China Can’t Afford a Cashless Society

As payment by phone accelerates in China, the reach of the biggest digital corporations are making its banking regulators uneasy. In Chinese cities, paying via the ubiquitous WeChat platform is now so common that vendors often have trouble making change for cash, or sometimes refuse to take it altogether. That’s prompted pushback from the state-owned banks. Anhui province’s branch of the People’s Bank of China (PBOC), recently began a working group to tackle the problem. Wang Yazhou, a senior banking official in Hefei, the province’s capital, commented a thorough cleanup was needed because refusing cash payments would be likely to have a very negative impact.

Regulators like Wang are right to be concerned. The growing “cashlessness” of Chinese cities threatens to expose underlying issues of economic instability. Mobile payments are carving out lines between young and old, and between the prosperous urban middle class and those left behind by the boom times. Mismanaged moves to mobile payments by municipalities could also lock the elderly and the poor out of the consumption economy—just when the Chinese government needs as many spenders as possible to drive forward the country’s economic transformation.

The policy question being debated is whether mobile payments can legally substitute for the renminbi, China’s currency. Specifically, regulators are looking to see if “cashless city” initiatives and the like violate China’s Renminbi Management Regulations. This law contains a clause that distinctly defines the renminbi as “the legal currency of the People’s Republic of China” and says that “within China’s national borders, the usage of renminbi for transactions by work units or individuals cannot be revoked.”

At the same time, the numbers suggest that cashlessness is rising and here to stay. January 2017 data reported by the Cyberspace Administration of China showed that 469 million users were registered on a mobile payment platform, and found an increase of 31.2 percent in total registered users compared to 2016 numbers. The China Internet Network Administration Center, another government bureau that collects usage data, indicated that the proportion of mobile payment usage in transactions rose from 57.7 percent to 67.5 percent from the end of 2016 to the end of 2017. In the cities, vendors ranging from brand-name stores to street food stalls have slapped colorful QR Code stickers from Alipay and Tencent—China’s two giant internet firms, which dominate online payments—near cash registers.

Bolstered by these promising numbers, the mega-corporations that run the cashless transactions applications are ramping up promotional events and municipal lobbying initiatives. In the early 2010s, online vendors pioneered “shopping holidays,” events such as Singles’ Day (Nov. 11—four lonely ones in a row) when purchases peaked thanks to deep discounts. The new events build on those, further normalizing cashless payments. In August 2017, Alibaba, Alipay’s parent company, rolled out “Cashless City Week” events in its home city of Hangzhou, as well as in Wuhan, Fuzhou, and Tianjin. Tencent’s WeChat Pay followed suit with a similar promotion that played off the auspicious date of Aug. 8, naming it an annual “Cashless Day.” However, bowing to pressure from Wuhan’s PBOC branch, wording for these promotions were later changed to “better respect consumer choice” in payment platform availability.

In many cities, cashlessness is so common that panhandlers and street musicians use WeChat and Alipay QR codes to ask for change. But these anecdotal cases obscure some of the class-related issues that cashlessness can’t fix, and may worsen. The 2017 World Bank Global Findex database, which measures financial inclusion, estimated that some 200 million Chinese rural citizens remain unbanked, or outside of the formal financial system. Cashless payment systems by design require formal enrollment in banks, which are then tied to the mobile payment platforms that WeChat and Alibaba host.

When apps are built on the assumption that residents of a specific community are formally enrolled in a bank or financial institution, the unenrolled are simply locked out of being able to pay. As a 2017 report from the Consultative Group to Assist the Poor indicates, close to 70 percent of rural Chinese remain offline and require a compelling reason to acquire the smartphone and bank account needed to utilize mobile payments. As these digital platforms attempt to become the default form of payment, China is facing a critical challenge to get its unbanked citizens caught up to financial inclusion standards.

The question of how accessible cashless payments truly are within China is an active, vibrant debate within domestic policy circles. A 2017 op-ed series in the Beijing News raised concerns that shifting invoicing systems to cashless ones without consulting rural communities or individuals would introduce risks: In communities that are cash-only, if individuals find themselves shut out of the financial system, they will be unable to conduct economic transactions related to agricultural equipment, seeds, and other purchases for farming.

Even as regulators and finance analysts worry about these gaps, Alibaba and Tencent remain determined to push cashlessness further into everyday life. Chinese firms are borrowing from the tactics and lingo of Silicon Valley CEOs determined to sell their products as socially valuable. In rural areas, both companies are investing resources and relying on their platforms’ unique characteristics to try to capture potential market shares of rural users of mobile banking products. Alibaba, which grew its revenues via the Taobao shopping site and supply chains, is in the tail end of a 2014 to 2019 10 billion renminbi spending spree to build e-commerce service centers in rural China. Tencent, on the other hand, relies on WeChat’s role connecting migrant workers to family members in rural areas to get more mobile payment users onboard.

Older users are another critical demographic targeted in cashless platform promotion campaigns. Because older users tend to struggle learning to use mobile devices, for example, Alibaba takes advantage of filial piety to encourage children to recruit parents and elders into getting on the apps. In a recent campaign to get more elderly users up to speed on using Alipay, Alibaba mimicked the language of a heartfelt child-to-parent note as an introduction to a tutorial on setting up mobile payments.

Alibaba and Tencent can issue lofty mission statements about bringing more users into the fold. But to them, the size of coverage disparities aren’t an overall problem as long as urban users keep the money flowing through their respective apps. They lose nothing substantial when lower-income, lower-technology, or unbanked users struggle to participate, because mobile transactions are still a massively growing sector. However, PBOC branches do, because lower spending and renminbi circulation reflects poorly on different provinces’ economic numbers—and, eventually, on the economic health of the whole country. When corporate needs and government objectives clash in China, however, the government tends to win. Yet the attraction of investment and the glamor of tech may give the payment firms the leverage they need to keep reaching for revenue opportunities.

How Chinese individuals, businesses, and communities can adapt to the prevalence of ubiquitous cashlessness will determine survival in a burgeoning but unequal digital economy. If China goes cashless without widening the opportunities to participate, the end result may exacerbate economic inequality in China even further—and leave rural provinces frustrated even as the country’s biggest corporations thrive.