What impact does the digital RMB’s “payment as settlement” have on the payment industry?

Payment is settlement, which may be the most important attribute of the digital RMB and the aspect that has the greatest impact on the payment industry.

Recently, the People's Bank of China released the "White Paper on the Research and Development Progress of China's Digital RMB" (hereinafter referred to as the "White Paper"). This is the first time that the People's Bank of China has provided the public with a detailed and clear analysis of the digital RMB's situation, concepts, definitions, visions, and future plans.

The most concerned and discussed issue in the payment industry is that payment is settlement. Payment has been a part of human history, and the importance of settlement has become more prominent in the era of electronic payment. The three-party and four-party models all exist because of settlement. It can be said that without the concept of settlement, there would be no payment today.

So how will the digital RMB’s payment and settlement have a profound impact on the payment industry? Let’s discuss this.

What is settlement?

Before discussing payment as settlement, we should understand what settlement is.

From the many explanations of "settlement", the author has selected a relatively recognized statement: settlement is the process of completing the final transfer of claims, including collecting the claims to be settled and conducting integrity checks, ensuring the availability of settlement funds, settling bond debts between financial institutions, and recording and notifying all parties.

Simply put, settlement is the process of transferring debt rights, including who owes you money, how much money has been paid, and the complete transfer confirmation of the legal relationship and legitimacy in between.

From the history of currency development, transactions in the past were indeed settled upon payment. From barter in ancient times to cash transactions today, settlement is completed after the funds are transferred.

In the era of electronic payment, however, payment cannot be settled immediately. Between users and merchants, there are still roles such as card issuers, acquiring institutions, and clearing institutions.

Schematic diagram of the traditional bank card four-party model (from the Internet)

Payment does not mean immediate settlement, which is why there are common settlement methods such as "T+1", "T+2", "D+1", "D+2", etc. Even if it is T+0, the so-called real-time settlement, it does not mean payment and settlement. There is an institutional advance payment process behind it.

"T+1" is currently a common settlement method in acquiring. It is not that the technology or model is difficult to complete, but that T+0 is very risky. There are greater risks in terms of non-payment, anti-money laundering, settlement errors, etc., and there are also many regulatory requirements for T+0 settlement.

For example, the "Notice of the People's Bank of China on Strengthening Payment and Settlement Management and Preventing New Types of Telecom Network Crimes" (Document No. 261) issued by the People's Bank of China in 2016 requires that if banks and payment institutions provide T+0 fund settlement services to designated merchants, they should strengthen transaction monitoring and risk management for designated merchants, and shall not provide T+0 fund settlement services to designated merchants who have been on the network for less than 90 days or have not had continuous normal transactions for less than 30 days after joining the network.

The creditor-debtor relationship behind the settlement

From the perspective of specific service content, from consumers to merchants, the creditor's rights are a complex transfer process, and there is also a controversial process of clarifying legal relations.

The relationship between the cardholder and the issuing bank. In bank card transactions, the cardholder deposits funds in the bank, and the deposit is listed as a liability on the bank's balance sheet. In layman's terms, from a liability perspective, the bank owes the cardholder money. When there is a deposit balance in the cardholder's account, the cardholder is the creditor and the issuing bank is the debtor.

When making transfer settlements, the cardholder and the issuing bank have a trust relationship, that is, the cardholder does not handle settlement matters with the relevant designated merchants, but entrusts the issuing bank to handle the settlement matters.

The relationship between merchants and acquiring institutions. There is much debate about the legal relationship between merchants and acquiring institutions. The book "Civil Law Analysis of Credit Card Transactions" written by Hou Chunlei shows that the view that is more widely accepted in my country is that since acquiring institutions are agents of issuing banks, the legal relationship between acquiring institutions and contracted merchants is actually the legal relationship between issuing banks and contracted merchants.

There is a certain degree of entrustment relationship between acquiring institutions and issuing banks. In a sense, acquiring institutions are agents of issuing institutions, which is why all payment institutions can be considered as "acquiring outsourcing" institutions of banks. However, in actual market operations, merchants must sign the "Bank Card Acceptance Agreement" with acquiring institutions, which actually establishes a legal relationship.

