This document discusses China's dominance in digital payment networks and the potential national security threats posed by Chinese companies like Alipay and TenPay controlling global payments. It notes that China's mobile payment transaction volume was over $41 trillion in 2018, dwarfing American companies, and that Chinese payment networks are expanding globally through countries participating in China's Belt and Road Initiative. The document recommends that the US act to counter China's rise in payments by considering placing Alipay and TenPay on the Entity List or running a campaign to encourage foreign governments to slow adoption of Chinese payment networks, as was done with 5G networks.

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SEPTEMBER, 2020
China’s Rising Digital Payment Networks
AUTHORS
Paul C. M. Touw, Science Fellow, Chief Strategy Officer
CONTRIBUTORS AND SUPPORTING AUTHORS
Mung Chang, Science and Technology Adviser to the Secretary
Edward P. Kinsey, II, Senior Advisor, Chief Financial Strategy Officer
James Shinn, Senior Advisor, Economic Growth, Energy and the Environment
U.S. Department of State
Office of Economic Growth, Energy, and the Environment
U/S Keith J. Krach

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U.S. foreign policy tends to react,
often after it’s too late. Case in point: 5G.

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China’s emerging payment networks are
a greater threat to U.S. national security aboard than
5G, Semiconductors, or AI.
If the U.S. acts now, it can counter China’s rising
quest to control global payments.
BLUF:

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$0b
$125b
$250b
$375b
$500b
Payment networks are big business
U.S. industry revenues
Payments
U.S. revenues from payment fees
3/4/5G Wireless
U.S. cellular wireless revenues
Semiconductor
U.S. semiconductor sales
AI
U.S. AI industry revenues
(hardware, software and service revenues)
$470b
$187b
$220b
$21b
Source: McKinsey & Company,
2018, “Global payments 2018: A
dynamic industry continues to
break new ground,”
https://www.mckinsey.com/~/media/McKinsey/
Industries/Financial%20Services/Our%20Insights/
Global%20payments%20Expansive%20growth%
20targeted%20opportunities/Global-payments-
map-2018.ashx
Source: Statista, 2019 U.S.
wireless industry revenues
https://www.statista.com/statistics/
185802/mobile-wirless-service-revenues-
in-the-united-states-since-1985/
Source: 2019,
Semiconductor Industry
Association (SIA)
https://www.semiconductors.org/wp-
content/uploads/2019/05/2019-SIA-
Factbook-FINAL.pdf
Source: Market Research
PVT, 2019 North America AI
Market
https://www.maximizemarketresearch.com/
market-report/north-america-artificial-
intelligence-ai-market/11329/

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$0T
$10T
$20T
$30T
$40T
$50T
China’s payment networks are crushing it
$41.5T
$796b
$8.8T
$6.5T $6.0T
Source: 2019 Visa
Annual Report
Source: 2019
Mastercard Annual
Report
Source: Digital
Transaction, April 2019,
https://www.digitaltransactions.net/
amex-card-volume-up-7-and-
other-digital-transactions-news-
briefs-from-4-18-19/
Source: PayPal 10Q 4Q
2019 Report
Source: Caixin, Mar. 22,
2019, China’s Mobile
Payments Transaction
Volume (TenPay, Alipay,
Union Pay)
China Mobile
Payments
(TenPay, AliPay, UnionPay)
https://www.caixinglobal.com/2019-03-22/chart-of-the-day-chinas-mobile-payment-
transaction-volume-hits-4151-trillion-in-2018-101395789.html
The U.S. first-mover
is ~50x smaller?

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China “mobilized” payments in under a decade

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Going global
Countries that now accept Alipay, TenPay

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U.S.merchants adopt Alipay,TenPay
Although adoption is meant to attract Chinese traveler’s spend in the U.S.

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From a cyber-security perspective,
Chinese payment networks make TikTok (& 5G)
look like child’s play.

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5G Network
Although critical data is generally encrypted
Hypothetically, personal information can be hacked
Moving data over China-controlled 5G networks
presents “hypothetical” security risks

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China Payment Network
Payment
Network
Servers
Consumers Merchants
Highly Personal Information is Required, Stored, and Tracked!
• Name
• Phone Number
• DOB, SSN, DL
• Personal addresses
• Geo location tracking
• Bank account information
• Bank credentials, passwords
• Credit card numbers
• Credit card pin
• Credit ratings
• Payment history
• Travel history
• Citizenship
• Employer(s)
• Social score
Moving money over China-controlled payment networks
presents “real and imminent” security threats

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Personal cyber-security threat matrix
Highly Personal Data Alipay, TenPay TikTok Huawei 5G
Personal Data ✓ Required ✓ Optional ✓ Maybe
Bank Account Data ✓ Required
Bank Account Log-in Credentials ✓ Required
Credit Card Information ✓ Required
Credit Card Pin ✓ Required
DOB, DL, SSN, Citizenship ✓ Required
GEO tracking ✓ Yes ✓ Optional ✓ Yes
Travel history ✓ Yes ✓ Some
Spending history ✓ Yes
Employment history ✓ Yes
Face-ID access ✓ Yes ✓ Yes ✓ Yes
Call logging ✓ Yes ✓ Maybe ✓ Maybe

