United Nations: Research report on China's social and e-commerce platforms and China's digital payment ecosystem

The Better_Than_Cash_Alliance under the United Nations Environment Programme released a report titled "Social Networks, e-Commerce Platforms, and the Growth of Digital Payment Ecosystems in China". The report believes that China is already significantly ahead of the world in the field of mobile payments, with the highest penetration rate. The report also highly praised the achievements of China's WeChat Pay and Alipay in promoting cashless payments, and summarized the successful experiences of the two companies, suggesting that governments and institutions around the world learn from their experiences and promote them.

1. The development of China’s digital payment market has attracted global attention

The report points out that China has developed digital payment methods using existing platforms and networks to bring a wide range of financial services, creating new value and opportunities for individuals and businesses. According to a report released by McKinsey in 2016, digital financial services could contribute $3.7 trillion in output value to the world by 2025, equivalent to a 6% increase on the current level. For China, this means an increase of $1.05 trillion, equivalent to a 4.2% increase in GDP.

Before 2010, China was still a society heavily dependent on cash. In 2010, 61% of retail consumption in China was mainly carried out through cash transactions, even though the average person had 1.8 bank debit cards at that time. The reasons for this phenomenon include people's greater trust in cash, convenience of transactions, and habits. However, this situation soon changed due to the development of e-commerce. In 2015, the proportion of cash transactions had dropped to 40%, while in 2016 cash transactions still accounted for 45% of all transactions in the UK. From 2010 to 2015, the proportion of Internet payment and mobile payment in retail consumption increased from 3% to 17%.

The report predicts that in 2020, mobile payments will account for 12% of China's retail payments, other online payments will account for 16%, cash payments will account for 30%, and bank card payments will account for 41%.

At the same time, China's offline retail industry is also very developed in non-cash use. China UnionPay is the main offline payment and clearing provider, with 26.7 million cooperative merchants nationwide. Now the average Chinese person has 3.1 cards. The latest POS terminals are required to be embedded with NFC and other technologies to support mobile payment functions.

The rapid growth of the non-cash ratio is inseparable from the rapid development of China's mobile Internet. China's mobile Internet charges and mobile terminal costs are rapidly decreasing, which has promoted the prosperity of the market.

Alipay handled $1.7 trillion in payments in China last year, compared with just $70 billion in 2012. Alipay's biggest rival, WeChat Pay, handled $1.2 trillion in payments last year, up from $11.6 billion in 2012.

Thanks to its dominant position in e-commerce, Alibaba's Alipay has firmly held about 50% of the Internet payment market share, while Tencent's Tenpay has maintained a market share of around 20%.

In the field of mobile payment, Tencent's Tenpay was initially suppressed by Alipay, but eventually it quickly opened up the offline mobile payment market through the high frequency of WeChat and the expansion of offline merchants. In 2014, Alipay's share of the payment market was 82.3%, and WeChat accounted for 10.6%. By 2016, Alipay's share fell to 68.4%, and WeChat Pay's share rose to 20.6%. Given the monopoly of Alipay and WeChat Pay, other manufacturers such as Apple Pay and Xiaomi Pay have basically no presence in the Chinese market. Statistics show that the total amount of mobile payments of other manufacturers is less than a fraction of the two giants.

Under the pressure of WeChat, Alipay tried social networking but all failed. Because of this, Ant Financial started early and acted quickly in asset management and credit investigation.

It can also be seen from the figure below that Alipay is ahead of Tencent in the layout and revenue of various financial businesses, but in terms of active users of payment software, WeChat has reached 800 million people, while Alipay has only 450 million. The huge user scale will become the development advantage of WeChat Pay.

In the field of mobile payment, China UnionPay and a large number of mobile phone manufacturers have suffered a setback. UnionPay has begun to lose hope in NFC payment and has started to develop mobile phone software scanning payment promoted by Alipay and WeChat. Major banks have also launched QR code payment interoperability plans with Alipay or WeChat Pay.

The report believes that one reason for the explosive growth of mobile payments in China is that China has not yet entered the credit card era, and card payment is not popular, which allows Chinese consumers to skip credit cards and directly enter the mobile payment era. In the European and American markets, card payment is quite convenient, and consumers believe that mobile payment has not significantly improved user experience compared to card payment, and it is not worth the trouble and trial.

2. China’s experience and benefits in promoting digital payments are worth learning from around the world

1. Innovative financial services are very popular and benefit the general public

Take Alipay, launched by Ant Financial and Tianhong Fund, for example. This money fund service has attracted a large number of users with its low risk, high returns and convenient access. The size of Yu'ebao's funds has increased from 200 billion yuan in 2013 to 810 billion yuan three years later, serving more than 152 million users, becoming one of the largest funds in the world.

2. Digital finance has significantly increased economic activities of merchants and users

In September 2016, Ant Financial lent 740 billion yuan to 4.11 million small and medium-sized businesses. The new business model enables loans to low-income groups in China, where 79% have bank accounts but only 10% can obtain loans from traditional financial institutions. Huabei was launched in 2014. During Singles’ Day in 2016, users spent 26.8 billion yuan through Huabei.

3. Effective incentives and obvious benefits play a significant role in attracting users to use digital payments for the first time and building loyalty

Take WeChat red envelopes as an example. If users want to send and receive WeChat red envelopes, they need to link their bank accounts to WeChat. In the first week, WeChat attracted more than 8 million users to use this service, and the number of newly added bank accounts reached millions. During the 2017 Spring Festival, WeChat users sent a total of 46 billion red envelopes, 43% higher than the 2016 Spring Festival.

4. New credit data becomes available, especially for low-income people and small and medium-sized enterprises

Ant Sesame Credit covers 350 million real-name registered users and 37 million small and medium-sized enterprises doing business within the Alibaba system. With user permission, these data are also being widely used by the government and private enterprises.

5. China’s major payment players are rapidly expanding overseas and acquiring new fintech companies

Users can now use Alipay and WeChat Pay in Thailand. Alibaba has invested in PayTM18 in India, while Tencent has invested in PayU in India. Tencent has also co-founded payment companies with other companies in Africa.

3. Governments, businesses and people can develop digital payments based on their own national conditions

Based on the experience of two major Chinese payment companies, foreign payment providers can:

1. Use existing e-commerce or social platforms to increase user stickiness to payment through effective incentives: For example, Tencent WeChat has built a widely used payment service on the existing platform. China's major payment providers have come up with various ways to increase user usage of payment, such as coupons, discounts, and gamification combined with local popular culture.

2. Keep the payment platform open to attract innovators to seamlessly integrate innovations. For example, by opening SDKs and APIs, small and medium-sized enterprises can add innovative services based on user needs and preferences, thereby expanding the ecosystem.

3. Make services available everywhere through cross-platform ecosystem services. Both of China’s two major payment companies provide cross-platform payment solutions that can be used on iOS and Android terminals, not limited to a certain brand.

For the government, the lessons from China’s experience are:

1. Create a favorable environment and balance innovation and risk regulation

2. Prioritize investment to accelerate digital construction. Take China as an example. In 2016, China had 530 million 4G users, more than the United States and Europe combined. In the next three years, China will invest 1.2 trillion yuan in broadband and mobile access.

The government and enterprises should also work together to promote the following:

1. Encourage public-private partnerships to develop a unified user authentication system or similar methods to identify players

2. Apply the successful payment experience on the instant messaging platform to your own market