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E-wallets dominate China, an analysis of the trend

  • E-Wallets: meaning and classification
  • Widespread acceptance of e-wallets in China
  • Comparison of PayPal, WeChat and Alipay on the operational parameters

 

E-wallets are known as digital wallets and are online analogues of physical wallets. One can use these to digitally store credit/debit card details in order to make payments as well as to store tickets, travel itineraries, loyalty benefits, etc. for transactions on both online and offline mediums. E-wallets like PayPal, WeChat Pay, Apple Pay, Paytm are referred to as open e-wallets as these are accepted by most merchants and are supported by a variety of payment options. On the other hand, wallets like Walmart Pay, MakeMyTrip, etc. have been restricted by vendors for purchase on their sites/apps only and thus are known as closed e-wallets. According to a report by the Zion Market Research, the global market value of mobile wallets stood at $594 billion in 2016 and is expected to grow at CAGR of 32% to reach $3142 billion in 2022. Increasing access to smartphones and the internet along with continuous advancements in technology are the prime contributors for a phenomenal growth of the sector.

China spearheaded the evolution of cashless society and is much ahead in the world in terms of mobile transactions. According to Xinhua News Agency, China recorded a mammoth $12.8 trillion mobile payments in the first 10 months of 2017, which was 38% higher than the previous year. Globally, a whopping 61.8% of the total mobile transactions are executed by Chinese ([Source: eMarketer], [figures represent mobile payments as a whole and not just e-wallets]). On a comparison, it was found that the number of e-wallet users on WeChat Pay and Alipay in China were approx. 800 million and 520 million, respectively. This easily surpasses others like Android Pay and Apple Pay with their user count at just 27 million and 87 million, respectively. The below graph represents a global share of digital wallets in terms of user count.

Let us now try to understand what China and its leading payment wallets; WeChat and Alipay are doing differently to be way ahead in the world.

First and the foremost, the Chinese people, both the consumers and the merchants have accepted transitions from cash to e-wallets with an open mind. In fact, China jumped from cash to a mobile payment society with not much of a history in credit/debit cards. On the other hand, the banking system was not so efficient and standing in queues to pay bills or withdraw cash was a time-consuming process. The ease brought through mobile payments was highly appreciated by people. Out of 772 million people using the internet in China, over 500 million are mobile payment users. China as a country has a maximum number of people using the internet (as shown in the below graph) even though the penetration of users on the internet is at 54%, which is lower than that of the US at 76.2%, the mindset of the people has given China an edge on the adaptability of digital wallets.

Secondly, the Chinese government has made remarkable investments in the IT infrastructure to promote digitisation in the country. It not only invests, but also acts as a developer and a consumer for digital wallets. The government believes that transacting digitally and integrating wallets in the growing network of mobile payments will promote economic growth and transparency. The regulatory framework is not as strict as that of the West, which has actually led Alibaba (Alipay is Alibaba’s affiliate), the company that controls sales, marketing, payments and delivery all by itself to expand exponentially through internal resources and synergies.

Finally, WeChat and Alipay are not solely limited as social media apps or payment wallets, instead, these offer a variety of services that have worked to their advantage. These services are not only used for merchant payments, but to book cabs, pay utility bills, order food, fix doctors’ appointment, transfer money to family and friends, read the news, provide approval for instant loans and even for unlocking a rented bicycle. The companies app are actually an amalgamation of various sub-apps into a single app, which has made the life easier and payments cheaper. Even for offline purchases, a user can simply press a pay button on the app and a QR code is generated which is unique and is scannable by a merchant. More and more retailers, especially restaurants have self-service scanners that can read QR codes and complete transactions in seconds.

These businesses began as social platforms or closed e-wallets and gradually gained loyalty and expanded their horizon to become open payments facilitators. This is completely opposite of the US, the world leader in digital payments, where card payments still rule the online payment market. The ecosystem built on QR codes is not as secure as the technology used by Apple Pay in the US, however, it is cheaper for merchants and thus is readily accepted in China. The financial services and social platforms are not yet combined in the US and people are hesitant to adopt mobile wallets due to security concerns. Additionally, the financial institutions in the US will suffer a huge set back if third-party wallets gain acceptance at the same rate as in China. According to a report by Bloomberg, the transaction fees of $43 billion could be lost by financial firms in the US to third-party payment vendors by 2020.

Further, the below table represents the contrasting world of e-wallets in China and the US and compares PayPal, Alipay and WeChat Pay on few key operational parameters (as of 2017). Even though PayPal, the US-based payment facilitator is available in over 200 countries, its user count is way lower than its counterparts; WeChat and Alipay by 252.4% and 129.1%, respectively. This is mainly due to an early and huge acceptance of these wallets (as already mentioned), along with the sheer size of the domestic market. Addedly, another crucial point that deserves a mention is the much lower transaction fee (0.9%-2.8%) for merchants if they adopt WeChat Pay than PayPal. In fact, foreign exchange transactions are also much costlier for merchants if they use PayPal than the other two payment assistors.

If one considers just WeChat and Alipay, which operate a duopoly in China then it can be observed that WeChat has been expanding its business mainly on the basis of volume. The average payment values for WeChat are lower as seen in the above table, however, its users and transactions processed per day are much higher. Alipay actually had a monopoly in China until 2014 when WeChat, which had around 500 million global users, initiated digital transfer of red envelopes (Hongbao), a South East Asian tradition of sending a monetary gift in a red packet. This led to an immediate and automatic adoption of digital wallet by subscribers of an already popular social media application. A well-established consumer base at a time when social media was a sensation gave WeChat an advantage over Alipay.

This crops up an interesting question. Has the Chinese market reached its saturation? With WeChat and Alipay holding more than 90% of the market share and 65% of the population using the internet, which already has access to smartphones, it is going to be tough for these companies to continue to grow at a fast pace. Furthermore, targeting a rural population to increase the number of subscribers is not possible in the short-term, which has been duly accepted by these companies. Thus, both have strategies in place to expand their global footprints, initially by focusing on Chinese students and tourists in the US and Europe. The international brands like Chanel, Burberry and Guess have already accepted these payment wallets as authorised partners. However, the competition beyond the local boundaries is fierce with players like Google Pay, Amazon Pay and Paytm promoting their brand aggressively through discounts and cashback and already have a strong foothold.

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