China International Payment System(CIPS): Ambitious SWIFT alternative


China International Payment System, or CIPS, is a payment system designed by the Chinese government to facilitate cross-border payments. CIPS was developed by China’s central bank, the People’s Bank of China (PBOC), and launched in October 2016.

It aims to make cross-border payments faster, cheaper, and more efficient for both businesses and individuals. It is seen as a direct challenge to SWIFT, the global standard for cross-border payments which has been in operation since 1973.

So far, over 100 banks from 30 countries have signed up to use CIPS, including major banks such as HSBC, Standard Chartered, and Citigroup. In contrast, SWIFT has over 11,000 member banks across 200 countries.

What makes great global payment systems?

Before we go further, we need to understand what makes a payment system great. It’s always about the user’s expectations and experience.

According to SWIFT, corporate clients require the following before a payment system can be called great.

Be Fast: Payments should be processed quickly and without errors.

Show me the money: Payment systems must have robust security measures in place to protect against fraud and cybercrime. Is their money safe when it travels?

Avoid Surprises: Payment systems should be reliable and predictable. Clients should know exactly when their payments will arrive and exactly how much money will hit the beneficiary’s account.

Keep it clean: They should be able to reconcile their payments easily, and have access to the data they need to do so. Clean data saves you money.

Top-notch service: Payment systems should be easy to use and save businesses time and money.

CIPS will need to accomplish these challenges before it can challenge SWIFT as a global payment leader.

China’s National Payment System 

Let us proceed to understand China’s payment system. In China, there are four tiers of payment systems. The first two, the Large-value Transfer System (LVTS) and the Cross-Border Interbank Payment System (CIPS), are for clearing large value or cross-border payments respectively. The third is the Chinese Yuan Clearinghouses (CYCs), which handle retail payments in yuan between banks, and the fourth is China’s Automated Teller Machine (ATM) network.

Large-value Transfer System (LVTS)

LVTS features include real-time gross settlement, meaning that payment instructions are processed and settled individually as soon as they are received, without being batched.

It is a centralized system that uses a single database to track the balance of each member bank participating in the system.

Cross-Border Interbank Payment System

CIPS is designed for cross-border payments in multiple currencies and can be used by banks, businesses, and individuals. In other words, it offers settlement and clearing services for cross-border renminbi(RMB/yuan)

Chinese Yuan Clearinghouses(CYC)

CYCs handle retail payments in yuan between banks, including ATM withdrawals, point-of-sale transactions, internet banking transactions, and phone banking transactions. Currently, there are four CYCs in China: The Beijing CYC, The Shanghai CYC, The Guangzhou CYC, and The Shenzhen CYC.

Automated Teller Machines(ATM)

China’s ATM network is the largest in the world with over 400,000 machines. ATMs in China are connected to the China UnionPay network, which allows cardholders to withdraw cash and make payments at over 30 million merchants across China.

What is the difference between RMB and Yuan?

The terms “RMB” and “yuan” are often used interchangeably, but there is a difference between the two. RMB is the abbreviation for Renminbi, which means “people’s currency.” Yuan is the unit of measurement of the Renminbi (e.g. 100 yuan = 100 RMB). Unlike the US Dollar which is both unit of account and currency, the RMB is only a unit of account in China. The currency is actually the yuan.RMB is part of IMF’s Special Drawing Right Basket.

Relationship between CIPS and SWIFT

Now that we have a better understanding of China’s payment system, let’s take a look at the relationship between the two.

As mentioned earlier, CIPS is designed for cross-border payments in multiple currencies and can be used by banks, businesses, and individuals. In contrast, SWIFT is a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized environment.

While CIPS is still in its infancy, it has the potential to become a major competitor to SWIFT as it gains more traction with banks and businesses. Currently, there are over 80 banks connected to its network, including major banks such as HSBC, Standard Chartered, and Citigroup. In contrast, there are over 11,000 banks connected to the SWIFT network.

One of the key advantages that CIPS has over SWIFT is its direct connection to China’s large and growing economy. As the world’s second-largest economy, China is an attractive market for many businesses. With a direct connection to CIPS, businesses can make cross-border payments to China quickly and easily.

Another advantage is its real-time settlement feature. This is a major selling point for businesses as it allows them to avoid the delays associated with traditional payment methods such as wire transfers.