Among them, the "debt buying and selling theory" is that when merchants collect payments from consumers, they entrust the debt to acquiring institutions. Through acquiring institutions, clearing institutions, issuing banks and other roles, the consumer's funds are finally transferred to the merchant, and the debt transfer is finally completed.

As for the intermediate clearing agency, in theory, it is to assume the role of unified information transmission, clarifying the legal relationship between institutions, and arbitrating business conflicts without directly touching the funds.

Therefore, the author believes that in normal settlement, even after the merchant obtains the debt claim against the consumer, it entrusts the acquiring agency to transfer the debt claim to the issuing bank through the mechanism of the clearing agency.

However, the "payment is settlement" attribute of the digital RMB may omit this process, and the transfer of debt rights can be completed directly between merchants and consumers.

In this way, the card issuing banks and acquiring institutions naturally have no creditor-debtor relationship with consumers and merchants, and it seems that the original industry logic has been lost, and there is no three-party or four-party model.

From this perspective, the impact of the digital RMB's "payment is settlement" on the payment industry seems to echo a line in "The Three-Body Problem": "Destroying you has nothing to do with you."

New responsibilities for the payments industry

Let's talk about the content of the White Paper. There is no detailed provision for the nature of the digital RMB account. It only states in many places that it is "based on a broad account system" and "loosely coupled with bank accounts." In addition, it is clear that the digital RMB itself is "a liability of the central bank to the public, supported by national credit and legally compensable."

Therefore, the nature of digital RMB accounts and the legal relationship between banks that provide digital RMB accounts and consumers need to be clarified.

According to the current definition of financial accounts, a personal bank account refers to a bank settlement account opened by a natural person with an ID card or corresponding documents for investment, consumption, settlement, etc. Bank accounts are the most direct carrier of clear rights and responsibilities, and can be used for payment and settlement directly.

Payment accounts are just electronic bookkeeping.

The "Non-Bank Payment Institutions (Draft for Comments)" stipulates that a payment account refers to an electronic book opened for a natural person (including an individual business owner) based on his or her true intention, which is used to initiate payment instructions, record the balance of prepaid transaction funds, and reflect transaction details.

In Western countries, the English word bookkeeping means keeping records in a notebook, which means accounting.

The digital RMB account will not be an electronic bookkeeping account because of the “loose coupling” setting, nor is it a bank settlement account. So what will it be?

In addition, the "White Paper" also makes it clear that the issuance and circulation management mechanism of the digital RMB is the same as that of the physical RMB, but the value transfer is realized in digital form.

Therefore, in the issuance and collection of digital RMB, the account party may only play the role of "wallet" and the acquirer may play the role of "cash box".

The wallet is not responsible for the loss of money when it is sold, and the cashier will not be held responsible if the merchant is robbed.

Payment is settlement, which greatly improves the transaction speed, but at the same time, the responsibility is also clearer. The so-called card issuing and acquiring in the four-party model no longer bear the original responsibilities.

But there may also be new responsibilities. To put it simply, if the wallet is of poor quality, the consumer can sue the merchant for selling counterfeit goods. If the cash box cannot be opened, the merchant can sue the manufacturer.

Whether it is card issuance or acquiring, the M0 of the digital RMB is equivalent to the properties of cash, which greatly reduces the financial responsibilities of participating institutions and also reduces the risks they bear, so it is understandable that the future rates of the digital RMB will be lower. However, some responsibilities are unavoidable.

Anti-money laundering responsibility. The White Paper points out that the design of the digital RMB system strictly abides by relevant requirements such as RMB management, anti-money laundering and anti-terrorist financing, foreign exchange management, data and privacy protection, and the operation of digital RMB must be included in the regulatory framework.

Data security responsibility. The White Paper requires that the digital RMB follow the principle of "small amounts are anonymous, large amounts are traceable according to law", attach great importance to the protection of personal information and privacy, fully consider the business risk characteristics and information processing logic under the existing electronic payment system, and meet the public's demand for small-amount anonymous payment services.

Behind the "payment is settlement" attribute of the digital RMB, there will be a tedious process of legal formulation, concept definition, division of responsibilities, and clear relationship. Many digital RMB pilots will also be carried out around these contents at a deep level. In practice, explore the theory, and then use the theory to consolidate the practical content, and when it reaches a level that can be replicated nationwide or even globally, it will be the time when the digital RMB is fully developed. (Mobile Payment Network)