In Depth: State-Backed UnionPay Wants to Challenge Alipay and WeChat

In the last few years, China has embraced third-party mobile payments and two names have come to dominate this massive market. Ant Financial’s Alipay and Tencent’s WeChat Pay together have an over 90% market share.

The market, which has over a billion customers, is effectively a duopoly.

However in the last few years, a challenger has emerged, offered by China UnionPay — China’s largest payment and settlement organization that operates under a central bank mandate.

The service, called QuickPass, has 160 million registered users, up from 100 million at the end of November. “Our target is to reach 250 million registered users by the end of this year,” said a UnionPay staff member who declined to be named. Even if it hits this goal, it will be far behind the big two. Alipay has over 1 billion registered users.

“It is estimated that the duopoly market of Alipay and WeChat Pay could start to be disrupted when QuickPass’ number of registered users reaches somewhere between 400 and 500 million,” the staff member went on to say. “We expect it to happen sometime in 2020.”

However it is not clear that QuickPass will be able to drive its user base that high, whether it can convince its registered users to become daily users or indeed what the ultimate purpose of the platform should be.

Breaking barriers

China’s online banking world has long been segmented, with banks each operating and promoting their own mobile apps without much interconnectivity. This is seen as one of the major reasons why Alipay and WeChat Pay grew so rapidly — their mobile payment services broke through the online payment barriers erected by different banks.

In a bid to compete, UnionPay launched QuickPass at the end of 2017, backed by the central bank with the cooperation of many commercial banks.

QuickPass said it would boost interconnectivity by bringing together the services provided by banks’ dedicated mobile apps into a single platform, including bank transfers and mobile payments — seemingly posing a direct challenge to Alipay and WeChat Pay.

However, unlike those two platforms, QuickPass focuses on bank cards and offers various card management services, such as applying for credit cards, making interbank transactions and payments, and managing statements.

QuickPass allows users to check their balance on debit cards issued by 21 national commercial banks, around 130 city banks and about 180 rural banks across the country. It also supports credit cards repayment for 120 banks nationwide and applications for 110 types of credit card issued by national banks.

Some argue financial regulators want to see UnionPay and the traditional banks reclaim their crown as the main payment and settlement channel in the next few years.

Observers note that QuickPass does have advantages over the mobile payment duo in terms of both compliance and interconnectivity. For example, a client of China Merchants Bank can use QuickPass to send money to many other banks by scanning a QR code, but the QR codes of Alipay and WeChat Pay are incompatible.

Fighting for users by offering subsidies

Alipay and WeChat Pay won over users and businesses in part by spending big on discounts and subsidies. This technique was effective, but costs ran into the billions of yuan a year.

UnionPay has followed this strategy. Its “UnionPay 62 Festival” — a three-day event during which users are offered 15% cash rebates on their spending, among other rewards — brings in a variety of banks and companies. This year, those that connected a UnionPay card to their Huawei Pay app had the chance to win a new handset.

During the festival’s three days, the average number of daily UnionPay QR code transactions and QuickPass transactions were three times and two times higher than during the 2018 festival, respectively. A total of 600,000 merchants participated, three times more than the previous year.

But luring in new users this way doesn’t come cheap.

“Marketing costs could have been well over 10 billion yuan ($1.46 billion) last year,” one person close to UnionPay told Caixin. “UnionPay has 35 branch offices. Those that spent less than 100 million yuan on marketing last year were named and shamed. This year marketing and promotional costs will be 8 billion yuan at least. And this is a very conservative estimate.”

UnionPay has also tried to lure smaller merchants to QuickPass by allowing them to transfer cash for free. In online payments, merchants and consumers are effectively two sides of one coin — one side’s existence supports and bolsters that of the other side. The more merchants sign up, the more motivated consumers become to use QuickPass.

But some question whether UnionPay can afford to keep up this spending on marketing. Even deep-pocketed Alipay and WeChat Pay have started to scale back such subsidies.

