Summary of Is China’s New Payment System the Future?

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When consumers pay for goods and services with credit cards, credit-card issuers make money on every transaction; “swipe fees” amount to $80 billion per year in the United States alone. Two new payment models from China could threaten those revenues – and oust banks as intermediaries – if those models gain traction in the West. In this intriguing report for financial services professionals and retail executives, economist Aaron Klein examines the explosive growth of the new payment platforms in China and assesses whether they could take hold in mature economies. 

About the Author

Aaron Klein is a fellow in economic studies at the Brookings Institution.

 

Summary

China’s approach to payments may cut out the role of banks as intermediaries.

The United States pioneered card-based payment systems linked to banks. Other Western countries adopted this approach, and even more recent transaction methods like PayPal and Square still hinge on it.

But since 2010, China has bypassed the card system and developed payment platforms based on digital wallets and QR codes. The growth of smartphone use has facilitated moving payment processes online. This method excludes banks from transactions and deprives them of that income, but it is quicker and cheaper for merchants and consumers. 

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