It’s time to discuss how to make money with digital RMB

The digital RMB pilot has entered a new stage.

On March 31, the People's Bank of China held a symposium on the research and development pilot work of the digital RMB, and a new list of pilot cities was announced. On the basis of the existing pilot areas, Tianjin, Chongqing, Guangzhou, Guangdong Province, Fuzhou and Xiamen, Fujian Province, and six cities in Zhejiang Province hosting the Asian Games were added as pilot areas. Beijing and Zhangjiakou, Hebei Province will become pilot areas after the 2022 Beijing Winter Olympics and Paralympics scenario pilot is completed.

As of now, the digital RMB pilot cities include 23 regions including Beijing, Tianjin, Hebei (Zhangjiakou, Xiongan New Area), Dalian, Shanghai, Suzhou, Zhejiang (Hangzhou, Ningbo, Wenzhou, Huzhou, Shaoxing, Jinhua, etc.), Fujian (Fuzhou, Xiamen, etc.), Qingdao, Changsha, Guangdong (Guangzhou, Shenzhen), Hainan Province, Chongqing, Chengdu, and Xi'an.

Basically, major economic zones in our country have begun to pilot the digital RMB.

In this regard, many readers of the mobile payment network expressed optimism that the next expansion of the pilot program might be nationwide.

However , compared with the expansion of the pilot scope, from the perspective of marketization and policy formulation, discussing how digital RMB can make money has become a more worthy issue to explore at the moment.

Marketization mentioned

At the People's Bank of China symposium, the focus of public opinion was on the expansion of the pilot scope. But there was also a more important message, namely sustainability and marketization:

"As the pilot test progresses, the research and development of the digital RMB faces new situations and problems in terms of highlighting convenience, optimizing inclusiveness, highlighting innovation, ensuring security, reflecting compliance, and strengthening sustainability, which require further in-depth research and exploration."

"We must adhere to marketization. In the process of developing, promoting and popularizing the digital RMB, policy design should fully stimulate the enthusiasm and creativity of financial institutions, technology companies, local governments and other parties, and encourage competition in promoting operations."

The key words of strengthening sustainability, adhering to marketization, and stimulating enthusiasm can actually be understood in a more straightforward way, which is to create a mature digital RMB business model.

This is actually not the first time that the People's Bank of China has proposed this. In the "White Paper on the Research and Development Progress of China's Digital RMB" (hereinafter referred to as the "White Paper") released in July 2021, it was proposed:

In the process of promoting the digital RMB, "the People's Bank of China will strive to maintain a fair competitive environment and ensure that the market plays a decisive role in resource allocation, so as to fully mobilize the enthusiasm and creativity of all parties involved and maintain the stability of the financial system."

The premise for giving play to the role of the market is not to change the basic attributes of the digital RMB. The attributes such as M0, no interest, payment and settlement, and low cost are very different from the current operating logic of the payment market.

Is the market making money?

So is the digital RMB profitable? The overall situation that needs to be understood at present is that financial institutions represented by the six major banks mainly participate in the pilot construction of the digital RMB in the form of subsidies. But where there are market activities, there are profitable roles. So which roles are clearly profitable?

System and solution providers are making money. In February this year, TANSUN Technology stated on an interactive platform that it has generated direct income and profits from digital currency business, and will generate certain sustainable income in the future as banks carry out system transformation for digital currency. TANSUN Technology mainly provides customers with consulting, financial technology products, financial IT services, cloud computing and operation services.

In addition, in response to investors' questions about whether the digital currency business is profitable, Digital China stated that its independently developed digital RMB comprehensive service platform has been implemented in nearly 20 banking institutions such as China Guangfa Bank and Bank of Beijing, but the related business does not have a significant impact on operating performance.

The promotion of the digital RMB requires support from technology, products, and terminals. These service providers will benefit more or less, but the overall scale of the digital RMB is limited, so it remains to be seen in the long term.

