Part I: Explaining the Popularity of Digital Payment in China
[Su Yang/China Daily]
China has become a force to be reckoned with in digital technologies at home and around the world. There is no better example of how digitalization has transformed Chinese society than the country’s homegrown digital payment system. China has almost skipped the credit card payment era and jumped directly into the digital and mobile payment era.
China’s economy is going cashless as a result of the country’s ballooning digital payment system. Approximately $15.4 trillion worth of payment transactions were conducted on third-party Chinese mobile platforms in 2017, compared with roughly $2 trillion in 2015. For perspective, credit card giants Visa and Mastercard processed a combined $12.5 trillion in transactions in 2017 globally. According to a Penguin Intelligence Survey, 92 percent of Chinese consumers prefer to pay for purchases in stores by using their mobile phones rather than cash or credit card.
Part I of this series discusses the current market situation of China’s digital payment system and explains how digital payment gained popularity so quickly, concluding that the popularity of the digital payment system in China is not a state-directed experiment, but is rather driven by the needs of rapidly-growing consumer markets in China and technological innovation. Part II will discuss recent regulatory changes in China’s digital payment system and how they might affect China’s digital payment institutions going forward.
Home-grown Digital Payment Platforms in China
Data show that the Chinese digital payment market exhibits duopoly features, with Alipay (支付宝) and Tenpay (财付通/腾讯金融) dominating the market and the other service providers barely visible (see Figure 1).
Figure 1 China's Mobile Pay keeps increasing in scale (Billion, RMB)
Source of Data: China Internet Network Information Center、Payment & Clearing Association of China, and iResearch Consulting Group
Figure 2 China’s Mobile Payment Market (Quarterly, 2015Q1- 2018Q1)
Source of data: Analysys (易观), Quarterly Report on China’s Third-party Mobile Payment Market (中国第三方支付移动支付市场季度监测报告), 2015 Q1 -2018Q1.
The rise of Tenpay has taken some of Alipay’s market share, but Alipay has consistently enjoyed a commanding lead, covering more than half of the Chinese digital payment market. This can largely be explained by Alipay services transactions on Taobao, the most popular online shopping platform in China. Tenpay’s rise in popularity since 2016 is largely due to the widely used social media platform WeChat—the third-party payment license used by “WeChat Pay” is, in fact, Tenpay.
Alipay was established in December 2004, when the China’s financial ecosystem remained underdeveloped and unable to match its fast-growing online shopping and Internet marketplace. Alipay as a supplementary mechanism to China’s unsophisticated financial infrastructure was able to find its niche in the market and quickly took off.
If Alipay’s dominance is due to its position as the most widely used transaction method for online shopping, the ascendance of Tenpay is due to its successful integration into almost every aspect of Chinese people’s daily life through WeChat and WeChat Pay. Apart from its original core feature, which is sending messages, WeChat has become a single platform that provides a collection of services including paying bills, transferring money, hiring a taxi, making reservations, booking flight tickets, and ordering takeout, among others. WeChat Pay/Tenpay has also integrated into China’s gift-giving culture. It provides a much more convenient way for Chinese people to send traditional “red envelopes” (红包) to friends and family members on various celebratory occasions and festivals, such as the Spring Festival, weddings, birthdays, anniversaries and the like. For example, in the five days spanning the recent Spring Festival holiday, the number of “red envelopes” traded through WeChat Pay/Tenpay reached 46 billion.
While the growth of third-party payment platforms certainly challenges the dominance of banks as financial intermediaries, it is safe to argue that the relationship between digital payment institutions and traditional banks is not purely competitive. Rather, their relationship is one of cooperative competition. Some of these payment platforms offer deposit service at a slightly higher interest rate than banks, and their own branded financial products (理财产品), which compete directly with the banks. However, all the settlement accounts of the third-party digital payment platforms ultimately reside with China’s commercial banks.
Why Digital Payment Gained Popularity in China
It is commonly understood that digital payment became so popular in China because there is a lack of a “credit card culture” among Chinese people. This is certainly true. With 225 million adults who do not have a bank account, China has the world’s largest unbanked population. Even among the members of the urban middle class who do have credit cards, few actually use them.
