Titans clash over mobile payments
The competition in China’s mobile payment market is growing tougher with the standardization of China UnionPay’s quick-response code technology in December. The head-to-head digital hongbao wars between the two dominant players WeChat and Alipay during the Spring Festival holidays provides one piece of evidence. Behind the cutthroat turf war, both of the platforms have broader ambitions, including creating tailored financial products based on their collections of big data. In the near future, the industry will also be subject to tighter regulations.
It was not so long ago that the red envelopes, or hongbao, that people handed out during the Spring Festival holidays were actual red envelopes.
But over the last few years, many of the red envelopes stuffed with cash have existed only virtually on online payment platforms.
During this year’s Spring Festival, a record of 46 billion electronic hongbao were sent and received via Chinese mobile social platform WeChat, which is operated by Tencent Technology Co, the Xinhua News Agency reported on Saturday. The figure was up 43 percent year-on-year.
Internet giants such as Tencent have promoted the use of virtual hongbao to expand their stakes in China’s fast-growing mobile payment market, as local shoppers are now using their smartphones to pay for everything from taxi fares to medical expenses.
In 2016, China’s third-party payment market is estimated to reach 20.3 trillion yuan ($2.96 trillion), up 45 percent from 2015, according to research firm Enfodesk. It projected that the market will grow by more than 20 percent annually to 33 trillion yuan by 2018.
The huge market base has lured a number of companies, making the turf war for China’s mobile payment market more cutthroat.
Early market entrants including WeChat and Alipay, which are run by Tencent and Alibaba respectively, have developed swipe-and-go payment systems based on quick-response (QR) codes. The two companies, which together control more than 70 percent of the market, have strived to secure their predominant position by spending heavily on discounts.
As a result, the use of credit cards has declined, rattling the country’s bank card association.
On December 12, 2016, China UnionPay announced its own standards for QR code payments. The move was followed by promotional campaigns involving more than 20,000 stores from December to February, a peak time for shopping.
Latecomer
It is not the first time that China UnionPay stepped up efforts to tap the mobile payment market. In December 2015, the bank card association rolled out its near-field communication (NFC)-based Quick Pass mobile payment tool, which enables consumers to make payments by tapping their smartphones against payment terminals.
But the NFC-based technology was not as popular as QR codes.
“That’s probably why UnionPay developed its own QR code last year,” said Li Yi, a research fellow at the Internet Research Center under the Shanghai Academy of Social Sciences.
Li was not optimistic that commercial banks would be able to break in. “WeChat and Alipay have a lock on the huge market thanks to an early entrance,” he told the Global Times on Monday.
But UnionPay still stands a chance in the mobile payment market because its technology is safer and more trustworthy, Li noted.
An employee from a commercial bank, who preferred not to be identified, agreed. “UnionPay also has an advantage in large payment transactions because WeChat and Alipay are more frequently used in payment of small amount,” the bank employee told the Global Times on Monday.
For example, the two digital wallets account for around 80 percent of the mobile payment market which are under 5,000 yuan, according to the employee.
However, Liu Dingding, an independent Internet industry analyst, pointed out that the cooperation between UnionPay and commercial banks is crucial to the bank card association’s goal of getting to the top.
Currently, UnionPay and the commercial banks have a “strange bedfellows” relationship, Liu said.
“UnionPay is looking to promote QR code with banks, but the logistics behind major banks’ moves are different – they seek to expand the user base of their own mobile applications so that they can engage with clients directly, which means banks may also cooperate with WeChat and Alipay if UnionPay’s promotion has not achieved their desired result,” Liu told the Global Times on Sunday.
Broader ambitions
To date, the battles in the mobile payment market between the two tech giants, Alibaba and Tencent, have also intensified.
Head-to-head against WeChat’s hongbao-grabbing activities during the Spring Festival, Alipay continued last year’s collection of five good fortune games with the introduction of augmented reality technology. Participants can split a 200 million yuan prize by scanning the street-side “fu” signs, or the Chinese character of fortune, that are ubiquitous during the holidays.
To attract users, the two digital wallets are also locked in a competition for offline payment points for businesses such as restaurants, supermarkets and department stores. Therefore, both platforms turned to third-party services providers who specialize in “offline promotion” and merchants services for potential offline business growth.
For example, WeChat announced in April a plan to attract third-party services providers with more than 300 million yuan in investments. Alipay also plans to provide 1 billion yuan in rewards to third-party services providers over the next three years.
But behind the tit-for-tat competition, both Alipay and WeChat have broader ambitions.
One is the collection of big data related to transactions, which enable those platforms to invent and tailor financial services such as marketing strategies, investment and loans to their clients, Liu said.
Tencent has been struggling with how to generate revenues based on its huge consumer bases. In an interview with Caixin magazine in January, Huang Li, director of WeChat Payment, refused to elaborate on the business blueprint for the platform, only noting that the company is considering a strategy “as a whole.”
Regulatory controls
In the near future, the country’s third-party payment market will face greater regulatory control.
In January, the People’s Bank of China (PBC) announced a new regulation that requires third-party payment companies to deposit clients reserve funds in bank accounts that do not generate interest. The new rules are intended to ensure institutions do not put the money into “risky” financial services. It is expected to takes effect in April.
An Alibaba spokesperson refused to comment on the policy’s effect on its business. He said that the company “welcomes the policy and will actively impose it.”
According to a report published by research firm TrendForce, following the policy implementation, major domestic payment providers, including Alibaba and Tencent, will suffer a blow, as the policy prevents them from using the funds to generate interest income or grow their business.
But Li disagreed. “Large-scale firms do not rely on interest from client funds. So the new measures will only hurt small third-payment firms.”
Yet the policy is likely to tip the scales in UnionPay’s favor, Li noted.
