancing.
SARS epidemic in 2003 expedited China’s path in launching digital payments and e-commerce in the country.
During the coronavirus crisis, digital payments have been keeping economies running and helping people reduce contact with virus.
Contactless digital payments at the point of sale, such as facial recognition, Quick Response (QR) codes or near-field communications (NFC), can make it less likely for the virus to spread to others through cash exchanges. Digital payments are limiting in-person transactions and ensuring consumers can buy essentials from the comfort of their homes. Ramped up e-commerce initiatives are also helping small businesses keep revenue flowing during an uncertain time.
Online payments are even helping to put stimulus funds into consumers’ hands more rapidly. For example, local governments in China have distributed vouchers through WeChat Pay to encourage immediate spending.
China’s move toward a cash-lite society has helped to sustain quarantines and will, as the economy restarts, help it to reduce disease transmission during that rebound. In fact, in 2019, nonbank online payment platforms in China processed RMB250 trillion, nearly $35 trillion USD, according to the People’s Bank of China (PBOC), showcasing the platforms’ widespread adoption. Given China’s status as a global leader in digital payments, tracing the sector’s growth there merits special study as other countries grapple with what’s needed to support these crucial platforms.
SARS and its impact
China’s experience with the SARS epidemic in 2003 helped launch digital payments and e-commerce in the country. SARS forced what would become a permanent shift in behaviours: consumers holed up in their homes had to turn to previously untrusted e-commerce sites, while Chinese companies adopted e-commerce for sales because people refused to meet in person. Alibaba launched Taobao that year, its first consumer-facing e-commerce website, and soon after created Alipay to help solve payments and trust problems that inhibited the growth of online shopping. JD.com also started selling products online in 2003.
Chinese e-commerce and online payments experienced symbiotic growth in the aftermath of SARS. Initially, China’s e-commerce platforms could not just accept credit cards for online payments. Credit card penetration was low, so a majority of online payments were done through bank transfers, which might still involve verifying payments in person at a local branch. Cash payment upon delivery was also a popular option, which is not virus-proof during an epidemic.
Transforming from cash-upon-delivery to a modern mobile-payment-upon-delivery system took cooperation between a range of stakeholders beyond just fintech entrepreneurs. Banks were cooperative and the government focused on building crucial infrastructure in the areas of identity, internet access and legacy payment systems, all while encouraging domestic online payments and digital commerce through light-touch regulations.
About 960 million of Chinese people had formal identification in 2003, removing one of the most common impediments in the world to account ownership – a lack of identity documentation. By 2011, 64% of Chinese had an account either with a bank or e-money provider, nearly double the penetration of India. Proof of bank account ownership then served as proof of identity for online payments, which made the initial sign up for platforms easier and cheaper. With banks processing transactions and integrating their online banking with its checkout process, they put their reputations on the line to keep customers’ e-wallet funds safe, building trust in the new system.
Building out critical networks
In 1993, 10 years before SARS, the Chinese government’s Golden Projects laid an important foundation for online payments. As the Golden Bridge Project built out internet networks, the Golden Card Project established a unified payment card system and the Golden Customs Project linked customs points through a national electronic data interchange (EDI) system to promote paperless trade.
When SARS hit in 2003, the basic infrastructures were in place for digital payments to start to grow. Nearly 67 million people, or 5.2% of the population, had access to the internet and 500 million payment cards were in circulation.
Informal fintech sandbox
Regulators put little red tape in the way of online payment companies, which essentially worked as a regulatory fintech sandbox. PBOC did not promulgate the regulations governing mobile payments until 2010, about seven years after Alipay’s launch, allowing Alipay to initially operate in an environment with little regulation. It also updated a previously clunky interbank payment system to “advance e-commerce’s rapid development” in 2010, helping Alipay and later WeChat Pay integrate more seamlessly with banks.
As SARS has shown in China, the world after COVID-19 will likely be more digitized. Countries lagging in digital payments should proactively build out their identity, Internet and banking infrastructure as China did, to take advantage of these advancements. It is also important, especially for smaller countries, to build a domestic payments system based on global standards that is interoperable with the rest of the world to actively participate in the global economy.
To be sure, digital payments do not come without costs. Data privacy remains a major concern in many countries, as does monopolistic behaviour in new markets that may only be dominated by a few firms. The wide adoption of digital payments also creates issues for populations who are less tech-savvy or who lack resources to purchase devices that could support digital payments.
Still, digital payments are now a backbone to China’s vibrant digital economy. Contactless payments to taxi drivers, vendors and even temples and beggars are possible through scanning a QR code. Payments for daily essentials, such as mobile phone bills, utilities, rent or internet fees, can all be made through mobile payments or online banking in China. Governments at all levels there also accept mobile payments as a payment method. Digital payments, in China, have almost become a public good.
Social distancing rules from the current pandemic could be with the world for years. People without access to digital payments not only miss out on a tool to ensure quarantine measures during outbreaks but also the benefits of financial inclusion and ever more digitized global trade beyond COVID-19. China’s path to enabling digital payments should provide some lessons to other countries eager to follow suit.