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For the past year, our analyst intern MayHo Hoh has been on the ground in China, collecting data about the payments scene. MayHo grew up in Hong Kong and goes back and forth between Berlin and China, where she is finishing a Masters in Economics. She sat down with Managing Consultant Sabrina Small to discuss her impression of the payments scene in China and where it’s heading.


February 18, 2019


Q: What makes mobile payments so attractive in China? What did you experience there?

A: The most popular form of mobile payment in China—whether we’re talking about WeChat Pay or Alipay—is the QR code. People pay either by scanning a QR code or generating a QR code that can be scanned by merchants. The whole process (if your phone is fast enough of course), takes under five seconds and the payment is done. I found it unnecessary to bring my wallet with me because almost all the merchants in China accepted a QR code. Even when I was in rural areas, small villages, or street food stalls I could count on paying with my phone. And the most amazing part was that the merchants instantly received money to their account. I asked one store owner when I traveled in Shangri-La, the 3000 m high mountain area in China, and he told me that they only pay a small fee to set up the QR code in order to accept payments. He preferred to have people pay via QR code rather than cards because everyone used them and he didn’t have to bear charges from the card  companies.

Q: Is there any difference between the QR codes you scan and the ones you generate to be scanned by merchants?

A: As a customer level, I don’t see much difference between scanned and generated QR codes. I know that, however, from a government perspective, there's actually regulations about the value limit for different types of QR codes. For example, the static QR code, which is printed out by the merchants, are limited to accept any payment that is no more than 500 RMB (around 70 USD) while the dynamic one, which you generate to be scanned by the merchants through their mobile phone or the special devices, has a value limit up to  1000 RMB.

"There were perfect conditions to move to mobile payments."
Q: Do you think there’s any reason for the difference?

A: I believe the reason is that the authorities want to control payment risk for the end user and to ensure the codes aren’t used for AML practices. Again, if we looked at the merchants point of view, small merchants—like hawkers or street food vendors—only need small payments from their consumers, like 5 - 7 USD. Having a static QR code from the print out is good enough because there's no need for them to process a large amount.  Bigger shops—like restaurants or chain retailer stores—deal with larger payment amounts, especially for fancy meals or bulk purchase in the supermarket, or from a big sale. With those amounts, it makes sense to adopt dynamic QR codes, which can go up to 1000 RMB, at the point of sale.

Q: Do you have any theory as to why mobile payments are so huge now? Why the society went so quickly from cash to virtually cashless?

A: I believe there's a couple of reasons, both related to the electronic payment ecosystem. First, almost everybody knows Taobao, an online shopping platform like Amazon. At Taobao, you can buy directly from suppliers and compare the same product from different suppliers, and choose the cheapest one. These suppliers sometimes give gifts and extra discounts and most deliver directly to your address. How convenient is that!? Chinese people love online shopping. By the way, Taobao is a subsidiary of Alibaba group, the founder of the Alipay, so you can see the connection there.

Second, the environment has provided the perfect conditions for the Chinese to move to mobile payments—it’s cool have a smartphone, it's affordable, and companies offer incentives when you use your mobile for payment. There are referral programs, money rebates and sometimes drawings to win a prize. For example, when you use Alipay to pay for your meal the first time, you get the whole meal free! Obviously that created positive word of mouth and helped spread mobile payments quickly. Once the end user was hooked, payment providers knew the merchants would follow. It was a perfect storm

"There’s competition and big differences between the payment providers inside China."
Q: What are the common apps the Chinese use for mobile payments? Is it just Alipay and WeChat Pay?

A: Yes, Alipay and WeChat Pay are the most common mobile payment apps by far in China. Of course, there are apps from China Union Pay, one from the Chinese card scheme or mobile application from banks like ICBC, ABC etc… But customer don’t want to install so many different apps. They figure, if the two most common apps cover all use cases, why add more? All merchants accept the two big giants so why download more? Again, from a pragmatic standpoint, the Chinese think in terms of benefits and convenience. They also differentiate between social media based purchasing and online purchasing. The Chinese use Taobao for online shopping and WeChat for communication and money transfers.

There’s also geographical differences in terms of preferred payment behavior in China, For example, Alipay is a Hangzhou-based company so it's more common to use Alipay in the Hangzhou, Shanghai area. Alipay marketed heavily in this area and now they’ve locked down Shanghai, which is one of the major cities in China. On the other hand, the company Tencent, which operates WeChat, is headquartered in Shenzhen, which is Southern China near Hong Kong. In this region, there are more payments accepted from WeChat Pay than Alipay. It’s interesting to see the competition between providers inside China.

Q: So is it necessary to have both Alipay and WeChat Pay? Or can you get away with using just one?

A: I had the same thought about that before I was in China because, why bother? But, I realized fairly quickly that these two apps Alipay and WeChat, have very different functions. People get more benefits by using Alipay for online shopping while with WeChat pay, it's primarily a communication tool and used to send money to friends. Historically, the Chinese associate Alipay with payments because it's used to be an online shopping platform. This allowed it to seamlessly merge to the next level—mobile use and use at physical POS  via QR codes. WeChat Pay has had a historically social orientation, because it was designed to function like WhatsApp and Facebook. The money transfer function was developed a couple of years ago and makes it easier for P2P transfers.

