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August 14, 2017August 11, 2017

Cheatsheet: What you need to know about mobile payments in China

The U.S. and Europe often look to China as an example of what a mobile or social payments ecosystem could look like at scale. Consumers and businesses alike online and in-person prefer using WeChat Pay, the mobile payments function of the popular messaging app, or the PayPal-like Alipay to cash — because it’s so easy. People like their payments done easily and quickly with money passing directly from the customer to the merchant or the other way around. That’s what WeChat and Alipay, the dominant forces in mobile payments, offer — and not just at Starbucks; people use mobile payments to pay bills, for transportation, movie tickets, even karaoke.

Now, the Chinese central bank is stepping in so it can monitor payments, without asking permission from the processors, to keep an eye out for money laundering and other illicit transactions.

Key updates

The People’s Bank of China has mandated online payment companies connect to a centralized clearing house by Oct. 15 and route all payments through it by June 30. Whether or not this makes payments as slow in China as they are in the U.S. remains to be seen.
The mandate by China’s central bank could force Ant Financial and Tencent, the parent companies of Alipay and WeChat, respectively, to begin sharing user transaction data with competing companies.

Key numbers

Social payments are set to increase China’s GDP by $236 billion by 2025
Mobile payments account for 12 percent of all payments in China (card payments account for 41 percent; cash payments, 30 percent; and online payments, 16 percent)
Alipay users sent $1.7 trillion last year compared to only $70 billion in 2012; WeChat users sent $1.2 trillion in the same year compared to $11.6 billion in 2012
In 2014, Alipay held 82.3 percent of the Chinese market for digital payments and WeChat Pay controlled 10.6 percent; by 2016, Alipay’s market share fell to 68.4 percent and WeChat Pay’s market share rose to 20.6 percent

The analyst view
David Sica, Nyca Partners, principal: “When earlier stage companies or private sector companies are able to find new types of behavior and commerce people are interested in, it gets to a certain point where it might be better suited as a utility. They’re saying let’s bring this back to the government level because it’s going to support this new type of behavior in commerce that’s interesting to people and that these private sector companies have proved out.”

Michelle Evans, Euromonitor International, global head of digital consumer research: “Tracking and monitoring the flow of such payments falls in line with the approach taken by many regulators in other nations that are attempting to eliminate money laundering and other such activity. This ruling, which will force these internet players to share more information about the transaction, could slow some of their unrestricted growth depending upon the amount of data shared with competitors.”

The bigger picture
Sometimes it takes private sector companies to demonstrate that consumers really want what they want. The struggle in most countries is existing systems don’t always support new behavioral changes and ways of transacting.

“It’s always positive to see governments being supportive of putting infrastructure and utility in place and policy that will enable and foster innovation and serve people with better products and better services that are hopefully lower in price and more transparent. This could be a really powerful thing,” Sica said.

Plus, China’s mobile payments market has become an obvious oligopoly and the PBOC probably wants to level the playing field so that new entrants and other players can compete. WeChat and Alipay have not only shown what consumers want, they’ve proved that in a world where commerce and financial services are digital, the most valuable asset is customer data. They know more about China’s consumers than any other (probably) business based on customer transaction data alone and can use that to extend other forms of financial services to them like credit lines and business loans.

April 21, 2017April 24, 2017

How Ant Financial is transforming the Chinese payments industry

Alibaba’s financial affiliate group is reaching out to the under-banked in China.

Alibaba’s Ant Financial Services Group has brought people with low income and limited to no credit history onto the financial grid by incorporating digital payments into existing e-commerce and social media platforms — a feat by any standards, especially as other markets, like the U.S., lag behind.

By using the customer data from those transactions, Ant has been able to give them access to other financial services its created that look a lot like typical core banking products — savings accounts, credit assessment and loans for consumers and small businesses — according to a report released Wednesday by the United Nations Better Than Cash Alliance.

“That Ant Financial is now able to analyze all that data and leverage the platform to extend loans to companies or individuals has had a big impact on how they produce new businesses,” said Camilo Tellez, head of research for Better Than Cash Alliance and the lead author of the report.

Ant Financial has basically found a way to scale financial access and wellness tools similar to existing apps in the U.S. either struggling to take hold or not really integrating with the other existing offerings – like the savings app Digit or micro investing app Acorns. But U.S. customers still largely pay with plastic, whereas mobile payments are so big in China that Ant can use transactional and other alternative data to create a true financial ecosystem. Friction around customer data is one of the biggest things in the U.S. keeping financial services siloed.

Ant Financial launched in 2014 and as of September 2016 had loaned $107.3 billion in loans to more than four million small businesses over its Alipay platform to date, according to the UN report. Grameen Bank, the Nobel Peace Prize-winning microfinance organization and community development bank, has lent $17 billion since its inception in 1976.

In China, 79 percent of adults have had a bank account at some point, according to the UN research, but only 10 percent of them have borrowed in the formal financial system and for them, their digital footprint of transactional data and payment behavior can add to their credit histories. The same is true of small businesses, which historically have had difficulty accessing credit or taking out loans because China’s major banks are so heavily focused on lending to state-owned enterprises. Sesame Credit, Ant’s social credit scoring system, now has more than 350 million registered users and 37 million small businesses that buy and sell on Alibaba Group marketplaces. Sesame examines customers’ credit history, financial behavior, contractual capacity, identity and users’ social networks.