Aiming for more daily users

While promotions might convince people to sign up to QuickPass, the platform has struggled to boost one of the most important metrics of success in this market — the number of daily active users.

Of QuickPass’ 160 million registered users, only around 18 million use it daily. Alipay has 1 billion daily users.

QuickPass’ goal is to hit 40 million daily users by year end. To do so, UnionPay is leveraging its banking connections and increasingly resorting to cross-selling financial products, rather than competing in mobile payments alone.

As consumer credit and wealth management products are frequently traded, cyclical and usually lead to repeated transactions, these types of products are widely seen by UnionPay staff members as an effective way to increase the platform’s “stickiness.”

An example of this is a consumer loan product provided by Xinwang Bank, a private bank in Southwest China’s Sichuan province. Since “Good Man Loan” was launched on QuickPass in March, more than 210,000 loan applications have been received — even with minimal marketing.

The first — and so far, only — wealth management product on QuickPass is offered by China Guangfa Bank, but sources close to UnionPay revealed that other banks will soon roll out their own products on the platform.

QuickPass is also looking at widening its offerings. Someone with inside knowledge told Caixin that QuickPass wishes to link users’ bank accounts to money market funds so they can use a function of such funds called “T=0 redemption” when making payments. This allows users to put money into funds and then pull it out on the same day, allowing them to use that money to make payments while leaving as much as possible in the fund, therefore securing the greatest returns. This function — which not all funds offer — allows users to manage their money with greater flexibility.

China’s largest money market fund — Alipay’s Yu’e Bao — works this way. But QuickPass’s advantage over Yu’e Bao is that it has access to its users’ debt and credit card information. This access could help QuickPass provide extra services like balance management and transfer.

Many more wealth management products with different underlying assets could be introduced in the near future too, such as bond funds, wealth management insurance and precious metals. In that case, QuickPass will be working not only with traditional banks, but also with financial institutions ranging from securities firms, fund managers, trusts, to insurance companies, and even regional equity exchanges.

UnionPay’s subtle relationship with banks

Generally speaking, banks have been willing to work with QuickPass because it has brought in significant numbers of customers. Although many banks have their own product promotion channels, most are pleased to have another string in their bow and to achieve better sales figures.

This is particularly true with small and midsize banks, which don’t have the cash or knowhow to build their own apps. For them, working with QuickPass is a cost-effective way to attract and engage with potential customers.

However, the relationship isn’t as close as it might seem, especially with the larger banks. “This is because many banks eventually want to promote their own apps,” commented a banker.

The fundamental reason that larger commercial banks are working with and promoting QuickPass is that they have been ordered to do so by the central bank. While they have no choice but to do so, they are not making QuickPass their priority. Banks are mostly focusing on promoting their own apps, leaving them with few human or financial resources left to promote QuickPass.

UnionPay is therefore in a rather awkward position.

“It’s all down to lack of regulation over payment giants in the past few years and the fact that banks all want to do their own stuff,” said a worker at a bank’s credit card department. “It created a good chance for the two payment giants to fully utilize their duopoly position to take on the banks one by one.”

Ultimately it’s a question of what business UnionPay should be in. Should it be in the payment business, in which it, acting on behalf of banks, competes directly with Alipay and WeChat Pay? Or should it be in the traditional banking business, making money by diverting users to other banks?

Some industry experts seem to favor the former, pointing out that UnionPay in principle is a settlement organization. Under no circumstances will it venture into traditional banking businesses such as opening its own bank accounts, developing banking products and managing a proprietary capital pool. Nor will it get into the bank card business. QuickPass is nothing more than an aggregation platform that diverts users to various financial products provided by commercial banks. Therefore it doesn’t have a conflict of interest with banks, and will not weaken banks’ position either.

Whether the alliance between UnionPay and the banks can excel in the mobile payment market so long dominated by Alipay and WeChat Pay is another question.