By Janine Coughlin
If you live in China, chances are you’ve used your mobile phone to pay for something with Alipay and/or WeChat Payment – the two dominant payment platforms in the country. According to their parent companies Alibaba and Tencent, they had more than 270 million and 200 million users respectively as of Q3 2015 and they’re growing fast. This February mobile phone maker Apple jumped into China’s lucrative mobile payment market with Apple Pay, its competitor launched Samsung Pay a month later and Huawei has announced similar initiatives to begin in the near future. Even the Swiss watchmaker Swatch has jumped in, partnering with China UnionPay and the Bank of Communications to introduce a special edition watch that includes an NFC (near-field communications) chip with payment functions.
Some retailers are also making changes to accommodate the new payment system. Fast food giant McDonald’s has begun remodelling some of its outlets to include touchscreen kiosks where customers can place their orders and pay with their mobiles. Now tech savvy vendors who previously only accepted cash at farmers’ markets are allowing mobile payment. But as with anything new, it also raises some questions. Can the Chinese market support so many mobile payment players? How secure is mobile payment compared to an ATM or credit card? What information are payment companies collecting about us?
“It’s just a new way to pay the bills, it’s not a revolutionary new technology,” says Zhongkun Chair in Finance Professor of Finance and Accounting at CEIBS Oliver Rui. “This is more related to inclusive finance. It gives more people access to financial services that they have not had before. There are many in China without any bank account, so mobile payment will be very beneficial to them.”
CEIBS Professor of Marketing Chiang Jeongwen agrees. He says that because Chinese consumers have been using payment services like Alipay for many years when shopping online from their PCs, the shift to mobile payment is simply a natural evolution, one happening a lot faster in China than elsewhere because of the high penetration of smartphone and mobile Internet usage here.
Alipay and WeChat Payment have also made their mobile payment platforms more attractive, he says, by leveraging their ties with other popular consumption platforms to offer consumers discounts for using their payment services through the restaurant and lifestyle service Dianping.com and taxi-hailing Apps such as Didi Dache. “They do that to try to enlarge their user base,” explains Prof Chiang. “They want people to have the habit of using their mobile payment system. That collaboration with the merchants gets consumers to forgo credit cards in order to take advantage of the discounts offered by Alipay or WeChat. I think it’s very clever of them, and of course they subsidise it. The credit card companies unfortunately don’t have the means to offer such discounts quickly, so I think they will be the losers in this game.”
Apple Pay uses a different technology than its local competitors and is so far unable to bundle third party discounts into its system. Its NFC hardware is the same as that used in multi-ride subway payment cards – you touch your phone to an NFC terminal to transfer funds for payment in the same way you swipe your subway card at the turnstile to pay your fare. Alipay and WeChat each have their own proprietary software systems that require users to scan QR codes to make a payment. This enables their parent companies, Alibaba and Tencent, to capture detailed information about users and their transactions. They add this information to the massive stockpile of data they have already accumulated about their users’ activities on their other services like Taobao.
Associate Professor of Strategy Chen Weiru explains that Apple Pay and other players that use NFC technology are merely payment instruments, while Alipay and WeChat have developed entry gateways for consumption and are now full-fledged platforms. In order for Apple Pay and other NFC systems to become platforms, they would have to offer more value-added services, but that would put them in conflict with their partner, China UnionPay, which is the entity that actually processes their NFC transactions.
The payment market in China can be divided into two stages, says Prof Chen, pre-decision and post-decision. “Alipay [and WeChat], through various Apps, lead consumers to make consumption decisions about goods and services,” he says. Once the consumer has entered their ecosystem, they don’t really need to make a decision about how to pay because using Alipay or WeChat Payment is relatively seamless within the Apps. “The NFC services like Apple can only compete on the post-decision stage, where there will be competition on convenient user experience. If both camps have the same strong technical level, I assume it will remain a divided market.”
