Much like Frank Sinatra, China has a well-deserved reputation for doing things its own way. So much so, in fact, that the country is officially described as being a "socialist market economy with Chinese characteristics." This remains true in the realms of financial inclusion and Digital Finance and Commerce (DFC). China has made huge strides towards reducing its numbers of unbanked citizens, and has an above average percentage of the population with a bank account for an upper middle income country. According to World Bank Findex data, China's unbanked rate dropped by an impressive 15 percentage points between 2011 and 2014.
Two key drivers of this change are China's growing wealth, and its rate of urbanization. In fact, 2011 stands out in over 8,000 years of Chinese civilization as the year in which China tipped from having a majority rural population, to being a country in which most of its inhabitants are urban dwellers.
This rise in disposable income among its rapidly urbanizing population has coincided with the rise of the cellphone. China now boasts 95% SIM penetration, which amounts to a staggering 1.3 billion mobile connections in a country of 1.4 billion people. According to GSMA data, almost 75% of these phones are smartphones, which are driving a payments revolution in the world's most populous nation.
Unlike in much of the rest of the world, where handset manufacturers have attempted to catalyze a shift to mobile payments, in China the key players are Alibaba and WeChat. It would not do justice to these Chinese behemoths to describe the former as an e-commerce website and the latter a messaging app, so wide is their influence and varied their commercial interests. (Click here for a previous Mondato Insight on Alibaba.)
Since its IPO two years ago, Alibaba has successfully navigated the consumer-led migration of much of its business from desktop to mobile. Although at one point last summer its share price briefly sank below its IPO price of US$68, it currently stands at over US$100, signalling market confidence in the company and its CEO Jack Ma. One side-effect of this transition to mobile has been to create offline opportunities for Alipay, the payments platform that is the glue that holds the Alibaba enterprise together.
Once an integral part of Alibaba, Alipay is now part of Ant Financial Services Group, an "affiliate" of Alibaba, and both companies are controlled by Jack Ma. Alipay handles around half of all online transactions in China, and is itself valued at around US$60 billion, making it currently 20% more valuable than PayPal, and 12 times more valuable than U.S. online payments upstart Stripe. Notably, such is the growing clout of Chinese consumers and Alipay, that the latter is now among the many forms of payment that merchants using Stripe can choose to accept.
Alipay came under pressure from regulators in 2014, in what some commentators saw as an attempt by China's banks to bring the upstart to heel. Nevertheless, since then Alipay has seen a massive growth in the number of merchants who accept payments from the Alipay app.
The Alipay payment experience will be familiar to anyone who has used the Starbucks or Dunkin Donuts app to make a payment: customers open the app and have the merchant scan a QR-code in the Alipay wallet. Its simplicity and ease of use has made it a huge hit, and in the first quarter of 2015 Alipay accounted for 79% of China's mobile payments market.
But Alipay's ambitions do not end at China's borders. Just this week the Wall Street Journal reports that Alipay is gearing up for an aggressive overseas expansion, piggy-backing on the lucrative and growing market of Chinese travelers. It is reported that Alipay is already accepted by over 70,000 merchants outside of China, and is targeting growth through the forging of alliances with big foreign players such as Paytm in India, Ingenico in Europe and VeriFone in the United States.
At home, however, Alipay is not having things all its own way. As the Chinese mobile payments market has expanded to become the largest in the world (valued at about US$235 billion in 2015), Alipay's share of the growing pie has shrunk to just over 50%. Chief among its antagonists is WeChat, China's most popular instant messaging app, offering payments capabilities for a vast array of online services that can be accessed directly via the WeChat app. And just as Alipay has done, WeChat's parent company, TenCent, is taking advantage of the app's presence on 639 million smartphones to triple its share of mobile payments to 38% in early 2016.
WeChat has been garnering a lot of international attention recently, due to its unique (Chinese?) characteristics. It is a self-contained ecoystem, described by the New York Times (see below for a helpful primer) as
"a Super-app, a Swiss Army knife that does everything for you...It's your WhatsApp, Facebook, Skype, Uber, Amazon, Instagram, Venmo and Tinder [and] it's other things we don't even have apps for."New York Times
WeChat's growth at home has partly been fueled by the same strategy Alipay is employing abroad: forging partnerships and making strategic investments. Partner apps brought inside the WeChat tent also come inside the WeChat app, making the transition from a suggestion in a WeChat conversation to actioned commercial activity as frictionless as possible. No doubt Facebook is taking copious notes. TenCent has moved to test the viability of WeChat Pay out side of China by making it available to South African WeChat users in early 2016.
It is remarkable that unlike in European and North American markets, handset manufacturers are playing catch-up in the mobile payments game in China, despite being ahead of the game in some instances. China's largest phone maker, Oppo, launched an NFC-equipped phone that could make payments back in 2013, through a partnership with China Merchant Bank. Xiaomi, Samsung and, of course, Apple all also offer payment capabilities, but have struggled with consumer adoption and usage.
As in other markets, handset manufacturers have been hampered by the need for a certain technological specification (NFC) on the part of both merchant and consumer in order for their system to work. Alipay and WeChat only need merchant adoption in order for their system to work - a lesson that was clearly learned by Walmart when it launched Walmart Pay.
China is leading the world in mobile payments, and it is no coincidence that the two commonalities that the market leaders share are being trusted brands and widely downloaded apps. If this model is replicable outside of China, it would suggest that Facebook and Google (ironically, both companies are banned in China) should be set to become market leaders in many markets around the world, while Alipay, and perhaps WeChat, could well give Visa and MasterCard a run for their money, so to speak.
However, Facebook and Google suffer from one significant disadvantage in the fact that QR codes, while widely recognized, are nowhere nearly as popular in Europe and the Americas as they are in China (despite, remarkably, being illegal as a form of payment until a few months ago). Meanwhile, payment cards enjoy a popularity in the West that is not matched in China. The result may well prove to be that in the event that mobile payments achieve ubiquity in China, it will be, again, based on a model with uniquely Chinese characteristics.
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Image courtesy of Technode.