The legions of Chinese travelers visiting Tokyo’s famed Ginza shopping district on any given day are just as likely to whip out their mobile phones when it comes time to pay for their fancy cosmetics and brand-name fashions as they are to dig into their wallets for Japanese yen or their UnionPay cards. Use of mobile phone payment systems like Alipay and WeChat Pay is expanding, even in the cash-dominated Japanese retail world.
[REITs]Cashless settlements already are the norm for many Chinese. Now, Ant Financial Services Group’s Alipay and Tencent Holdings’ WeChat Pay are looking to expand to overseas markets, initially by offering such options to Chinese overseas residents and tourists. The two Chinese fintech giants may make significant inroads in developing countries in Asia and elsewhere where consumers have relatively less access to traditional credit cards and other banking services, but experts say the going likely will be harder in more affluent markets like Japan and the U.S.
Mobile payments took off in China thanks to a savvy decision by Alipay to use QR, or Quick Response, codes to handle such transactions. The technology was developed by Japanese company Denso Wave in 1994 for the automotive industry, but it was the Chinese who seized on its promise as a way to handle mobile payments. Digital payments are processed by scanning QR codes at the point of sales which link to the customer’s bank account in China.
That genius for pragmatically tweaking an existing technology to serve a new purpose helped mobile payments soar to 58.8 trillion yuan in 2016 from just 1.2 trillion yuan to in 2013, according to iResearch Consulting Group in China. China e-commerce giant Alibaba Group Holdings, which owns Ant Financial, and Tencent Holdings, which owns payment platform WeChat Pay, hold a combined market share of 92% of such transactions in the market of 1.4 billion people. Alipay says it processed 256,000 payment transactions per second during its peak Singles’ Day festival on November 11, 2017.
But it’s likely that the spread of mobile payments will not go as smoothly in Japan or elsewhere as it has in China, says Wharton Dean Geoffrey Garrett. Innovation of customer services — from delivery to mobile banking — has gone faster there because China’s regulatory environment is less mature than in the West, so there’s more room for new players to innovate and “leapfrog,” Garrett notes. Since Alibaba is an “end-to-end” company that handles marketing, sales, payments and delivery, it has been easier for it to expand into mobile payments by using all of its resources and internal synergies. Wechat Pay, owned by Tencent, is linked to the Tencent mobile messaging and social media platform, helping it to catch up with Alipay.
Bumps Along the Digital Road
Alipay recently hit a snag with its U.S. strategy. A deal set in May 2017 enabled its Chinese users to shop at 4 million U.S. merchants served by payments processor First Data Corp. That was a big step forward. But the U.S. government recently rejected its attempt to acquire Dallas-based MoneyGram International, citing national security concerns. The deal would have allowed Alipay to market its services to MoneyGram customers in 200 countries. “In the U.S., innovation like this would more likely come from a Paypal 2.0 that one of the big tech players would acquire,” Garrett says. “American firms have a lot of interests to protect, and hence may not innovate as quickly.”
“We are trying to develop local payment services in countries that have big unbanked or underbanked populations.”— Xinyun Yang
The lack of a history of credit card use and the very centralized nature of China’s e-commerce market have facilitated the quick expansion of mobile payments in China. “Meanwhile, using banks here for pretty much anything is inefficient, and you have to spend a lot of time standing in line and paying bills, or getting them to give you cash,” says Benjamin Cavender, principal of China Market Research Group based in Shanghai. “When Alibaba came up with Alipay originally, it was so easy compared with anything people have had before, and they became interested in it very quickly.”
It didn’t hurt that Alibaba owns both Tmall and Taobao, which together account for more than 70% of all e-commerce transactions in China. “Having access to the retail space where all consumers were already shopping online made it easy for them to build a strong payments platform,” Cavender says. In other markets where there is no dominant player, it can be more difficult to get customers to try such services, he adds.
A big share of consumer spending in China is by the younger generation — the under-35s who grew up with smart phones and are very comfortable with the internet and technology. Many have never shopped much apart from online. “If you look at American consumers, they have other options. They are used to using credit cards, debit cards or are more likely to log on to their laptops or desktop computers at home. They always have had more choice, so it is more difficult to convince them to use a mobile payments platform,” Cavender says.
