Fintech Innovation in China

In most Western countries, credit or debit cards are more popular than private payment platforms such as Apple Pay or PayPal. Around the world, crypto currencies and stablecoins are also increasing in popularity. However, to promote inexpensive digital payments and provide an alternative to crypto, more than 100 central banks around the world are now studying central bank digital currencies (CBDCs).⁷ Several countries in Asia and Africa already have introduced CBDCs, and the European Central Bank announced it will likely introduce a digital euro in 2026. But any new payment system still needs to overcome the “chicken-or-egg” problem common to all two-sided markets: How to get the equivalent of buyers and sellers to adopt the new platform.

Here is where other countries might learn from China. The Chinese have the most experience when it comes to digital payment platforms. Most important was the introduction of Alipay and WeChat Pay in the early 2000s, with their adoption of QR (quick-response) codes invented by Japan’s Denso Wave in 1994 for labeling automotive parts. QR codes enabled China to leapfrog Western technology relying on plastic cards with magnetic strips, which have relatively little data and weak security.¹³ In 2025, approximately 93% of China’s digital payments and 70% of the 1.4 billion population used Alipay and WeChat Pay, and cash transactions were expected to drop to 3% by 2027.^8,21 By contrast, 84% of North American adults used credit cards and 15% of transactions were still in cash.⁶ The People’s Bank of China (PBOC) also began studying CBDCs in 2014 and launched the e-CNY (also called the digital yuan or digital RMB) in April 2020.What has been China’s experience?

Background: Chinese Mobile Payments Versus Credit Cards

In 2002, China set up a state-owned network for debit and credit cards called UnionPay and blocked the domestic expansion of Visa and MasterCard. The government gradually loosened restrictions on foreign cards, but UnionPay has continued to dominate the domestic credit-card market.³⁰ Nonetheless, Chinese merchants disliked the high credit-card processing fees of between 1.5% and 3.5%. When mobile phones appeared that could read QR codes, private payment platforms and digital wallet apps took off as an efficient and cheaper alternative.

Alibaba introduced Alipay in 2003 as an escrow system for its Taobao marketplace and then re-launched this as a mobile e-wallet in 2008. Tencent introduced Tenpay in 2005 as an online payment system for its gaming service paired with its popular QQ messaging service, relaunched in 2011 as WeChat. Tencent then introduced WeChat Pay in 2013 as a peer-to-peer payments app.⁴ In 2017, to gain some control over these systems, the PBOC ordered Alipay and WeChat Pay to move customer deposits into custodial accounts overseen by the central bank, which they did by 2019.¹⁹

Both Alipay and WeChat Pay transactions are free for users (except for a small fee for large ATM cash withdrawals) and merchants pay a relatively small fee compared to credit cards (0.55%) per transaction.²⁰ Money in the digital wallets bears no interest and so investing these funds (the “float”) can be an important source of profit. Both groups also offer interest-bearing money-market accounts. The two platforms are not interoperable and compete with separate user bases and ecosystems, including their own spendable loyalty points, though in 2022 Alipay added a “friends feature” that allows transferring money directly to WeChat wallets.²⁷ In 2025, not only are Alipay and WeChat Pay universally accepted by Chinese merchants, but many stores, small vendors, and vending machines only accept payments through these private systems. Some overseas merchants accept Alipay and WeChat Pay because Chinese tourists still do not commonly use credit cards. Since 2023, foreigners in China also have been able to connect their credit or debit cards to Alipay and WeChat Pay.¹²

Enter the e-CNY

Given the extraordinary success of Alipay and WeChat Pay, why has the Chinese central bank introduced a competing digital currency and payment platform? And how has the bank fared with its chicken-or-egg problem?

