Fitch Ratings-London/Hong Kong-21 June 2021: The impact of China’s central bank digital currency (CBDC) pilot projects on payment service providers is limited at present, but wider adoption of the CBDC could lead to changes in data sharing and competition, says Fitch Ratings. In the longer term, this could lead to changes to the revenue structure of Alipay and Weixin Pay, which dominate non-bank mobile-based payments.
Our understanding is that that China’s CBDC – referred to as Digital Currency/Electronic Payment (DC/EP) – will be a two-tier system when it is rolled out more broadly. Under this, designated commercial banks may open digital wallets and convert currencies to and from CBDC for customers. A sub-tier of banks and private-payment service providers are likely to be authorised to provide services facilitating CBDC circulation. However, many uncertainties remain, notably surrounding the technology, regulation and payment costs associated with the DC/EP.
Alipay and Weixin Pay (the latter sometimes referred to as WeChat Pay in English-language sources) should be able to provide CBDC payment services. Alipay was added to China’s existing CBDC pilot trial through the participation of Ant Group’s 30%-owned commercial bank, MYbank in May 2021 and we expect Weixin Pay to soon join the trial through WeBank.
The new regulatory regime surrounding China’s DC/EP could change the revenue structure of existing providers of payment services over the longer term. The existing fintech platforms could face increased competition if the authorities enable more entities to access DC/EP payment transaction data. If the government were to offer a public option DC/EP payment system – which is not indicated in its announcements to date – this could raise further competitive challenges.
We believe the system’s adoption will require cooperation and promotion by commercial banks and internet companies, which have already invested heavily in payments and networks. Their engagement in the process is still largely untested, and the impact on their credit metrics will depend on a variety of factors, such as the levels of investment and compensation involved, the cost of processing transactions and customer/merchant adoption.
Potential challenges to payment service providers from the wider rollout of the DC/EP are likely to manifest over the longer term, if at all. A greater near-term effect will be felt from regulatory steps that the government has already taken. The authorities are, for example, pressuring non-bank mobile payment-service providers to share more transaction data with regulators. This has been accompanied by new regulations that seek to limit private firms’ collection of excessive amounts of personal data.
We expect Weixin Pay to be an increasingly important rating driver for parent Tencent Holdings Limited (A+/Stable), as it creates synergies for Tencent’s other business segments. The financial contribution of payment services within the overall business may also increase.
We expect the direct impact of developments affecting Ant on Alibaba Group Holding Limited’s (A+/Stable) cash generation to be limited. Ant is a 33%-owned associate of Alibaba, but has never paid any dividends to shareholders, including Alibaba. Alibaba’s credit profile remains underpinned by its leading market positions in China’s online shopping market and cloud computing services, its high free cash flow generation from its core commerce business, and a conservative capital structure with ample net cash.