Mobile phone payments totaled 58.8 trillion yuan (US$9 trillion) in 2016, nearly quadrupling from 12.2 trillion yuan in 2015. In 2017, QR code settlements are forecast to have totaled 98.7 trillion yuan and 165.9 trillion in 2018, according to iResearch Consulting Group in China. That is more than 90 times the size of the U.S. mobile payments market, according to Forrester Research. The mobile penetration rate in China, with its population of 1.4 billion, is 96.88% (some own more than one), of which 58% own smartphones. That’s higher than in Japan, where 83.6% own mobile phones, of which 56.8% own smart phones.
Although it is slowly losing its supremacy as Japanese warm to banking online and using credit cards, cash is still king in Japan. A survey by the Bank of Japan in 2016 showed only 6% of Japanese have used mobile phone payments via smart phones or mobile phones, while 98.3% of Chinese had used mobile payments. In America, only 5.6% of those surveyed had used mobile payments like Venmo.
Mobile settlements are barely beginning to make inroads into Japan and America, and use of Alipay and WeChat Pay is still mainly confined to Chinese visitors. But Alipay has been moving aggressively into Southeast Asia, tying up with local payment platforms and other companies in more than seven countries in the region since 2015. It has now four local payment platforms providing such services in Thailand, India, Hong Kong and the Philippines, and is expected to expand across Asia soon. Yang Xinyun, a spokeswoman for Ant Financial, says Alipay had about 280 million users of its four local payment platforms and 520 million users in China by the end of 2017.
Ant Financial has acquired the Lazada Group payment service HelloPay Group in Singapore, rebranding it as Alipay in 2017. “They first focus on making it easy for Chinese consumers to travel there for a vacation or business overseas. The second step is to cooperate with local payment platforms or build their own that allow local consumers to use the service,” Cavender says.
“We are trying to develop local payment services in countries that have big unbaked or underbanked population,” says Xinyun Yang, a spokeswoman for Ant Financial. “What we are doing now is to find local strategic partners we can work with to provide technology know-how, business know-how and experience.” In India, Alipay joined with local partner One97 Communications — which operates India’s Paytm Payments Bank and is backed by Alibaba — to provide local payment services. According to Bloomberg, Paytm is majority owned by Indian entrepreneur Vijay Shekhar Sharma, and One97 owns the remaining 49%. Meanwhile, in Thailand, Ant Financial is partnering with Ascend Money.
Tencent, likewise, is expanding in the region. It has obtained a license for local transactions in Malaysia, with plans to launch WeChat pay there early this year. Tencent also is edging into Thailand, having bought local company Sanook.com, which has been rebranded as Tencent Thailand.
The Japanese financial daily Nikkei reported on August 20, 2017, that Alipay plans to launch its Japanese local market payment platform in spring 2018, building on the success of its payment platform for Chinese tourists. The number of Japanese vendors in Alipay’s network, from department stores to mom-and-pop shops, is expected to grow to 45,000 by March of this year, up from 40,000 at the end of 2017, Yang says. Ant Financial started providing payment services to Chinese tourists in Japan in 2015. WeChat Pay also started up in Japan in 2015 and has about 10,000 vendors providing mobile payment services to Chinese tourists.
Yang did not confirm the Nikkei report, calling it a “rumor.” But she did say Ant Financial is looking for partners to jointly develop overseas versions of Alipay to provide services to local users in overseas markets. “Japan is one of the markets where we could offer this kind of service to local users with a Japanese partner in the future if there is a chance,” Yang says.
A Tough Market
Breaking into Japan’s local payments market requires finding a local bank to cooperate, says Cavender. “If they get one bank to cooperate in Japan and it is popular, they may be able to grow. But Japan is a tough market for them.”
“Over time the companies gaining scale here like Alibaba and Tencent are likely to become players in pure research and radical innovation, too.” –Duncan Clark
Japanese experts agree with Cavender. Given the hard times the Japanese banking industry is facing thanks to the central bank’s negative interest rate policy and a shrinking local market, it’s unclear if the banks could be enticed to join forces with Alipay or WeChat in offering mobile payments unless it would pay off for them. The three megabanks — Mizuho Financial Group, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Finance Group — are hurting badly enough that they are laying off retail staff and downsizing their domestic retail networks. “I wonder if there is any Japanese bank willing to cooperate with Chinese payment platforms that could take away some of their business,” says Tomoo Marukawa, a China industry and economy expert and professor at the Institute of Social Science at the University of Tokyo. “If they attempt to enter the Japanese market, there may be a negative campaign against them, saying they might leak your personal data for free,” Marukawa says.
