When it comes to mobile payments and e-wallets, China has leapfrogged the West. Tired of waiting for the conservative banking sector to reform, tech giants Alibaba and Tencent, created a seamless experience for consumers to purchase on their platforms. While in the West, e-commerce providers needed to figure out how to operate within the existing landscape of credit card operators, Tencent and Alibaba developed a system to bypass them completely, becoming the go-to technology for moving funds.

In both markets, online retailers and social media sites alike need to integrate with some type of payment aggregator to handle the backend of payments. In the West, groups like Adyen, Stripe and Worldpay allow retailers to accept payment schemes like credit and debit cards, as well as e-wallets and other alternative payment methods. Those aggregator companies in turn work with online sites, or are integrated into e-commerce sites that use Shopify or Magento. In China, the end-user and the gateway are often one in the same. A consumer will go onto a Wechat store and use Wechat Pay to complete the transaction, or they will shop on one of Alibaba’s platforms and pay with Alipay.

Rise of Alibaba and Tencent Payment Platforms

The rise of alternative payment schemes in China and the dominant position of Alibaba and Tencent is perhaps best explained by two factors that predate electronic payments, the relatively limited use of credit cards and the dominant presence of cash. While credit cards offer consumers a convenient option when purchasing, merchants must bear those costs which are typically in the 2%-3% range. In China, the majority of merchants balked at the idea of paying to process transactions and in an incredibly price-sensitive environment, they were never going to pass those costs along to their customers. The result was that sellers were slow to accept credit card payments. With card acceptance being somewhat rare, there was naturally less interest on the consumer side to pay with plastic.

This meant that cash was used for most transactions including on higher value items such as plane tickets, electronics or even rent. But in a country where the largest note domination is 100 yuan (roughly £11) that meant frequent visits to the atm to stock up on cash. While walking around with a huge stack of bills may be fun for some, others didn’t like it so much.

In 2003, when Alibaba launched their e-commerce platform Taobao they recognised a gap in the market around payment. Customers were reluctant to hand over their cash to buy products sight unseen and sellers weren’t going to ship items before they received payment. In basic terms e-commerce, needed e-payments. Seeing the relative lack of credit in the market Alibaba developed Alipay as a means to build trust within their e-commerce ecosystem. Some ten years later, this service had become so successful that Alibaba decided to spin off Alipay into a new company (Ant Financial).

Around the same time, Tencent started trialling person to person payments for the Chinese New Year’s tradition of gifting little red envelopes of cash using their Wechat Pay. These digital red envelopes where hugely popular and by the end of 2014, more than 100 million users had an integrated bank account with Wechat. Tencent haven’t looked back since.

In both cases, Alibaba and Tencent recognized a need in the market, Alipay was built to help facilitate e-commerce, Wechat Pay to make sending money to contacts much easier. As these platforms have grown, they have stayed true to their initial learning of focusing on convenience.

Today, Wechat boasts more than 1 billion active users in China and Alibaba can claim over 50% of the B2C retail market in China. In most cases, users are already active, using Wechat for social media and Alibaba for online retail, so they have already gone through the process of signing up and verifying an account. Taking the next step to signup up for Alipay or Wechat Pay only requires them to add their banks’ details and off they go.

Alibaba and Tencent have also focused on the merchant side of the equation and incentivized them to use their payment systems. In the West, businesses have become accustomed to the fact that payment aggregators may take a couple of days for the funds to enter the merchant account. Not in China. As James Baillie the founder of payments technology company Wundr, says “Chinese payments are able to make transactions basically instant. You do a payment now and you’ll get the funds a half-second later.” As if an instantaneous settlement isn’t enough, within its major B2C platform (Taobao) Alibaba charges no fees to its merchants on Alipay transactions.

Such convenience has helped spur along activity as it pushes consumers to spend within the Alibaba and Wechat ecosystem and makes it easy and cheap to do so.

Online payment in China is not plagued with issues of fraud that are sometimes found in the West. For Wechat Pay and Alipay, users activate their account by submitting their bank account information, which in turn is connected to their official government identification. These documents are strictly controlled and monitored.  Similar standards are expected for merchants. Prior to selling on the platforms, they have to submit their business license and official ID of the account holder.

With such robust verification in place, the amount of counterfeit payment fraud in China is much lower than found in Europe or North America. According to the International Security Ligue a private security trade organisation, counterfeit activity in China is roughly 1/10 of the global average.

Innovations from China

The rise of facial recognition and fingerprint technology, have made payment faster and even more immune to fraud. First introduced in 2017, Alibaba’s ‘smile to pay’ scans a customer’s face to verify their identity. Not to be outdone, in 2019 Tencent introduced their Frog Pro system with similar functionality. While the take-up of Apple Pay’s facial recognition technology to pay in stores has been slow, it is much more common in China. Facial recognition programs and the idea that the government and businesses can have full access to such powerful information leads to privacy concerns in the West. Consumers in China are more accepting of this reality.

As Baillie says, “In China consumers are happy with facial recognition. But I think in the West there will be a slow uptake as people will not want to give their information.” Baillie projects that at some point we will see more widespread use of this technology, but it will be some time before it is as common as it is in China.

With the outbreak of Covid, consumers and businesses have been encouraged by governments to minimize physical contact. Contactless payments are already popular in the UK, and the Financial Conduct Authority recently doubled the single payment limit to £100 from its previous level of £45. There has also been the introduction of Quick Response (QR) codes to check-in to locations with the goal of aiding the tracking and tracing of the virus. While QR technology may be unfamiliar to many in the West, Chinese use these technologies daily by going into their Wechat or Alipay accounts to scan codes to connect with friends or pay for items. Shops in China will typically have payment terminals that can handle e-wallet payments, in some cases that means a separate terminal for Wechat Pay and another for Alipay, although increasingly there are payment machines that can link to both options. Here in the UK, popular e-wallets like Apple Pay and Google Pay work on the same near field technology (NFC) that power contactless payments, so there was less of a need to develop the QR systems. But as consumers become more familiar with using QR codes in their daily life, and with the continuing need to promote safe, distanced payments, don’t be surprised if we start to emulate China and interact with many more QR codes.

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