CBDCs do have specific advantages, even over Alipay and WeChat Pay. They come with programmable APIs, software wrappers, the ability to track transactions via blockchains or central ledgers, and other features of interest to central banks. Like crypto, CBDCs also can enable secure real-time payments and money transfers without high bank fees and delays in reconciling accounts. The transactions can be encrypted and connected to smart contracts, so central banks can issue CBDCs as incentives with expiration dates, like coupons, encouraging people to spend money when the government wants to stimulate the economy.¹⁷ With smartcards (similar to pre-paid debit cards), even people without bank accounts (10% to 20% of the Chinese population) or smartphones can use e-CNY and participate in the digital economy.¹⁵

Private stablecoins could fulfill some of the same functions as CBDCs, but their values are not always stable and they are not backed by central bank reserves. Crypto accounts also have been hacked and facilitated tax evasion as well as illegal payments for terrorism, the drug trade, and money laundering, in addition to enabling sometimes-ruinous speculation. The Chinese government avoided these problems by banning crypto exchanges in 2017 and crypto transactions in 2021, but it is trying to take advantage of crypto-like technology with its own CBDC, integrated with the existing QR code systems.³ Stablecoins are also currently banned in China, though this may change in the future.

The e-CNY functions as follows: The PBOC issues e-CNY to China’s main commercial banks as part of the money supply.² These banks then distribute e-CNY to smaller banks and the general public via transfers to private payment platforms or accounts at companies, merchants, and other entities. Individual users must download a digital wallet to store and use their e-CNY. They can make peer-to-peer transfers or retail payments using QR codes generated automatically by their e-wallets or reading merchant codes using the same technology as Alipay and We Chat Pay.^a The central bank does not charge banks or other institutions a handling fee, and banks cannot charge service fees to individuals, although they can charge institutions. The e-CNY accounts do not pay interest in order to encourage people to keep money in banks. The Chinese central bank also can track deposits and payments, though it is supposed to treat small payments like anonymous digital cash.¹⁴

In 2021, the PBOC launched another pilot using the e-CNY with a digital token system for cross-border business-to-business payments (initially with the Bank of International Settlements, which stepped back from active participation in late 2024) as well as Hong Kong and countries with CBDCs—Saudi Arabia, Thailand, and the United Arab Emirates. This system, called Project mBridge,^b uses blockchain technology and tokens to record and reconcile transactions within seconds, at up to 50% the cost of prior systems.^9,15,24 However, the value of this platform is strongly subject to network effects. It is useful only to subscribing countries and becomes more useful only as more participants join. By comparison, the SWIFT messaging platform normally used for international payments is already universal, though it is costly and takes a few days to a week to reconcile transactions, generally in American dollars.²³ In partial reaction to Project mBridge, central banks in Japan, the U.S., and Europe are now testing how to interface with CBDCs and bank payment systems using digital tokens.¹

The Chicken-or-Egg Problem

China’s central bank attacked its chicken-or-egg problem by gradually seeding the market with promotions and expanding use cases, but it has had limited success. In April 2020, the bank started with a pilot in four cities, now up to 29 cities. In 2021, some cities began accepting e-CNY on subway ticket vending machines. Then the Communist Party began accepting e-CNY for dues payments.² Alipay began accepting e-CNY in May 2021 (WeChat waited until March 2023).⁸ In 2022, China introduced trials at the 2022 Winter Olympics. A few cities also began disbursing unemployment checks in e-CNY.³ More aggressively, the government distributed 340 million yuan (approximately $50 million) in e-CNY coupons via lotteries for use in retail stores and elsewhere; recipients could not convert these to cash.²² Other giveaways in 2022 added another 50 million e-CNY (approximately $7 million).⁸ In 2023, several major cities began paying government employees in e-CNY.¹¹ Gradually, more companies in more cities have begun paying employees in e-CNY, and schools have started to accept the currency for tuition payments.Usage of the e-CNY has been comparatively high in the city of Suzhou because of aggressive promotions and mandates. The state-owned Industrial and Commercial Bank of China in 2023 also began allowing e-CNY wallet holders to convert the balances into regular bank deposits.⁸

