Non-Cash China, a mobile frontrunner

e-Commerce, Mobile Transactions and Data Wars

Non-Cash China, a mobile frontrunner

by Pininvest Analysis

One of the most striking game changing developments in China over the past 5 years has been the explosive growth of mobile payments

Out of a total population of 1.4 billion,  around 527 million people have been using  mobile payment in 2017, up from 125 million in 2013 

Source M.Meeker report 2018 Kleiner Perkins

China today is the largest retail market in the world

  • 42% of in-store purchases are done via non-cash payments
  • 75% of all online payments are mobile
Aug '16 statistics - indicative 2017-2020 trend

Sourced from the May 2018 report edited by Mrs Meeker (Kleiner Perkins), mobile transaction volume, combining all financial transfers at retail, in business and between individuals, has been estimated to grow from $5.5 trillion in 2016 to $16 trillion, striking fear into the hearts of all financial institutions

  • in China where the authorities see monetary control slipping away
  • worldwide where the advent of non-cash societies bodes ill for the intricate network of payment processing
Source M.Meeker report 2018 Kleiner Perkins

Skipping credit cards, cutting banks and credit card companies out of the loop, China’s non-cash experience is dominated by digital wallets, with Alipay from Ant Financial (Alibaba) and TenPay (Tencent) together controlling more than 90% of the mobile payment market in China

The lightning speed with which digital payments have been adopted has much to do with a less developed traditional banking system, but the aggressive competition between Alibaba and Tencent, both keenly aware that their sway over a payment system is a matter of life or death, rocked the market with an ever accelerating rate of adoption (+ 210% rate increase 2017/2018)

Because of the dominance of credit cards in the US and in the other developed economies, no sensible comparison with the much smaller acceptance rate of digital wallets (at $ 377 billion in 2017 after including Apple Pay and Paypal) should be made

  • Alipay, the mobile wallet launched in 2004 by Ant Financial, Alibaba’s financial affiliate, has owned about 80 % of the mobile market in 2013/2014 but the digital wallet was a middling gimmick with limited market penetration at the time. As of 2018, with 520 million active users and relying on Alibaba's strength in e-commerce, the application runs 53 % of total transactions and 61.5% of business-related transactions
  • The launch of Tenpay by Tencent in 2013, as the mobile wallet of Chinese social messaging app WeChat brought about a profound transformation, with Alibaba defending its hold on e-commerce payments aggressively while digital payments went mainstream, growing exponentially for both companies. On the strength of the ubiquitous WeChat messaging system, Tenpay announced 1 billion monthly active users as of February ‘18.
Source ASEAN Today (January '18)

The base concept – a transfer from supplier account to client account or between two individual accounts for a very low fee (0.6% on average) using QR codes, a type of black-and-white matrix recognized by digital scanners.– has in effect extended the reach of Ant Financial and Tencent with options of

  • automatic transfer of client account balance on the company’s money fund, earning interest (which turned out to be higher than the interest on offer in the Chinese banking system)
  • swift credit approval to suppliers (with account tracking giving the necessary insight to evaluate the request)
  • multiple financial services including mutual fund investment and insurance products

This has been enough to establish the Ant Financial monetary fund Tianghong Yu’e Bao as the premier fund in the world – topping Yuan 1.7 trillion (approx. $270 billion) at the end of Q1-2018 before the monetary authorities tightened regulatory constraints to secure some balance in the financial markets

Tianghong Yu’e Bao fund - Source WSJ 29July'18

Since 2016, as the outsized weight of Ant Financial started to take hold in the wake of  the new transaction formats, Chinese regulators have sought to strike a balance between monetary control and  the multiple advantages of disruptive innovation

As an engine powering domestic consumption, the flexibility of digital payment was unparalleled - and remains unstoppable; its advantages are very much in line with official policy supporting domestic buying power

The vast trove of data collected from millions of consumers may ultimately be the greatest prize, certainly for the companies but for the Government as well

Very consequential, the spending profiles and the financial data of millions of individuals and businesses will

  • give physical stores partnering with one of the digital companies access to reams of data on their customers habits
  • turn into an entry point to pitch financial products like loans, investments and insurance products
  • help train AI algorithms
  • create a world-beating force in third-party advertising

Unsurprisingly, both companies entertain grand plans in cloud computing, data analytics and AI

To extend the reach of Chinese influence beyond the borders in all of South East Asia, the payment systems might be viewed as the ultimate model of soft power

While the domestic Chinese market is maturing, most Asian neighbors (with the exceptions of Singapore and South Korea) present the under-banked characteristics which powered digital penetration in China, potential growth beckoning....

 

Our folow-up reports will cover

Pininvest Analysis

Pininvest Analysis

Experienced professionals, seeking to combine financial acumen and business expertise