There are also accessible ways for people to save and invest their money. Alibaba’s Yu’e bao lets customers invest the money “left behind” on digital wallets into a money market fund, earn interest on that spare change daily and still have the freedom to withdraw the funds when they want. Alipay effectively acts as a fund manager but is treated as a distribution service from a regulatory perspective. Customers can also use Yu’e bao funds to make e-commerce purchases. Yu’e bao, which now serves more than 152 million customers, grew its assets under management to $117 billion in 2016 from $29 million in 2013.

“You have all these different opportunities being created through these messaging platforms for younger entrepreneurs for small and medium sized enterprises,” Tellez said. “Hopefully some of that impact will be found in other markets and similarly be able to provide SMEs better access to capital.”

In China, merchants are required to accept mobile payments — each point-of-sale terminal needs to have near field communication technology built in — so they’re more accessible, user friendly and more people can take advantage of the opportunity, which allows more data to enter and flow through the system.

The closest thing to a social payments platform in the U.S. is Venmo, which stops at peer-to-peer money transfers. But Tellez says he sees Venmo 2.0 bringing the money transfer capability to merchants. While the U.S. has so far missed out on a lot of mobile payments opportunity the China has been using to the advantage of its financially excluded consumers, it’s possible merchant partnerships with Venmo or something like it could be how we actually start integrating mobile payments.

“As companies are leveraging more data analysis and they start looking at how to integrate wallet functionality into everyday activities, the wallets will become like silent pipes through which payments move,” he said. “We’ll see more partnerships happening where you don’t even recognize that you’re using Venmo to pay for things, it’ll be more seamless.”

April 20, 2017April 22, 2017

5 charts on how mobile payments are growing in China

Social payments in China now reach almost $3 trillion, according to a United Nations report released Wednesday.

China has been a world leader in mobile and social payments while the U.S. and Europe have been slow to adopt them. Payments on messaging and e-commerce platforms like WeChat and Alibaba are set to increase China’s GDP by $236 billion by 2025.

Now, the United Nations’ Better Than Cash Alliance is hoping other countries can emulate China’s models as much as possible, if only to unlock economic opportunities for people and small businesses the way China has.

“While China is a very specific country study, it does give us insight into some changes in behavior starting to happen across the global consumer segment, specifically regarding how people make payments,” said Camilo Tellez, head of research for Better Than Cash Alliance. “This ecosystem that has grown in China in an insular way has shown how we can take advantage of these social platforms and really use them to reach economics of scale.”

China learned early on what many financial startups and institutions are just starting to integrate into its own financial system: the keys to success include building payments services existing e-commerce platforms and social networks to draw new customers, making platform tools like application programming interfaces openly available to innovators for seamless integration and enabling universal access for users and businesses by developing ecosystems that function across various platforms, according to the report.

Here are five charts from the report that show the success of WeChat, Alipay and China’s payments market.

Alipay and WeChat absolutely dominate mobile payments. WeChat payments rose to $1.2 trillion in 2016 from less than $11.6 billion in 2012. That’s an 85-fold increase in four years. Combined, Alipay and WeChat payments rose to about $2.9 trillion in 2016 from less than $81 billion in 2012.

WeChat payments are growing faster than its original messaging service. The Tencent subsidiary launched in 2011 and introduced its payments functionality in 2013. WeChat grew its active daily user base 43 percent to 806 million in 2016 from 195 million in 2012.

The rise of Internet and mobile phone use in China has had a lot to do with this. China’s shift to smart phones took place over the course of the last five years, according to the report. Mobile payments capabilities existed for most of that time, whereas in the U.S. and Europe, customers became heavily dependent on their phones before being introduced to that function.

Integrating payments into WeChat has fueled its growth. In 2015, Alipay had 450 million monthly active users each spending $2,921 on average. In the same year, WeChat had 697 million users whose average spend was $568 on average and grew 168% to $1,526 in 2016.

Tencent’s partnership strategy allowed WeChat users to pay for basically anything – beyond just peer-to-peer payments – by establishing relationships with vendors and merchants which sometimes offer promotions for WeChat users in physical stores. Customers can use WeChat to top up their mobile phones, pay utility bills and book plane, train and movie tickets. You can even book a karaoke session with WeChat.

Cards are still king. Despite impressive growth over a short period, just 12 percent of payments are done on mobile devices in China compared to 16 percent online, 30 percent in cash and 41 percent with cards. The sheer scale of the Chinese market, however, means these numbers get pretty big.

China UnionPay, the main domestic payment card clearing and settlement system, as 26.7 million merchants with electronic point of sale devices installed for card payments. Debit card penetration stands at 3.1 cards per person – and is increasing, according to the report. Although, every new POS device sold in China is required to come equipped with near field communication technology for mobile payments. Meanwhile, the U.S. has been in a chip versus stripe cards debate when most of Europe implemented chips a decade ago.

April 10, 2017September 12, 2017

Is the US ready for WeChat?