As of July 31, 2024 (the most recent data), the cumulative value of e-CNY transactions over four years totaled 7.3 trillion yuan (approximately $1 trillion).³ This sounds high but Alipay and WeChat Pay in 2023 alone had a combined transaction volume of approximately $70 trillion.^25,c An estimated 10 million merchants accepted e-CNY for payments. However, as of June 2023, e-CNY accounted for only 0.16% of China’s cash-equivalent money supply (M0). Less than one-fifth of the Chinese population seems to have used the new currency, and most people who opened e-CNY accounts seem to have done so for the coupon giveaways or because of mandates.^3,8

Another obstacle to broad CBDC adoption seems to be security concerns. Central banks can choose to make CBDC transactions either fully anonymized or fully visible, such as to other government agencies. Indeed, a recent survey in China indicated that privacy concerns, though mainly for data security rather than government surveillance, were hindering more widespread adoption of the e-CNY.²⁸ Another survey in Korea indicated people were up to 60% more likely to use CBDCs for sensitive purchases if they received adequate information on privacy protections and trusted their governments.⁵

Lessons for Other Countries?

China’s experience does suggest a roadmap for other central banks. It is possible to combine a public digital currency with private digital payment platforms. Integration of public and private systems, and assurances regarding privacy concerns, seem very important to encourage CBDC usage. That said, some Chinese restrictions (for example, no interest on wallet accounts, no conversion to cash directly, limited ability to transfer and invest the CBDC) are not attractive for people receiving salaries in e-CNY. Nor will most central banks be able to mandate usage or offer millions of dollars’ worth of giveaways.

In short, even backed by the enormous power of the Chinese government, usage of the e-CNY has been minuscule, so far. Within and outside China, merchants should want to avoid high credit or debit card bank fees, but they probably need to pass on some savings to incentivize consumers. For peer-to-peer money transfers or international payments, CBDCs already have competition from private crypto currencies and stablecoins. Nonetheless, China is unlikely to give up on its CBDC initiative, for several reasons.

Domestically, Alipay and its owner, the Ant Group, spun off from Alibaba (which still owns about one-third), as well as WeChat and its owner Tencent, have evolved beyond simple mobile payment platforms. They offer a full slate of financial services (credit, loans, insurance, and money market accounts) that compete with Chinese banks, most of which are fully or partially government-owned. Like banks, private payment platforms can create digital money whenever they make loans. Alipay began offering loans in 2014 through a lending subsidiary, which the central government had it spin off in 2021.¹⁰ WeChat started to offer loans in 2015 through the online WeBank, 30%-owned by Tencent.¹⁶ But too many deposits and loans via these private financial platforms could have undermined the Chinese banking system, particularly if there were a technological breakdown or major hacking episode and many people suddenly tried to withdraw cash. The e-CNY serves as a government-controlled backup system and technological alternative to Alipay and WeChat pay, should that ever prove necessary.²⁶

Internationally, the yuan is not much used by non-Chinese entities to reconcile wholesale cross-border payments (approximately 4% in 2024, compared to 47% via the U.S. dollar).²⁹ The dollar gives the U.S. enormous power in global commerce. We saw this when the U.S. government issued sanctions against Iran, Russia, and North Korea as well as Huawei and other Chinese companies, with sanctions enforced largely through the international banking system.²⁴ If e-CNY can be easily exchanged into other currencies, that gives China some protection against international sanctions. For retail users, China’s actions resemble moves by India and other countries to create their own payment networks, limiting the influence of American credit-card companies and banks.²¹ For wholesale users, in April 2025, China announced the e-CNY was now accepted by 10 ASEAN and six Middle Eastern countries, implying that approximately 38% of global trade can now bypass the U.S. dollar—at least in theory.¹⁸

Perhaps the biggest lesson from China’s experience is that CBDC adoption is probably going to be very difficult for countries that are already advanced with private electronic payment systems. It is very unlikely that Western central banks can be more aggressive than China in their CBDC rollout strategies, so a digital euro (or digital pound) may fail as consumer payment platforms. Still, wholesale international payments could become a lot cheaper and faster with coordinated CBDCs and digital tokens. How to bring these savings to consumers more effectively than private crypto currencies and stablecoins will be a major challenge for central banks around the world.