Caixin
Feb 09, 2017 06:22 PM
BUSINESS & TECH

China’s Battle Over Virtual Wallets Intensifies

Illustration: Hu Yuanyuan/Caixin
Illustration: Hu Yuanyuan/Caixin

(Beijing) — Private tech giants have battled fiercely over the past few years to change the way Chinese people pay for their daily expenses, promoting online and mobile app services. Now the war for wallets is becoming more cutthroat as state-owned financial institutions are fighting back to snatch their share of the market that’s worth tens of trillions of yuan a year.

During the holiday season between December and February, online payment providers and vendors have been fighting to win shoppers by offering big discounts and gift coupons. This year, the competition has heated up as China UnionPay, the country’s only bank card association, and a group of partner banks joined the fray with lucrative offers on their own mobile payment platforms.

In December, UnionPay launched a series of promotional campaigns in partnership with banks and 20,000 stores to encourage shoppers to use their mobile payment apps with the hope of winning back the business lost to third-party payment providers Tenpay and Alipay.

A Huge Market

At stake is the world’s largest mobile payment market, involving 35 trillion yuan ($5.1 trillion) in transactions in the third quarter, according to data from the central bank. Transactions handled by nonbank third-party payment providers surged 106% year-on-year to 26 trillion yuan during the same period. The gains were driven by the growing popularity of Quick Response (QR) code payments, a function that allows shoppers to pay by scanning a black-and-white bar code with their phones.

Alipay, the payment service run by Ant Financial Services Group and controlled by Alibaba Chairman Jack Ma, and Tencent’s Tenpay, which operates the payment option in the messaging app WeChat, jointly control nearly 70% of the mobile payment market.

Also in December, UnionPay issued its version of technology and security standards for QR code payments, marking a foray into the market while moving to bring some payment services into its network.

In January, UnionPay announced that the online payment unit of JD.com became its member. This extended the bank-card operator’s network in China to over 120 third-party payment platforms with the notable exception of Alipay. The membership allows payment companies to connect and switch between different banking systems that have joined the UnionPay settlement network.

Industry experts said UnionPay is gearing up to take back the territory it lost to tech firms after it moved too slowly into the sector.

UnionPay’s entry, coupled with a series of new government regulations designed to tighten scrutiny of online payments, is likely to shake up the landscape.

“Compared with the traditional market, the biggest difference with the mobile payment market is that it maintains equilibrium for only a very short time, and the market balance can be changed quickly by the new technology. It also poses great challenges to regulators,” said Zhao Yao, a financial professor at China University of Political Science and Law in Beijing.

The war waged by UnionPay is still unfolding, but “whether UnionPay can win back some market share this time and how it will play the game will determine the future of the QR code payment business in the banking sector,” said a bank source who asked not to be named.

Fighting Back

UnionPay has lost tens of billions of yuan in revenue because mobile payment transactions, including those made using QR codes, don’t go through its system and so UnionPay doesn't get a fee.

In May 2014, the central bank suspended QR payments, citing security concerns surrounding identification and potential theft of consumers’ personal information and money.

In spite of the temporary ban, QR codes proved such a popular way of paying for goods and services that the market continued to grow, albeit in a regulatory gray zone. In August 2016, the central bank issued rules to regulate QR-code payments and eventually lifted the ban on the sector.

UnionPay has since 2015 bet on near-field communication (NFC) technology in its mobile payment attempt. It launched the QuickPass contactless payment service, which allows users of smartphones equipped with NFC function to make payments by waving their devices at UnionPay point-of-sale terminals. But the NFC service has grown slowly due to the equipment requirements for both shoppers and vendors.

According to Ding Linrun, general manager of UnionPay’s product department, the company expected to profit from 24 billion yuan in transactions in 2016 in Shanghai Disneyland Park after UnionPay obtained exclusive rights as the payment service provider. But it later found many vendors inside the park adopted QR code payments for Alipay and WeChat users. It is unclear how much UnionPay lost compared with its projected revenue from Shanghai Disneyland to its tech rivals, but the company has switched its focus to QR payment service starting this year, Ding said.

Some industry experts have cast doubt on UnionPay’s late move toward QR payments, but others said there are still plenty of opportunities as mobile payment services expand to smaller cities and the countryside. “The future focus of China’s mobile payment market will be third- and fourth-tier cities, and the key is to win vendors” by safe and convenient services, a UnionPay employee said.

The key to success also relies on whether UnionPay can cooperate with its partner banks and quickly promote their QR-code payment services as a joint force, the employee said. UnionPay’s recent move to launch QR-code payment standards is part of its strategy to connect its services with different banks and put all payments under its network.

But banks are also considering promoting their own mobile payment services to maintain their direct access to users. Last year, the Industrial and Commercial Bank of China and China Construction Bank both launched QR-code payment products that comply with UnionPay’s standards.

Game Changer

The payment market also expects major changes as regulators step up to put the sector under closer scrutiny after years of wild growth, analysts said.

On Jan.13, the central bank issued a policy requiring all third-party payment providers to gradually move their customers’ funds into a special interest-free account, cutting the companies’ revenue sources from interest generated by the funds.

The policy is likely to pose great challenges to payment firms’ business, especially the small ones, as it cuts their major profit source, analysts said.

Data from the central bank show that by the end of the third quarter of 2016, funds temporarily stored in the bank accounts of third-party payment firms amounted to 460 billion yuan. Alipay and Tencent’s Tenpay combined made up 70% of the total.

Many small companies have relied heavily on interest earned by those funds. Nearly 85% of the net profit all third-party payment firms made in 2015 came from interest payments, according to the central bank.

The government policy came after a series of other measures initiated by the central bank since February 2016 to tighten regulation on the payment sector. These included orders to crack down on unlicensed online payment service providers; adjusting interbank money transfer fees; and creating a new online payment clearinghouse, which will settle all online transactions following standard protocols and rules under the central bank’s supervision. The new clearinghouse is set to begin operating in late March.

The tightening supervision is expected to force many small players out of the market.

“Only a handful of companies will survive,” said Tang Ling, vice president of Lakala Payment Co., a major third-party payment platform.

One analyst said: “It is hard to judge now how the mobile payment market will change. The next six to 12 months is the key period to watch.”

Contact reporter Han Wei (weihan@caixin.com)

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