China’s Amazing Cashless Conversion

While there is still much in the way of debate in the U.S. and the rest of the developed West about the shape of things to come with the mobile and digital payments revolution that remains in nascent stages, on the other side of the world in China, the waiting has ended.

The mobile revolution is here.

Paper money — The New York Times writer Paul Mozer recently noted in a column — is seemingly dying a swift and unceremonious death in the Chinese market, as just about everyone seems to be using their smartphone to pay for just about everything.

“At restaurants, a waiter will ask if you want to use WeChat or Alipay — the two smartphone payment options — before bringing up cash as a third, remote possibility.”

And while to American audiences who are perhaps just beginning to warm to the idea of using Apple Pay or PayPal in a physical store, more interesting is that a short three years ago cash was very much still king among Chinese consumers, as card use has always been a somewhat limited phenomenon.

“From a tech standpoint, this is probably one of the single most important innovations that has happened first in China, and at the moment it’s only in China,” said Richard Lim, managing director of venture capital firm GSR Ventures.

Beyond the tech standpoint — and even past the rather impressive numbers, though — is a completely different street-level experience in China, noted Mozer.  A very short time ago, being a cash customer was just the norm when in a Chinese mainland city. But these days, he said, it makes one stand out as something of a foreign nuisance. Something he learned in his first few weeks — when a banking snafu left him unable to properly activate WeChat or Alipay for day-to-day use.

“At coffee shops and restaurants, I held up lines as I fumbled out my wallet and peeled off the bills to give the cashier. If I was hungry, I had to go outside and find a restaurant, while bowls of noodles, groceries and coffee materialized at our office, ordered by my colleagues and paid for on the phone. If I had to get somewhere, I couldn’t use my phone to unlock one of the ubiquitous bicycles that are a part of China’s bike-sharing craze.”

The Mobile Swap — by the Numbers and Beyond

In 2016, the value of smartphone payments in China hit $5.5 trillion — compared to the $112 billion market in the U.S., according to IR Search.

That roughly 50-fold difference in size denotes that in the U.S — and to a somewhat lesser extent, Western Europe — mobile payment is an emerging option that is still finding footing with use cases.

In China by comparison, mobile payments are increasingly a baked-in part of the fabric of commerce — literally all of it, down to the street musicians of Shanghai and Beijing who put up boards with QR codes on them so passersby who no longer have cash and coins easily at hand can still pay them.

“It has become the default way of life now,” said Shiv Putcha, an analyst with the research firm IDC. “Literally every business and brand in China is plugged into this ecosystem.”

Remarkable Dedication

China’s break from cash itself isn’t completely unprecedented. Many Northern European nations have also nearly entirely eschewed cash, but those are economies where payment cards have an extremely active presence.

In China, cards have nearly been entirely leap-frogged by Ant Financial and Tencent and the payments platforms they run, WeChat and Alipay.

According to Richard Lim, Ant Financial and Tencent could both potentially  surpass credit card companies like Visa and Mastercard in total global transactions per day in the coming year, as they offer merchants a cheaper and more accessible QR-based option that is more desirable than a more costly upgrade to payments terminals for cards.

That nearly ubiquitous presence among merchants online and off in China’s major retail sector has lead to an incredibly mobile-dominated marketplace full of some very loyal customers.

At present, according to analyst Matthew Brennan, Alipay and WeChat Pay collectively control some 67 percent of the Chinese payments market in major cities — compared to Union Pay’s 22 percent and cash’s 11 percent.

Apple Pay, which launched in China over a year ago? Less than 1 percent. And not for lack of trying or interest. Apple went into the market with an alliance with Union Pay — the nation’s only state-backed issuer of six billion cards that are accepted at major retail stores all over China. They also enlisted participation from 19 Chinese banks, including its four largest. They even managed to get three million customers to link their cards to an Apple Pay account within the first two days the service was available.

Full speed ahead? Not so much — it didn’t even make so much as a ripple in the marketplace. According to Brennan’s data, 67 percent of store clerks have no idea how the service even works — and built in, smartphone-based payments tools are an order of magnitude less popular among Chinese consumers than app-based systems that use the more understandable and accessible QR codes.

Those mobile apps, by the way — and the services that make them possible — are actually much more popular with consumers than the phones that house them among Chinese consumers. When asked what they would do if they could not access WeChat on their iPhone, 55 percent of consumers said they would immediately switch to an Android model, and another 26 percent said they would hack their iPhone so they could continue to use WeChat.

WeChat and Alipay enable consumers’ day-to-day lives in China. The phone is just the tool that allows them to do it.

The Potential Problem

The problem China’s dominant mobile payment systems could have is essentially becoming victims of their own success in getting in early with mobile payments and building a system that functions perfectly for one (admittedly huge) class of consumers.

“There is a corollary for what could happen here. In Japan in the early 2000s, flip phones could do everything from stream cable TV to pay at stores. But because the phones were so advanced, Japan was slow to adopt smartphones, and it went from tech giant to tech laggard in 15 years. Now in Japan, those flip phones, which are still being used, are called Galápagos phones, because they evolved perfectly for an isolated environment,” Mozer noted.

Analysts have found that the risks here are somewhat different — starting with the fact that China’s market for mobile payments is a much, much larger market than Japan’s smartphone market.

And, it seems, Chinese firms, particularly Ant Financial’s Alipay, are acutely aware of the need to make Alipay a globally accessible system. The company has spent much of the year building on that goal with its attempted acquisition of U.S.-based MoneyGram, not to mention high profile extensions in Thailand, the Philippines and (through a variety of channels) India.

“We are always looking for where there is volume and where we can serve a lot of consumers. It is more than what’s next — it’s what have we done well in China that we can leverage well overseas. Lending, credit insurance, savings — all these things we are doing. We are a network in our own sense. So, now if I am a wallet user in the Philippines coming to the U.S., I have a way to pay,” Alipay North America’s President, Souheil Badran, told Karen Webster on stage at Innovation Project 2017.

The New Million Dollar Question

“The million dollar question is: Will Western firms decide to build a system and compete?” GSR Venture’s Richard Lim asked at the end of the New York Times piece. “The answer is probably yes.”

But as Apple and various other newer entrants to the market have spent the last two years learning, competing with a way of life is a lot harder than competing with a product. Just because Western firms build it, doesn’t mean Chinese consumers will come.

And, given how quickly the mobile players in China have successfully converted the masses to mobile, perhaps the next million dollar question to ask, particularly now that Alipay is on such an assertive international expansion-oriented path, is: Are Western players really ready to compete with their Chinese counterparts in China specifically — or even on the world stage?