The Arrival of the China Pays
The payments news last week was dominated by Apple, whose CEO Tim Cook promised that its newly introduced Apple Card and its Apple Pay platform will “transform another fundamental method of payment.” But many payments professionals are equally intrigued by the steady unveiling of potentially more impactful disruptors. These disruptors come not from the innovation labs at Cupertino, but from China. Two companies, Alipay and WeChat Pay, are following the trajectory of the Chinese economy and moving beyond their dominance in China to the rest of the world.
Initially, Alipay and WeChat Pay target the purchasing power of Chinese tourists and emigrants, who are estimated to spend nearly $500 billion dollars overseas in the next five years. Japan, for example, is rapidly gearing up its acceptance options for Chinese tourists in advance of the 2020 Olympic Games. Both Alipay and WeChat Pay are targeting merchants that cater to Chinese tourists and business people across the world, ranging from Europe to Asia and the United States. But while that strategy makes perfect sense at the outset, from the perspective of a U.S. payments landscape that badly needs an injection of competition, it will be more interesting to see if Alipay and WeChat Pay extend their offerings to non-Chinese consumers.
True differentiators
If WeChat Pay and Alipay choose to market their wares to consumers outside of China, they could conceivably find a receptive audience. Both platforms allow users to make both online and point-of-sale (POS) purchases without even having to sign into a separate payments app. It’s as simple as pressing “pay” on the main app, after which a QR code appears for the merchant to scan. That QR functionality also allows retailers to accept WeChat Pay and Alipay without a POS device; a merchant can literally print out a piece of paper with a QR code, place it on their counter, and customers just point their phones at the image to effectuate payment. Done. No NFC development costs, and no requirement to abide by onerous network rules that effectively control the NFC payments ecosystem. That could mean more convenience and perhaps lower costs for both retailers and consumers.
Equally importantly, their model enables consumers to fund their wallets directly from their bank accounts. In the United States, the existing digital wallets require credit or debit card funding, which (not at all surprisingly) brings the conversation back to interchange. Since everything occurs in app, the platforms have holistic insight into consumer behaviors and can provide better loyalty programs. In China, the China Pays are even offering financial services like money-market accounts and investment advice. It is a true disintermediation threat for Visa, Mastercard, and the banks.
American tech behemoths like Facebook recognize the potential advantages of Alipay and WeChat Pay, and are exploring how to emulate the model (you can read our previous post on Facebook’s recent efforts here).
Hurdles remain, but they are manageable
That is not to say that the China Pays will be spared of any headwinds. Wells Fargo CEO Tim Sloan, for example, downplayed the threat of Alipay at the recent FinTech Ideas Festival by noting the complicated U.S. regulatory environment, where Wells Fargo and other incumbents actively lobby to protect their profitable status quo. Indeed, as we have seen many times, innovative payments providers that have promised lower acceptance costs (including Paypal and Apple) have disappointingly succumbed to the will of Visa, Mastercard, and their member banks. To quote the well-worn and unfortunate adage, “if you can’t beat them, join them.” Privately, however, U.S. payments executives are concerned about the threat from China, according to individuals at Mercator Advisory Group, and Citi executives based in China have suggested that it’s only a matter of time before China’s model influences payments in the United States.
Unlike smaller payments start-ups in the United States that have been swallowed or suppressed by the incumbent players, the China Pays are powerfully funded and bring with them scores of existing users. AliPay, for example, brings with it more than 700 million active users in China and 200 million users overseas, and is currently being accepted at nearly 200,000 U.S. merchant locations. The two companies jointly own 90% of Chinese mobile payments. On top of this, the Chinese government is heavily incentivizing the expansion of mobile payments with the stated goal of ubiquity by 2020. All of this muscle means that neither Alipay nor WeChat Pay need to play nice with Visa and Mastercard to survive. As Chinese purchasing power expands globally, and that expansion is inevitable, so too will the scale and reach of these platforms. It may take some time, but eventually that will impact even the ossified U.S. payments market.
As a result, it is not a question about whether the China Pays will follow through on their disruptive potential, but whether they will flex their muscles quickly or tactfully play it slow given the current geopolitical and regulatory environment. At the end of the day, the only question is how much time it will take for these payment forms to make their mark in the United States.