Another advantage Alipay and WeChat Payment have is their massive scale. They had a huge head-start on Apple Pay in amassing users through their other services, like Taobao and WeChat messaging, and they already have a massive stockpile of data on their users’ traditional online behaviours. By extending their payment services to mobile phones, the two Internet giants can now follow consumers offline as well.
“I think it’s a very powerful way for them to gather all the information they can about your daily life,” says Prof Chiang. “They can combine it with what they already know about your online consumption and find out your precise preferences, which stores you patronise, where you go to buy bread, or get your nails manicured. They will have all this information.”
The Chinese giants are also making inroads beyond mainland China with their payment platforms. WeChat Payment is currently also available in Hong Kong and South Africa while Alipay is available in Australia and New Zealand. Prof Chiang sees this as being aimed mostly at capturing the business of Chinese tourists – for now. “I think at this stage it is more for the convenience of overseas Chinese who happen to have Alipay,” he says. “If, say, you are a New Zealander or you are French, you have no idea what Alipay is all about.” He adds that banking rules and regulations vary country by country, making it difficult for payment services to develop a global footprint. Prof Rui adds that consumers are usually more comfortable using a domestic payment system from a familiar company.
In the race to accumulate a cache of Big Data, China’s Internet giants are also at an advantage because of the country’s lax regulatory environment in this area. Prof Chiang shared an anecdote about a recent meeting he had with a group of bankers from Spain who were shocked at how Alibaba’s financial services arm, Ant Financial, is able to access detailed information about the activities of Taobao merchants in order to make decisions on their credit worthiness for small loans.
“When I mentioned this practice to these bankers, their jaws dropped. They said it is impossible for a country like Spain to allow, for example, the information exchange between ecommerce sites and an almost bank-like financier like Ant Financial,” says Prof Chiang. “It would be like, if in the US, Amazon.com was freely sharing information about its customers with Bank of America. They were surprised there were no government regulations to oversee this kind of data exchange.”
Prof Chiang also noted that Alibaba owns more than just e-commerce platforms, for example it recently acquired China’s largest video platform, Youku. “They are involved in every aspect of our lives, and sooner or later, anything we do, any transaction, whether it’s a good or a bad thing, they will have all the information. To some degree they can advise the merchant or the manufacturers on individual consumers, but on the other hand, this information is contributed by millions and millions of people like us. And so the more we use them, the more we give them information and the more powerful they are. That is a scary thought.”
Consumers with privacy concerns about mobile payment would likely be better off using one of the NFC payment systems, which for the moment are more compartmentalised, says Prof Chiang. For example China UnionPay, not Apple, processes Apple Pay transactions and is therefore the entity that collects that data. The NFC chip in your subway pass has no connection to the NFC chip in your iPhone.
Privacy issues aside, making transactions with your mobile should be at least as secure as using a credit card. Prof Rui explains that government regulations limit the size of transactions that can be done via mobile payment, which provides some protection for consumers as it caps any potential losses. Prof Chiang also notes that the technology used by Alipay and WeChat for mobile payment is more flexible than with a credit card, which stores your information on a chip or magnetic strip that cannot be updated. With mobile payment, information can be updated instantaneously through electronic transmission, which would make it more efficient to change your account number in the event of theft, for example.
Thanks to its convenience, mobile payment has a bright future ahead. “The trend is mobile banking. People want to have a good user experience and they don’t need to go to a PC, its more user friendly,” says Prof Rui.
Though currently Tencent and Alibaba are happy to subsidise merchant discounts to hook users on their payment systems, eventually it will be the merchants who have to pay. “Once you cannot live without them they can use that to extract rent from the merchants because they will have millions and millions of people using WeChat or Alipay,” says Prof Chiang. “They will say, ‘if you want to do business with my customers, you have to buy advertising space.’ Just like today the credit card companies charge a fee to the merchants, sooner or later the merchants will be made to pay.”