If you live in the U.S., “social payments” is relegated to Venmo and its emoji-powered money transfers.

But compare that relatively thin offering to China’s WeChat, the do-everything messaging app that is the cornerstone of Chinese digital life. WeChat lets users execute peer-to-peer payments, top up their mobile phones, pay utility bills and book plane, train and movie tickets or book a karaoke session – to name just a few things. If China is any indication, social networks and messaging services could be killer apps for money transfer; WeChat is already leading that movement.

“WeChat is kind of a de facto operating system and has massive, massive usage,” said Sean Neville, cofounder and president of bitcoin wallet turned social payments app Circle. “There isn’t anything quite like that in the West.”

Just yet. But when WeChat, or a WeChat-like clone, finally hits the U.S., it’s going to look different. There’s more competition in the U.S., so there will probably be a few players as opposed to one “winner.” And although the U.S. payments system desperately needs an upgrade – sending payments is excruciatingly slow and expensive – it works well enough; how much U.S. customers benefit from paying in new ways with new technologies doesn’t yet outweigh trained behaviors that don’t want to change.

Worlds apart
The U.S. and China are on opposite ends of the behavioral spectrum. First of all, China is a mobile-first nation. Mobile e-commerce took off there because its retailing landscape was weaker and less efficient 15 years ago compared to the U.S., said Michelle Evans,, global head of digital consumer research at Euromonitor International. Mobile phones brought people online that were previously cut out and now, Asia’s technology landscape has a really diverse portfolio of online businesses. The adoption gap between the different worlds is less about technology and more about the fact that people in China and emerging economies enter the social payments ecosystem without a pre-existing bias as to how they transact.

“In an emerging market like China, digital technology became a lifeline, providing something consumers would otherwise not have access to,” said Evans. “In the U.S. market it tends to be more of a convenience plug.”

By contrast, the transition to chip-enabled cards in the U.S. happened a decade after it had in Europe. That was largely because retailers and banks didn’t see the incentive to retrofit their point-of-sale terminals and issue new cards to customers.

And while the U.S. market is large like China’s, it has more competitors, said Evans. Alibaba is China’s dominant Internet retailer. Union Pay is its dominant card network. That’s it. There are so many more players in U.S. retail and card issuance – and in social networking and messaging services.

“There are so many different innovative companies trying to address payments from many angles,” said Warren Hayashi, president of the Asia Pacific arm of Adyen, a payment platform that provides technology for WeChat. Adyen alone has built more than 250 local payment methods onto its platform, he said.

From conversational banking to conversational payments
China may be ahead of the U.S. but Circle’s Neville is betting message-based payments will go the same way regular text message conversations in that sending money to someone will be as easy and direct as sending that person a text.

“Messaging on mobile is a killer app for money transfer,” he said. “If I send a message to you in Europe and I happen to be in Boston, the Internet doesn’t really care,” and there aren’t any barriers to receiving that message. “That same thing will happen with money. That kind of behavior isn’t perfectly natural or common yet in Europe or the U.S.”

Circle launched as a bitcoin wallet service with significant backing from Goldman Sachs and the Chinese company IDG Capital. Last year it raised another $60 million from Chinese investors to continue expanding in China and in December it decided to refocus its efforts on messenger-based payments more broadly as it dropped its bitcoin exchange service.

Messaging platforms for exchanging information like bank account balances and spending recaps have attracted a lot of investment in the last two years; customers spend more time in messengers now than single-purpose apps, investors say. Kasisto’s MyKAI, which allows people to talk with their banks and make Venmo payments through Facebook Messenger, Slack and text messages, is perhaps the best example in the U.S.

“In the U.S. it’ll happen naturally, using messaging,” Neville said. “Consumers use it to pay one another back, merchants will catch on, it’ll be a holistic development that occurs. There are more people sending messages and sending other content through messaging. It’s an emerging organic behavior.”

How this manifests in the U.S.
It’s not unlikely to see social payments take off in the U.S., but it’ll look different than China’s WeChat model. WeChat had the opportunity to establish a very strong leadership position if not a monopoly, but that leadership will be more distributed in the U.S., said Josh Sutton, head of artificial intelligence at Publicis.Sapient.

The first step will be industry consolidation in processing. “Payments processing will standardize very similarly to how the credit card industry is standardized today: on a common backbone in a common ecosystem,” Sutton said. “Mobile payments initially will drop out of that existing ecosystem… There’ll be the First Datas of the world that help to centralize and consolidate. There’ll probably be another tier of companies that provide different flavors of payment – you already see that with Square and Venmo. Then you look at how that gets integrated into different solutions, and that’ll be wide open.”

The consolidation has begun. Social networks are already starting to morph into one another – suddenly it seems all of them have their version of Snaps, Stories or Moments – and what once distinguished one from another is starting to blur. At the same time, those networks will begin to bring different brands and payments companies onto their platforms if they haven’t already that may start in emerging economies – just last week, WhatsApp, which is owned by Facebook, announced a payments push into India – and then make their way the U.S. and Europe.

“You see social payments trying in the U.S.,” Evans said, “but you don’t see the same uptake.”