China is not the only country in which digital payment has grown rapidly. Many other developing countries with underdeveloped domestic banking services have moved toward digital transactions as well thanks to the increasing penetration of smartphones, such as M-Pesa in Kenya and the Eko program in India. However, none of these countries have witnessed a growth in digital transactions on the same scale as in China.
1. China’s Financial Infrastructure:
China’s financial infrastructure cannot be overlooked as a reason for the growth of digital payments. Just as China’s express delivery service (快递) is inseparable from the country’s high-quality logistics infrastructure, the development of digital payments in China cannot be separated from the upgrade of China’s domestic financial infrastructure.
As third-party payment platforms, Alipay, WeChat Pay, and other non-bank payment institutions have for the most part served as transfer intermediaries between the payer and the receiver: Money coming out of the bank account linked to the digital payment platform is transferred to the receiver’s bank account through the platform. The platform thus makes transactions between different banks cheaper and more convenient for both the payer and the receiver.
These transactions are closely intertwined with China’s banking system, and therefore the success of digital transactions depends heavily upon China’s financial infrastructure, particularly the implementation of the China National Advanced Payment System (CNAPS) developed by the People’s Bank of China (PBoC). Previously known as the Modern Payment System (MPS), the up-to-date CNAPS has four major components: High-Value Payment System (HVPS)，Bulk Electronic Payment System (BEPS), Check Image System (CIS), and China Domestic Foreign Currency Payment System (CDFCPS). This state-led large-scale financial infrastructure upgrade provides security and credibility for digital transactions and clearance.
2. Credit Guarantee for Online Purchases:
Equally important, many third-party payment platforms provide credit guarantees for online transactions between buyers and sellers to protect the interests of both sides. On many third-party payment platforms, such as Alipay, the buyer’s account will not be charged until the purchased goods are delivered and received to buyer’s satisfaction. So far this service has been free of charge.
This credit guarantee service is especially important for online market transactions in China: because of the absence of an established national credit system, buyers and sellers lack sufficient information about counterparty risk. Without such credit guarantees, there is no way to guarantee the enforcement of an online purchase agreement. In fact, the credit guarantees provided by third-party digital payment platforms are arguably driving the rapid growth of online shopping in China.
3. The Convenience of QR Codes:
Another important factor that deserves consideration with regards to the rapid growth of digital payments in China is the broader technological adoption of QR codes. China’s Alipay first introduced QR codes as a digital payment method in July 2011 and they quickly gained popularity. As a new and more convenient method of payment, QR codes challenged the dominant position of debit cards in offline payments. In 2016, a third of all digital payments in China, or approximately $2.6 trillion in transactions, used QR codes.
Apart from the high penetration rate of more powerful smartphones and the relatively low implementation cost of QR codes, a critical reason behind their success in China is that they provide an easy, fast, and machine-readable identification for payment.
Online payment using debit and credit cards was cumbersome before the introduction of QR codes. Without QR codes, online payment in China requires a number of devices (such as a special USBKey and a mobile phone to receive an identification code) and a combination of security measures to confirm identity. The implementation of QR codes quickly revolutionized payment Chinese people’s daily life, from online payment, to shopping at grocery store, grabbing a snack at a food stand, paying bills, you name it.
The rapid adoption of digital payment has ushered in a “great leap forward” in China’s payment system in which the vast majority of Chinese smartphone users have skipped the era of credit card and marched directly into digitalized cashless transaction. A critical takeaway from the Chinese experience is that this “great leap forward” has been driven by consumer demand and technological innovation. It is not a state-directed experiment.
A few homegrown technology firms have been able to seize the market opportunity and successfully integrate their services into almost every aspect of daily life. In developing China’s digital payment system, the private non-bank payment institutions—which really are tech firms—have been the pioneers. The Chinese government and the central bank have mostly played a facilitating but nonetheless indispensable role: the upgrade of financial infrastructure and payment system, without which transactions facilitated by non-bank payment institutions could not be easily cleared and settled.