A profoundly important development in digital trade took place this week – and it was not a very good one. But it attracted much less notice and protest than it should have. We are referring to the decision by the Committee on Foreign Investment in the U.S. to erect a major barrier to trade in digital financial services.

Fintech is the new label for the computerization and networking of payment systems and financial services. It involves the use of smartphones, mobile payment systems and (sometimes) cryptocurrencies.

Fintech is the site of increasing global competition. For nearly a year, Chinese Internet giant Alibaba has been trying to expand its AliPay mobile payment system beyond China by acquiring the Dallas, Texas-based firm Moneygram International. Alipay was spun off by Alibaba into a separate subsidiary known as Ant Financial. Moneygram, which has only 5% of the global remittance market, is not a Fintech innovator and may have been a declining force in the financial world, but the $1.2 billion deal would have given Alipay access to Moneygram’s 350,000 outlets in 200 countries, greatly expanding its reach. The acquisition would also upgrade Moneygram into the digital-mobile world by linking it to AliPay.

The proposed acquisition was prompted in large part by intense competition between the two Chinese Internet giants, Alibaba and TenCent. TenCent owns China’s leading social network WeChat. In 2014 TenCent leveraged its dominance of social media to build WeChat Pay into a major force in China’s economy. According to an April 2017 report from the Better than Cash Alliance, Alipay processed nearly $1.7 trillion in payments in 2016, and WeChat users sent about $1.2 trillion in payments in 2016. The $2.9 trillion in mobile payments dwarfs the levels achieved by US Fintech companies like PayPal and Apple Pay.

So the back story to the AliPay – Moneygram deal is an attempt to globalize the diffusion of mobile payments, which would create convenience for mobile payment users and intensify competition in mobile internet-based payments systems.

But this effort was given a rude shock last week when the U.S. Treasury Department’s Committee on Foreign Investment in the United States (CFIUS) blocked the Moneygram deal. CFIUS is an interagency committee chaired by the Treasury Secretary, whose deliberations are shrouded in secrecy. Its legal purpose is to review foreign investments based entirely on national security concerns. Ever since its creation, however, there have been concerns about the abuse of confidentiality and national security to cover up trade protectionism.

CFIUS issued no statement or rationale explaining why they blocked the deal. But that’s normal – it is just the way it operates.

On its face, there are no obvious security problems to the Moneygram deal. Ant Financial has no links to the Chinese military nor is it even a state-owned corporation. China’s sovereign wealth fund is a major shareholder, but such funds are primarily interested in generating return on investment. Furthermore, this is a payment service with many competitors. As noted before, Moneygram’s market share was only 5%.

Given the secrecy of CFIUS we can only speculate as to what was going on here. And – let’s face it – speculation about national security, the digital economy and the Chinese is an emerging sport that can sustain many a blog post. Given that these concerns seem to be profoundly shaping Internet governance and the digital economy, however, speculate we must. As the very least, we need to provoke a wide-ranging dialogue about the implications of this and similar decisions, and assess their impact on the direction of internet governance.

A Forbes article made one attempt to justify the block based on national security concerns: “The Treasury Department is probably right to be concerned about a Chinese company buying Moneygram and using it as a platform to enter the US payments market,” one Salvatore Babones wrote. “After all, the Treasury Department itself uses the global dominance of Visa, Mastercard and the SWIFT interbank payment system to exert pressure on other countries in the service of U.S. foreign policy goals. As Fintech leads to the consolidation of payments systems under the control of a small number of global giants, it is strategically important that those giants be under domestic control.”

If this was indeed the rationale, it’s a pretty stupid one. First, it amounts to a frank admission that the firms currently dominating transnational payment systems have concentrated market power, and that the US government has a political interest in preventing competition that would undermine that cartel. In other words, the world’s financial services customers are supposed to suffer under a restrictive cartel because that makes it easier for the US government to do things like block donations to Wikileaks or interfere with payments to any other entity that provokes its wrath. This leveraging of monopoly power over payment systems may enhance the state’s power, but it is a stretch to say that it enhances the security of US citizens. In fact, it may reduce their security by subjecting them to greater surveillance and control. Aside from that, how likely is it that one government can ensure that “a small number of global giants” in a rapidly evolving, tech-driven market can remain under “domestic control” forever? And if it is possible, won’t other powerful governments, notably China, want to do the same thing? What is the end game here, other than a fragmentation of the world’s internet and financial system into geopolitical blocs? Where is the security and consumer benefit in that?

Another “security” concern we have heard relates to the massive amount of consumer behavior data that could be harvested from Moneygram’s transactions. Well, yes, if a Chinese company runs a payment system then it will know a lot about what its customers do. Superficially, this sounds scary but only if the word “China” provokes a knee-jerk reaction that collapses all commercial market actors into evil state-directed conspirators. While AliBaba is a Chinese firm, it seems interested in making money more than in anything else. More to the point, couldn’t the same argument be made about Google, Facebook, Amazon or any other major global Internet company? If access to user data is a security threat, then how can the U.S. argue that our global Internet companies, which make all their money on such data, should be let into Chinese markets? This is an argument for a nationally walled-off Internet; it is impossible to maintain a double standard.

The CFIUS block seems to be driven more by trade policy, and particularly by the Trump Administration’s anti-China posturing, than by any legitimate national security concerns. But given the wall of secrecy surrounding both the evidence considered and the criteria used to evaluate the acquisition, it is difficult to say for sure. We think this lack of transparency is a major problem. The evolution of the Internet and of the digital economy are too important to be left to these kinds of opaque, arbitrary decisions.

That being said, it’s certainly true that China itself is protectionist in the digital economy. Its market barriers in the internet, information and telecommunications sectors are legendary, and it abuses and confuses “national security” and trade protection as much as, and probably more than, the Trump administration. Is it possible to argue that this kind of a rude shock to Chinese commercial actors will prompt the Chinese state to loosen up? Perhaps. But unlikely.

We fail to see how we solve the problem of reciprocal market access by becoming more like the Chinese. As one Hong Kong-based M&A director covering the Asia-Pacific region said, “CFIUS is the most Chinese of US regulations, it’s totally a black box. Nobody has any insight into the practicality of what’s going on.”[1] If both sides are to open up, there need to be transparent and above-board negotiations in which the real policy concerns are clear and the costs and benefits can be assessed objectively.


[1] Quoted in Ann Shi, The CFIUS Quagmire. FinanceAsia. July/August 2017

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