Soundwave payments, super-apps and central-bank digital currencies

Our conversation covered the growth of digital finance as well as the opportunities and risks this creates. Here is the transcript of the first part of the interview, which has been edited for clarity and length.

Economist Education: How is digital finance different in Asia compared with the rest of the world?

Zennon Kapron: China is a really good starting point to understand how things are different in Asia. The challenge in China was that a lot of friction existed within traditional banking. With five main banks controlling 90% of retail deposits there wasn’t much motivation to innovate, because one bank’s products were pretty much the same as every other’s. This meant there was a big space for technology companies to come in and make a difference in the market. When Alipay first launched in China they were playing around with soundwave payments, where you’d go up to a vending machine and hold your phone very close to the machine. Then the vending machine and your phone would communicate in a frequency that only your dog and the vending machine could hear, and you would get your can of Coca-Cola from the machine. 

Another development was QR codes. The brilliant thing about QR codes was that they operated completely independently from any of the traditional financial infrastructure. They didn’t require a connection to UnionPay, Visa or MasterCard, because Alipay created their own system for processing payments. So I think China is a really stark example of how you can have new entrants come into a relatively complacent market and innovate. 

Economist Education: Can you provide any examples of the impact that super-apps have made in Asia?

Zennon Kapron: WeChat is probably the best example of how super-apps have changed the nature of fintech. When I was living in China, I used WeChatpretty much every day for the 14 years I was there. It was the first app that I would open up in the morning to see what friends were talking about. It’s the stickiness of the communications that really brought everybody to the app. So the idea of adding financial services into that was very natural, because then you have a wallet that you can use to send money to friends. Even as a foreigner in China, at the centre of my life were two super-apps: Alipay and WeChat Pay. When I got there in 2004 everybody was using cash, because credit-card and debit-card transactions were so slow. In this environment, where there were so many points of friction, WeChat completely changed the way that people handle money.

We’ve seen here in South-East Asia that there are a lot of companies that are trying to become super-apps, including the ride-hailing service, Grab. I think describing your app as a super-app is like describing yourself as cool. If you say, “Yeah, I’m a really cool person”, you’re probably not, right? It’s other people’s verdict on who you are that makes you cool. Nobody from WeChat Pay came along and said, ”Hey, we’re a super-app”. People started describing those platforms as super-apps. There are many companies in South-East Asia that call themselves a super-app, but they’re really not, because they don’t have the stickiness of the communications platform, in the case of WeChat, or the e-commerce, in the case of Alipay. I might open apps like Grab once every two days when I need to take a taxi, but I wouldn’t open them every day. 

Economist Education: Are there any groups in society that you have seen significantly benefit from super-apps?

Zennon Kapron: Yes, and we have done a couple of papers on this with various different development organisations, including with the Better Than Cash Alliance. In 2017, we interviewed a number of people whose lives have been touched by this digital economy. I’ll give you two examples. 

First, there was a woman who lived in the city of Ordos, one of China’s “ghost cities”, in the north. The population was very low, and the economy around there was heavily driven by coal and natural resources. But there were lay-offs in the coal industry and the woman’s husband lost his job. Because of that, she set up an online shop on the Taobao platform, which is a Chinese shopping platform that is part of Alibaba, and started selling children’s clothes to help support her family. She was one of a coterie of mothers in Ordos who started selling clothes online. 

Due to the platforms’ inbuilt payments and logistics infrastructure, the woman was able to sell her products anywhere in China. Her shop was successful enough that a couple of years later, when her husband had the opportunity to go back to work, she was making so much money from her online business that it exceeded what her husband could have made working in the coal industry. Instead, they continued to grow her business. That wouldn’t have been possible if those platforms weren’t there. 

The second example comes from a trip to Hangzhou, which is near Shanghai, and an encounter with a scooter salesperson. He had a shop selling eight or nine electric scooters, buying them for around the equivalent of $300 and selling them for $500. This being a small business, his ability to go to the bank and try and get a loan was restricted. Even getting scooters on consignment was impossible. So when he set up his business, he had to have quite a bit of capital—$300 for each scooter, and then money for repairs and everything else. He borrowed that from his family. 

When I visited him later on, up on the wall of the store were two QR codes, one from Alipay and one from WeChat. Alipay in particular looks at your transactions and was able to identify that this individual was actually a merchant. Once he had a month or two of data from selling scooters and paying his utility bills, he had a credit score that meant he could start borrowing from the platform. He started off borrowing small amounts, of about $100 a time. But when we met him, I believe his credit score was such that he could borrow the equivalent of $15,000 from the platform, nearly instantaneously. There’s no way he would have got the money from the bank, because banks are just not interested in high-risk people. 

By using Alipay, he no longer had to borrow from friends and family. He could expand his shop, and his economic prosperity was certainly enhanced. By using that platform he was able to access financial products and services that he wouldn’t otherwise have access to. 

Economist Education: In your experience, what are some of the drawbacks and risks associated with super-apps?

Zennon Kapron: The issue in all this and with the financial industry is trust and control. We trust banks to look after our funds. And increasingly, as money becomes digital, our ability to control our own funds diminishes. 

The safest place to put your money is in your mattress. But if you don’t have physical cash, if you just have digital money in the control of a third party or a government that you don’t necessarily trust, that can be really dangerous. We don’t have to look to Asia to see that. Take Cyprus in 2013, when they did haircuts on three different banks. Unless you had withdrawn physical cash, your digital money was gone.

Now we’re looking at things like central-bank digital currencies (CBDCs). With CBDCs, if a government wanted to do a haircut across all accounts, they would be able to do so immediately, by flipping a switch.

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