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Economic control of an economy threat matrix
Economic Sanctioning Alipay, TenPay TikTok Huawei 5G
Economic brown-outs ✓ Yes
Sanction users, or groups of uses,
by shutting down ability to pay
✓ Yes
Sanction a country by shutting
down commerce
✓ Yes
Ability to track individual’s
movements, spending, travel
✓ Yes ✓ Yes ✓ Yes
Espionage of individuals,
merchants, and companies
✓ Yes ✓ Maybe
Steal money, bank accounts ✓ Yes
Flow of money

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Select U.S.actions to counter China
5G,Semiconductors,AI
5G Semiconductors AI Payment Networks
• Banned Huawei, ZTE in
the United States
• Sanctioned Huawei,
ZTE
• Export controls on
semiconductor
equipment and
technology to Huawei
• International effort to
block Huawei in foreign
countries, Japan,
Australia, part of
Europe
• 1996 Wassenaar
Arrangement, excluding
China
• 2020 Chips Act, $10
Billion, passed by
Congress, signed by
President
• Numerous Export
Controls on
semiconductor
equipment to China
• DoD, NSF invest
billions in AI
• Republicans propose
$100 billion Endless
Frontier Act, including
investments in AI
• Democrats propose
$350 billion bill to
counter China,
including investments
in AI
?
• EO blocking
downloads, halted by
courts

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In 5G, Semi’s, and AI,
western allies are winning

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Western allies are winning in 5G
62%
38%
China 5G Equipment
Manufacturer Deal Wins
Europe 5G Equipment
Manufacturer Deal Wins
Is China losing in 5G?
In 2019/20, Europe beat China by a nearly
2-1 margin in 5G equipment wins.
Which Countries have banned
Huawei?

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Western allies are winning in semiconductors
China is still a net consumer of chips
$0B
$25B
$50B
$75B
$100B
$125B
$150B
$175B
$200B
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Purchases
Sales
China Purchases vs.Sales of semiconductor chips

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And,western allies are leading in AI
Despite some concerns to the contrary
CSET further estimates that, “we assess with low to moderate
confidence that China’s public investment in AI R&D was on the
order of a few billion dollars in 2018. With higher confidence, we
assess that China’s government is not investing tens of billions of
dollars annually in AI R&D, as some have suggested.”
3%
25%
17%
55%
North America
Europe
Asia
Rest of World
North America leading in AI investments
(Pitchbook, 2019, stateof.ai)

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In mobile payment networks,
China is winning—by a large margin, and it’s a
bigger potential problem.

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$0T
$10T
$20T
$30T
$40T
$50T
Once again…China dominates digital payments
$41.5T
$796b
$8.8T
$6.5T $6.0T
Source: 2019 Visa
Annual Report
Source: 2019
Mastercard Annual
Report
Source: Digital
Transaction, April 2019,
https://www.digitaltransactions.net/
amex-card-volume-up-7-and-
other-digital-transactions-news-
briefs-from-4-18-19/
Source: PayPal 10Q 4Q
2019 Report
Source: Caixin, Mar. 22,
2019, China’s Mobile
Payments Transaction
Volume (TenPay, Alipay,
Union Pay)
China Mobile
Payments
(TenPay, AliPay, UnionPay)
https://www.caixinglobal.com/2019-03-22/chart-of-the-day-chinas-mobile-payment-
transaction-volume-hits-4151-trillion-in-2018-101395789.html

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U.S.regulatory environment crimps Fintech
• U.S. money transmitter laws require licenses in 50 separate states
• Process can take years and millions to complete
• Many Fintech’s require U.S. banking licenses, thus they avoid
• Most U.S. new payment networks are “slaved” to banks or credit
card networks, muting their benefits
• China’s regulatory environment is far less cumbersome
• Thus, China’s global rise in Fintech and lower cost structure

23. 25
Cash
Credit Cards
(+ Paypal,Venmo,
ApplePay,etc.)
China
Payment
Networks
Micro-
transactions
0-$10
Mid-range
transactions
$10-$10,000
High-value
transactions
$10,000+
Ok
Must obtain cash
from bank,does not
work online
Bad
Insecure to handle
larger amounts,does
not work online
Very Bad
Does not work,
except for money-
laundering purposes
Bad
Minimum per
transaction fees
can take 5-16%
Ok
Fees range from 2.1% to
3.0%,but works online,
cards stolen often
Very Bad
Fees become
impractical,most don’t
accept
Best
works across
the spectrum
—
• Lowest fees
• Works on/offline
• Real-time
• More secure
• No wallet
• No ATM
• No credit req’d
Bigger,broader payments spectrum
Payments
Spectrum

24. 26
Better convenience for consumers

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Cheaper for merchants
0.0%
1.0%
2.0%
3.0%
4.0%
$41.5T
2.95%
2.98% 2.98%
3.20%
0.60%
China’s payment networks charge substantially lower fees to merchants