CIPS also has a number of other features that make it an attractive option for banks and businesses, including 24/365 availability, multiple currency support, and lower costs.

SWIFT has an upper hand in terms of its global reach. As the largest network of its kind, SWIFT has a presence in over 200 countries and territories. This gives it a significant advantage over CIPS, which is only available in China.

In terms of security, both CIPS and SWIFT are highly secure systems. However, SWIFT has a slightly higher level of security as it uses an end-to-end encryption system.

China CIPS

CIPS vs SWIFT: Which is better?

There is no easy answer to this question as it depends on the needs of the banks and businesses involved. For example, if you are doing business in China, then CIPS may be the better option due to its direct connection to China’s economy. On the other hand, if you need to make cross-border payments to multiple countries, then SWIFT may be the better option due to its global reach.

Ultimately, the decision of which system to use will come down to a number of factors including cost, speed, security, and convenience. It is also a question of how much the world has become interdependent.

For example, did you know CIPS uses SWIFT to connect to other countries outside of China? Or that some banks are connected to both CIPS and SWIFT? Besides, unlike CIPS which offers clearing and settlements services, SWIFT does not.

You can read more about SWIFT

How does CIPS work?

CIPS works by directly connecting banks and businesses to China’s economy. This allows for quick and easy cross-border payments. CIPS also has a number of other features that make it an attractive option for banks and businesses, including 24/365 availability, multiple currency support and lower costs.

Message standards: It uses the same message standards as SWIFT. SWIFT uses the following ISO message standards.

– 20022 Payment Initiation

– 20022 Customer Credit Transfer

– 20022 Financial Institution Credit Transfer

These message standards are used by CIPS to connect to other countries outside of China. By using the same message standards like SWIFT, CIPS is able to provide a high level of compatibility with the existing global payments system.

Working hours: CIPS is available 24 hours a day, 365 days a year. This is a major selling point for businesses as it allows them to avoid the delays associated with traditional payment methods such as wire transfers.

Membership: CIPS is open to banks and businesses of all sizes. There are two types of membership direct and indirect. Under direct membership, banks and businesses are directly connected to the CIPS network. Indirect membership allows banks and businesses to access the CIPS network through a direct member. Some of their indirect member banks include HSBC, Citibank, and Deutsche Bank.

How does China’s CIPS stick up against SWIFT?

As matters stand SWIFT ticks most of the boxes when it comes to global payments. It has a membership of 11000 in over 200 countries.

CIPS is still a long way to go but has a promising future. It still has to grapple through the following challenges ;

# Critical mass membership: Though CIPS has direct and indirect membership, it still needs to achieve critical mass in terms of members. This is essential for its long-term success.

# Chinese Government influence: CIPS is owned by the Chinese government. This could be seen as a positive or negative depending on your perspective. Some may see this as a benefit as it provides CIPS with a high level of security and stability. However, others may see this as a disadvantage as it gives the Chinese government too much control over the system.

Russia and Ukraine Conflict

Russia and Ukraine Conflict has increased interest in SWIFT alternatives. Certainly, Russia has to face stiff sanctions including being shut from the SWIFT system. Russia naturally views SWIFT as being weaponized against it. They are not the only ones with the same view. Whatever the outcome of this conflict, SWIFT alternatives will continue developing themselves to handle global payment and settlement challenges.

Bitcoin vs SWIFT

SWIFT, CIPS, and other similar organizations face an even bigger challenge. Cryptocurrencies. Bitcoin, Ethereum, and many more cryptocurrencies continue to become mainstream. Some countries have made Bitcoin legal tender. Ethereum has been undergoing improvement to make it cheaper and highly scalable.

The advantages that cryptocurrencies have over legacy systems include their level of transparency, fastness, cost-effectiveness, and decentralization. Using distributed ledger technologies(DLT), transactions can be completed within seconds without the need for an intermediary and at fraction of the cost. Yet cryptocurrencies still need to cross major hurdles before mass adoption.

Both CIPS and SWIFT will need to work around their systems to offer better and cheaper services. We are already seeing SWIFT discuss DLT in their recent developments. Only time will tell whether we shall see disruption or collaborations between these systems.

Thank you for reading this post. Let’s know what you think about the future of SIPS and make sure to subscribe.