Acquiring institutions make money from peripheral products. When answering the question about the profit point of the digital RMB, Lakala said that at present, no fees have been charged in the pilot phase of the digital RMB. The company has entered many large and medium-sized merchants that were not previously covered by the digital RMB, and has been involved in various scenarios such as supermarkets, business districts, catering services, parks and scenic spots, chain pharmacies, new energy vehicles, and public utilities, which has brought certain profits to the company's WeChat, Alipay, bank cards and other payment methods.

Although they did not make money directly from the digital RMB business, they did make money from merchants, expanded scenarios, and other aspects. Of course, it is difficult to calculate the stock gains of listed companies due to digital RMB concept stocks.

The ground-pushing service providers made money. In the pilot promotion of the digital RMB, many banks or acquiring institutions provided transformation support to existing merchants, while some expanded new merchants. Among them, banks subsidized service providers to help them expand digital RMB merchants. According to the mobile payment website, some banks have digital RMB merchant expansion indicators, and service providers have provided ground-pushing services for banks' digital RMB needs and received cooperation fees.

Previously, campus payment service provider Xinkaipu disclosed on March 30 that its digital RMB business had achieved revenue, accounting for a small proportion of the company's total revenue, but the details of the revenue realization were not announced.

It is understood that the specific implementation method of Xinkaipu's digital RMB is that users open a digital RMB wallet, and after signing the contract, they use its self-developed Perfect Campus digital RMB App sub-wallet to make payments in various scenarios. The author speculates that it is likely to help banks expand the benefits of digital RMB payment scenarios. In addition, Mobile Payment Network also learned that when banks expand the transportation payment scenarios of digital RMB, they will also pay relevant landing fees to transportation operators.

Gray industries such as pyramid schemes and frauds have "made money". In the context of rampant telecommunications fraud, hot topics may be used for fraud or pyramid schemes, and illegal fundraising may occur. In the statistics of relevant topics on the mobile payment network, there have been illegal and irregular behaviors such as counterfeit digital RMB apps, digital RMB "running points" money laundering, and collecting six digital RMB to exchange for 1 million. This is an illegitimate profit, but it needs to be taken seriously.

Generally speaking, most of the profits made by companies in the market from digital RMB come from service support or peripheral profits. For a company, as long as the digital RMB is actively developing, its individual businesses can be profitable, but overall, how to create an industry win-win, rather than a subsidy-driven business model, is what policymakers should consider.

How to make profit?

What kind of sustainable business model can the digital RMB build? We can imagine it based on the rules of mature markets and the digital RMB’s own attributes.

Inheriting the model of the traditional rate system. At the beginning of 2020, Su Ning, former deputy governor of the People's Bank of China, said at a summit that the People's Bank of China has been paying attention to digital currency for a long time. The benefit of adopting digital currency is to eliminate intermediaries, and the payment cost is expected to drop to one-tenth of the original.

The "White Paper" points out that the digital RMB has the characteristic of "low cost". If the current payment institution revenue model remains unchanged, the existing fee system is inherited and the fee rate is lowered, which is a more feasible and mature revenue model.

The vision of programmability. Among the seven design features of the White Paper (account and value characteristics, no interest, low cost, payment and settlement, anonymity, security, and programmability), only programmability is the attribute that is more adaptable to the market's customizable needs. The so-called programmability means that the digital RMB can achieve programmability by loading smart contracts that do not affect the currency function, so that the digital RMB can automatically pay transactions according to the conditions and rules agreed upon by the two parties to the transaction while ensuring security and compliance, thereby promoting business model innovation.

This is somewhat similar to the current digital upgrade of payment, such as "payment + SaaS", "payment + marketing", "payment + membership", etc., which actually use payment as the underlying channel to extend other value-added services. The digital RMB with the "low-cost" attribute can also use the programmability attribute to open up more digital possibilities, and service providers can then obtain "programming" service fees.