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The Cashless Society

James Baghurst examines the rise of mobile payment apps in China

Recent Chinese innovation in the financial services industry is another chapter in the long history of Chinese contributions to the modern economy. Just as Chinese tea merchants in 806 AD were the first to conceive of a system of promissory notes known as ‘flying cash’ to circumvent the dangers and inconveniences of transporting large amounts of capital across the country, Alibaba and Tencent’s mobile payment apps now offer the modern Chinese consumer secure and convenient mobile payments as well as a myriad of other features – from paying utility bills to investing in money market funds.

One Belt, One Road, One Payment Method
Alibaba’s foray into the mobile payments industry began in 2009 with the release of a mobile app connected to Alipay, Alibaba’s online payment system. CEO Jack Ma sought to resolve the lack of trust in online transactions — in the mid 2000s the bank card penetration rate, the ratio of total bank cards to population, in China sat at around 0.01 per person compared to almost 4 per person in the US, and those with credit cards felt uncomfortable exchanging credit card information with strangers. Positioning itself as a trustworthy intermediary between payer and recipient, Alipay leveraged its first mover advantage to attract the growing Chinese internet population and ballooned from 100 million users in 2009 to 500 million users this year. More recently, Alipay has faced increasing competition from Tencent, which added mobile payment functionality to its social media messaging app, WeChat, in 2013. The mobile payment industry in China has since evolved into a duopoly where 90% of the mobile payment market is controlled by Alipay and WeChat Pay.

The convenience and security provided by these apps mirror the Chinese currency system’s humble past, but while the elegant solution of ‘flying cash’ catered almost exclusively to the ancient Chinese mercantile classes, Alipay and Wechat have capitalised on their knowledge of the Chinese market to lead a society-wide mobile payment revolution.

Consumption Culture
It is easy to imagine generic uses for mobile wallet apps, such as paying restaurant bills and paying for public transport, but the ubiquity of mobile payment systems in China has pushed Alipay and WeChat Pay to evolve into uniquely Chinese applications, giving the two mobile payment giants a huge competitive advantage over foreign mobile payment services like Apple Pay.

A clear example of this is WeChat’s 2014 Chinese New Year marketing campaign. Tencent announced that users would be able to send digital versions of ‘red packets’, a twenty-first-century adaptation of the cash-containing red envelopes traditionally given to friends and family during the New Year festival. During the Chinese New Year Gala, a live TV event watched by 700m people every New Year, viewers were encouraged to shake their phones during the broadcast for a chance to win digital red packets. WeChat even added a novel twist by allowing users to send red packets to group chats, randomly distributing the money amongst the group members. The campaign was a massive success, attracting 200m new users to WeChat’s wallet payment service and intensifying competition between Alipay and WeChat. Jack Ma described the campaign as a ‘Pearl Harbour moment’ and many media outlets reported the emergence of a ‘red packet war’ as Alipay rushed to entice users to send red packets through its own platform.

But the targeted Chinese business strategy of Alipay and WeChat isn’t limited to the New Year festival; mobile payment apps have become increasingly embedded into daily life. For example, one of the most popular taxi companies in China, Didi, has an integrated ‘Mini Program’ within WeChat to cater to mobile payments, and people can scan QR codes on rental bikes in most major cities to unlock and pay for their ride.

Indeed, one of the most important differences between China and the West with regard to mobile payment systems is the widespread use of QR codes. In contrast to Apple Pay which utilises Near-Field Communication, the QR code has remained the modus operandi for Alipay and Wechat. This has not only allowed multinational fast food chains, supermarkets and even universities to accept mobile payments, but also stalls at fresh food markets, local street vendors and small family-owned convenience stores which can display QR codes for customers to scan. Transaction costs are also significantly cheaper than foreign alternatives — it was only recently that WeChat raised the merchant transaction fee from nothing to 0.6% in comparison to the 3% charged by Paypal, further incentivising small business owners operating on narrow margins to adopt mobile payment systems.

Having outcompeted foreign mobile payment services on home turf through their understanding of the local consumer, Alipay and WeChat are set to increase competition further as both services seek to capture the rest of the Chinese market, particularly in rural areas. However, the long-term performance of the two Chinese giants will depend on whether they are able to replicate their success on the world stage. While this presents many challenges, Alipay and Wechat have created a massive opportunity to change the stereotypical view of the Chinese economic landscape from ‘Made in China’ to ‘Innovated in China’ by introducing the international community to the benefits of a cashless society.

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