So Alipay and WeChat Pay are competing with each other, but occupy different niches in the Chinese payment market.

"WeChat gained 8 million users with one function."
Q: So is there any widespread use case for a payment app that isn’t covered by the normal WeChat or Alipay apps?

A: Yes! That would be the Chinese red packet, the traditional gift given during the Chinese New Year or for someone's birthday. Historically, money was put into special red envelopes but now there is a digital version and it's  good news for people like me, who live abroad. It makes it easier for us to receive the red packet money from our relatives. It also eliminates the need to go to the bank and do all the physical work; withdrawing all new notes (because it's tradition to fill the envelope with new paper notes), spend all that time filling red packets and distributing them and all that jazz… Nowadays it’s just a click, which is so much easier.  

Q: So who started the red envelope idea? Alipay or WeChat Pay?

A: Can you guess? Think about the social element and the money transfer…

Q: Was it WeChat Pay?

A: Yes! The company rolled out this functionality during the 2014 Chinese New Year period and it went viral because everybody in China was so curious about the new digital envelope function. It was fun for people to try out and it caught on very quickly. It was a huge success for WeChat Pay, which had a boost of 8 million users due to this function.

Q: Could you share with us what a typical day is like using these mobile payment apps?

A: Sure! So in the morning I take a bike-share to school. I scan the QR code on the bike using my Alipay QR code scanner and I can take the bike immediately, and the charges are automatically deducted from my bike app that is linked to WeChat. While I bike somewhere, I use my Alipay again to get my breakfast, sometimes I get a discount because the retailer has an extra QR code for special offers, so I usually scan that first before I scan the QR code for payment. In the afternoon, I go out with friends for lunch and we have to scan the QR code on the table using one of the apps (depends on which food catering app they support) and view our menu and order on the app. Once we finish lunch somebody will pay for the whole meal in advance on their phone, then we split the bill on WeChat using the “Go Dutch” function. Since I was in school all day and have no chance to go to the supermarket, I use the API app from the Alipay to do quick grocery shopping and choose to have it delivered to the student dorm by the time I get back. At night, I go out late and the metro is no longer running so I can use my Alipay app to arrange a taxi and that is sort of like Uber, where it is paid after the ride is done.

"There will be more biometric payment technology options in the future."
Q: Do you have any prediction for what features will be available on these apps in the future?

A: Right now Alipay already has the “face recognition” payment at particular places like KFC in Hangzhou, but it’s not popular yet in the market. I was walking in Chengdu the other day and there was a road show promoting this face recognition payment thing. I was so excited to try. The people from the roadshow were very nice and showed me what I should do by picking a product and scanning the product’s barcode in front of the face recognition machine. I stood in front of the machine and it scanned my face to pay. Since I was a tourist there, I could only test it. It wasn’t offered to me. They only offer this feature to locals. My face would not be recognized by the machine. From what I know though, WeChat Pay does not have this feature yet.  

Alipay and WeChat Pay both have a voice recognition payment function, fingerprint authorization etc… So I believe that there will be more biometric payment technology options in the future. I can imagine the big apps want to move from using your phone to pay, to using your physical body. At that point, there will be no excuse not to pay—you can’t say “I left my wallet or phone at home!”  

I can also imagine that this will work in conjunction with the mandatory social credit system in China in the future, but that’s another topic outside of payments, for now.

"Europe can learn a lot from China regarding app positioning."
Q: How about cash nowadays? Will the shop owner give you a dirty look if you pay in cash?

A: Good question, it is indeed happening that some shops don’t even bother to accept cash and simply put a sign in front of the café/shop saying “no cash, WeChat/Alipay only.” As an end customer, or tourist, you can’t do anything but just walk away and find another shop. If more and more shops reject cash, that would be a problem. From what I know the Chinese central bank has already taken action against this. Last year they launched a campaign to encourage people to report which shops reject cash because it’s illegal to do that in China. The central bank sees RMB (the Chinese currency) as legal tender and they do not want to hurt their own currency through the domination of mobile payments.  I’d say that, for the most part, small retailers are happy to get any payment they sometimes  have difficulties giving you back exact change.

Q: What can Europe learn from China in regards to payment apps?

A: I think Europe can learn a lot from China in regard to how the payment apps in position themselves in the market. I think competition in the payments space is widespread and a global phenomenon. All the big tech firms are fighting to be the best, and to be the only payment app in the market—from Google Pay to Apple Pay to Amazon Pay.  Instead of vying for ultimate supremacy, the example of Alipay and WeChat Pay in China has taught us that when companies focus on one strength or try to suit a particular consumer need they are successful. It’s a matter of coopetition instead of competition. This is especially true on the social side, in my opinion, because it makes life so much easier if you can send money to a friend via chat. I know WhatsApp is trying something similar in India, but it would be nice if payment apps in EU could work in that direction to make a chat-based payment app.

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