The limits of cashless payments in China

Written by Kapronasia || June 06 2024

China’s cashless evolution is a remarkable story, as the country transitioned in less than two decades from a cash-first society to one with an 86% mobile payments penetration rate. The comprehensive ecosystems of Alipay and WeChat Pay have made payments in China among the most convenient and frictionless in the world with one important caveat: One must be within the domestic Chinese payments ecosystems, with a Chinese bank account that can be tied to the payment apps.

This has not been a bug of the system, but a feature. Beijing has sought to develop a strong digital financial services industry undergirded by domestic tech and banking giants. The Chinese payment rails to date have not been comprehensively integrated with the global financial system, though it is slowly starting to change in certain respects.

Foreign visitors to China have been vexed by their inability to smoothly pay in retail settings. Those who try to use cash often are met with a cold reception, while foreign credit and debit cards sometimes are not accepted.

While Beijing has been moving to address the payment travails of foreign visitors with policies that aim to reduce friction between China’s and the international financial systems, authorities are simultaneously cracking down on the rejection of cash – which likely disproportionately  affects elderly Chinese.

Baby steps

In a nutshell, the challenge China faces in making mobile payments easier for foreign visitors lies in the self-contained nature of the country’s digital payments ecosystem. The largest global card companies, including Visa, Mastercard and American Express, have a limited footprint in the country, as do foreign banks and even prominent fintechs. The only realistic way to reduce payment friction for foreigners is to make exceptions for them within the existing system.

In March, Alipay announced some changes to payment policies for foreign visitors to China. Per the policy changes, foreign visitors to China can now spend up to $2,000 a year on the Alipay app without registering their ID, up from $500 previously. Those who do register their ID with Alipay can use the app for single transactions as large as $5,000, up from $1,000 previously. The annual transaction limit for those who register their IDs is now $50,000, up from $10,000 previously.

The largest beneficiaries of these changes – which were facilitated by the People’s Bank of China (PBOC) – are users of the Alipay+ ecosystem, which are mostly concentrated in Hong Kong, Macau, Southeast Asia and Korea. It is possible to directly pay for goods and services in China with any e-wallet in the Alipay+ ecosystem, such as Thailand’s TrueMoney, the Philippines’ GCash and Korea’s Kakao.

Everybody else has to download the Alipay app and link it to a bank account or credit card, which is an inconvenience for someone visiting a country as a business traveler or a tourist. There are also concerns about data security.

Combating financial exclusion

 In addition to addressing payment challenges for foreigners, Chinese authorities are also moving to broadly crack down on the rejection of cash payments. For those of us who have spent considerable time in China and remember when merchants used to request to be paid in cash rather than with a card – and offer a lower price if cash was used – it is ironic to observe the disdain for physical currency that is prevalent in the country today.

Earlier this month, China's central bank fined seven businesses, among them a local KFC

franchise, for rejecting cash payments. The fines, which ranged from RMB 3,000 ($414) to RMB 55,000 ($7,594) are part of an ongoing campaign to ensure physical currency remains accepted in the country. Branches of state-owned China Post Group, PICC Property and Casualty, and New China Life Insurance were also penalized. Further, in late 2023, the PBOC fined a Beijing branch of China Life Property and Casualty Insurance as well as car dealership Beijing Dashihang Century Motor Sales for refusing to accept cash.

We believe that Beijing is concerned about the implications of a cash-free economy on elderly Chinese who are less digitally proficient than the general population. We can also imagine there are scenarios during which people from rural areas where cash use remains more common encounter difficulty using cash in major cities.

There is also probably a consideration of central bank sovereignty over monetary policy. The PBOC aims to assert its authority. It is illegal in China to reject cash payments, no matter what the preferences of merchants are.

Making payments more utilitarian

Looking ahead, we expect the PBOC will continue to crack down on the rejection of cash, which will ensure that it does remain a viable payment option in China. The current crackdown is not new – one of the first occurred in July 2018 – but part of a long-running campaign by the central bank to curb in the excesses of digitization of payments.

In some respects, it is a numbers game. If 14% of the Chinese population of 1.4 billion is not using mobile payments, that means 196 million people – larger than the populations of Japan and South Korea combined.

Yet there is no denying the convenience of digital payments. It is just that most visitors to China do not want to download an additional app simply so they can pay for a coffee at Starbucks or a book a taxi ride seamlessly, or be obligated to register their ID if their spending exceeds $2,000.

The answer to this problem would seem to be additional Alipay+ partnerships with e-wallets outside of Asia, and perhaps – though this would be more challenging – tie-ups with large global payment providers that facilitate the greater use in China of international bank and credit cards.

With China’s economy entering a period of slower growth, we do expect that for the foreseeable future its fintech giants will actively look for new partnership opportunities, while the PBOC will aim to strategically tweak policies to make life easier for foreign visitors.