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China adoption of advanced payments is near complete

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Credit Card
Cash
Bank card
Check
Paypal
Apple Pay
Venmo
Zelle
Google Pay
Square
Facebook
Other
Snapcash
0% 20% 40% 60% 80%
1%
2%
3%
3%
6%
6%
7%
9%
44%
53%
59%
79%
80%
Percentage Adoption
1Source: Bain/Research Now Retail Banking NPS Survey 2018
Traditional Methods Mobile
Generally
slaved to credit card networks
at approx.3% fees!
U.S.adoption of advanced payments has been slow1
In part, because U.S. mobile payments do not offer something bigger, better, cheaper

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Like lower corporate taxes, lower payment fees
can be a competitive advantage to an economy.

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Credit Card Fees
$274 million1
State, FET, Fed Taxes
$289 million
Share Holders
$459 million
1Note that online “card-not-present” fees are higher.Data from Southwest 10K filed 02/08/2011 for period ending Dec 31,2010;
credit card fees based on industry averages of 2.21% on passenger ticket revenues.
Where do
Southwest’s gross
profits go?
What
consumers
actually paid
After all
expenses
$1,022 million
Case study: Southwest

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Bottom line—
China’s rising payment networks pose a threat to
U.S. national security interest abroad.

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Targeting BRI regions,62% of world population
Alipay, TenPay expanding to Africa, Latin America, and Indo-Pacific
Likely regions targeted by Chinese payment networks

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Max
Min
37
Cyber-security threat is real
Alipay,TenPay actually
collect your most valuable
personal information
• Potential for espionage…
• But, sensitive information is
generally encrypted
• Overseas operators still
control 5G deployments
• Name, address, location
• Bank accounts + login
credentials
• Credit cards + pin
• KYA data
• Employer data
• Geo tracking
• Citizenship
Max
Min
5G is a “conduit,”
but mobile data can
be encrypted

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U.S.might wake-up to a world surrounded by Alipay

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Many U.S.Military and State personnel rely on
Alipay or TenPay abroad
• China could track military movements,spending,personal data
• Or,cut thousands off from an ability to pay in-country if tensions arise

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Alipay,TenPay to support China’s new digital yuan
Renminbi could underpin these payment networks
The U.S.Dollar is the reserve currency,until it isn’t!

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Giving rise to a very real possibility…

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In time,giving China a new weapon in global payments
The ability to coerce people, groups, and countries by controlling payments

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Recommendations to U.S. foreign policy—
the best defense is a great offense.
If the U.S. acts now, it can counter China’s rising
quest to control global payments.

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Consider placing Alipay,TenPay on Entities List

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Consider slowing Chinese Payment Networks with
5G-like campaign to foreign gov’ts abroad

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Thankfully,in 5G,U.S.could push western alternatives
Western
5G Alternatives
Payment Platform,Digital
Currency Alternatives
?

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Foreign central banks have a foremost interest in
controlling their own monetary policies, payment
networks, and digital currencies.
But they lack the technical expertise
or solutions to deploy them, or the ability to
make them inter-operable abroad.
Consider an offensive strategy

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America leads in core technologies required to
implement payment networks and digital currencies
Cloud Solutions
Transaction Processing
Solutions
Database Solutions
Largest Social Network
Platforms

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More importantly,America dominates in mobile OS’s
99%of mobile OS market is Apple iOS or Google Android
Source: statista, 2020, https://www.statista.com/statistics/266136/global-market-share-held-by-smartphone-operating-systems/

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An open-source CBDC,payment network platform
Consortium Team
Public-Private
Assemble a team of U.S. technology leaders to build an
open-source, configurable, digital currency and payment
network platform for independent foreign central banks
Build,
Maintain
Once
Deploy
Everywhere
Potential
Technology
Partners

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Like “Operation Warp Speed”
Timeline
Over 40 Central Banks are
considering Digital Currency
policies for their countries
Build in parallel a configurable
CBDC and open-source
payments platform that can
accommodate most likely policy
scenarios
When foreign central banks are
ready, they can configure,
implement, and go-live

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Benefits of one system,independently deployed
Common
POS inter-operability standards—
allows mobiles devices to work
everywhere
(NFC, QR-code standards)
The right U.S. technology partners
could be highly motivated to
participate at no charge. They seek
new “use cases” for their end
products.
International currency clearing
mechanisms—allows one digital
currency to be converted into
another, allowing cross broader
payments

48. 48
For immediate comment, analysis, and further explanations contact:
Paul Touw
Chief Strategy Officer
Senior Advisor to U/S Keith Krach
Economic Growth, the Environment, and Energy
U.S. Department of State
TouwP@state.gov
Cell: (202) 664-6421
Keith Krach
Under Secretary of State
Economic Growth, the Environment, and Energy
U.S. Department of State
KrachKJ@state.gov
Cell: (202) 975-5469
Work: 202-647-7575