The fortress mentality of Japan’s banking sector has long been evident: Foreign banks generally have made little headway in the highly overbanked market. “Any attempt by Alibaba to dominate in the Japanese market is a major threat. It is like a U.S. ‘black ship’ invasion for us in the banking industry,” Daisuke Yamada, Mizuho Financial Group’s chief digital technology offer, said in a speech last September, alluding to the so-called black ships of Commodore William Perry that helped end Japan’s long era of isolation in the 19th century. But while Mizuho appears uninterested in joining forces with Chinese newcomers, the Mizuho Financial Group is cooperating with Japanese regional banks to develop a QR code settlement system before the 2020 Tokyo Olympics.
Assuming that Alipay and WeChat Pay are widely adopted in emerging markets like Southeast Asia and South Asia, eventually, Japanese banks may have to accept their payment settlements, given their own extensive and growing business engagement in those regions, says professor Yasuhiro Goto of Asia University, an expert on China’s economy and industry.
Backlash?
While the volume of mobile payments in China has skyrocketed, Alipay and WeChat Pay could be facing a backlash. In August 2017, the People’s Bank of China (PBOC), the central bank, ordered that all electronic payments must go through a new central bank payments clearing platform, called Wanglian, beginning sometime in 2018. Up to now, the PBOC has not required mobile payments to use that clearing system, which was set up in March 2017 and enables the central bank to keep tabs on capital outflows and monitor transactions for money laundering and fraud. The central bank and the Chinese banking industry may also being angling for a share of the massive profits generated by the mobile payments platforms, says Toshihiko Okano, senior specialist at Global Financial Business Unit of NTT DATA Institute of Management Consulting, a research unit of NTT DATA Corp.
Ant Financial declined to comment on the potential impact of such requirements on its business. “We are working with the central bank at the moment, but it is hard to say how it will be affect our business. We do not know when we might have to use [the PBOC’s payment clearing platform],” Yang says.
In December, the Central Bank also announced new rules on mobile payments made by QR code, and companies including Alipay and WeChat Pay will be required to set three levels of daily transaction limits for users based on their demand and risk — 500 yuan, 1,000 yuan and 5,000 yuan. Yang says “the new rules will be valid from April 1. We are still studying them and will not be able to comment at this stage. But we do support any efforts from the regulator that ensure the security of users’ accounts and assets.”
“Globalization of the Chinese tech sector will be a massive feature of our world in the next few years.” –Geoffrey Garrett
For now, Ant and Tencent are basking in the payoff of having spotted a lucrative market niche for commercializing use of QR code technology for financial transactions. While China may lag in such technological innovations, it excels in finding ways to deploy them. “They had the foresight to see how using it could become such a big business. Japanese are able to develop wonderful technologies, but they fail at spreading and marketing such innovations to the world, to make them world standards,” says Goto of Asia University. “This is the weakness of Japanese industry.”
Duncan Clark, chairman of investment advisory firm BDA China and the author of Alibaba: The House That Jack Ma Built, sees strong potential for China to lead in innovation. For now, such developments are mostly market driven and incremental, helped by the massive scale of Chinese markets. “But over time, the companies gaining scale here like Alibaba and Tencent are likely to become players in pure research and radical innovation, too,” he says. Such cash-rich giants have a powerful ally in a government keen to lead technology initiatives in areas like artificial intelligence, big data and super computing, where China is poised to rival the West.
So while up to now, China has mostly piggybacked on technologies that emerged elsewhere, that may be changing, says Wharton’s Garrett. “China did not invent high speed rail. But they have scaled it much more and much faster than anywhere else, and they can build the networks much more cheaply. If innovation is the process of turning ideas into outcomes, China is clearly an innovation economy,” he says.
In high speed rail, the technology was nurtured from the top down, with the government in the driver’s seat, Garrett says, pun intended. “In mobile payments, it was bottom up, and now the Chinese government is trying to play catch up to regulate what Alipay and WeChat pay are doing. That is a pretty powerful one-two punch when it comes to innovation,” he says. “I do think that globalization of the Chinese tech sector will be a massive feature of our world in the next few years.”
Article by Knwledge@Wharton
