A growing middle class and a decade of annual double-digit growth in retail sales have provided a powerful magnet for businesses hoping to cash in on emerging China. Yet outside of the main cities—in the vast expanse of rural China, where around 750 million people live—the reliance on cash makes it difficult for consumers to spend and for retailers to sell.

China has just 530 point-of-sale (POS) terminals and ATMs per million people, far below the 10,000 per million found in the United States. Accordingly, cash is used in 83 percent of all payment transactions in China, compared with just 21 percent in the United States. With most of these terminals and ATMs in China’s cities, practically all rural transactions are cash based.

One way to wean rural consumers off their reliance on cash might be to add more ATMs and POS terminals. However, we estimate that such an effort would cost at least $2 billion and add just 130 terminals and ATMs per million people. Installing equipment and extending the telecommunications network in remote areas would also take a prohibitively long time.

Recognizing the need for a new rural payments system, in August 2006 the People’s Bank of China...