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China’s mobile payment market has grown to become the largest in the world. In 2018 alone, it handled approximately $532.8 billion mobile payment transactions, amounting to $66.6 trillion. Following the advent of the COVID-19 outbreak in China, the Payment & Clearing Association of China (PCAC) further encouraged the use of digital payments by issuing an initiative to encourage people to use mobile, online and barcode payments in order to minimize risks of infection. This is expected to boost mobile payment transactions in the country, with Global News Wire estimating a total of approximately $116.2 trillion in 2020, a surge of 31.8 percent on an annualized basis.
For the bulk of Chinese consumers, digital wallets have become a crucial aspect of their daily routines. Many sellers, ranging from small local businesses to multinational corporations, have also increasingly replaced cash payment with digital payment methods. In this article, we delve deeper into the story behind China’s success in going cashless, as well as some key takeaways from China’s success story.
How did the ‘going cashless’ movement start?
China’s remarkable transformation to becoming an almost cashless economy dates back to 2003. Alibaba, then a four-year old e-commerce platform, had initially required users to pay for their purchases using their bank accounts. However, one of the challenges it faced in the early e-commerce market was a lack of trust in online transactions between strangers, which had caused many users to hold off on online purchases. To resolve this issue, the company introduced Alipay – an online digital payment solution based on escrow, a financial agreement that involved having Alibaba hold on to the money until the buyer has signed off on receiving their goods, before releasing the money to sellers.
In 2008, Alipay officially launched its mobile e-wallet, which kicked off its exponential growth. Prior to the official launch, Alipay had taken five years to reach 100 million customers, however, following the launch, Alipay added 20 million new users in the first two months of 2009. As of June 2020 this year, Alipay boasts over 1.3 billion annual active users, and has successfully processed $17 trillion worth of transactions in mainland China over the course of a year.
Apart from Alibaba’s Alipay, another key player in the market for digital payment services is Tencent’s WeChat Pay, a payments product embedded in the popular Chinese social messaging application WeChat. Bolstered by the large user base and strong social component of WeChat, WeChat pay took off among Chinese consumers in no time. The wide array of functions offered by WeChat Pay provides users with a one-stop platform for all of their payment needs, allowing them to book taxis, split the bill at restaurants, and even gift virtual red packets to friends and family with the convenience of a tap on their mobile phones.
Together, Alipay and WeChat Pay have reshaped China’s payments landscape by creating a robust market for digital payment services, making up 53.8 percent and 38.9 percent of the digital payments market respectively.
What contributed to the rise of digital payments?
Quick Response (QR) codes
Much of the growth of Alipay and WeChat Pay has taken place on the back of QR codes. Although they were originally invented in Japan in 1994, QR codes never really gained traction until it began taking off in China in the early 2010s. Both Alipay and WeChat Pay introduced proprietary versions of QR codes in 2011 and by 2016, they had collectively accumulated over $1.65 trillion of transactions using QR codes.
For buyers, the introduction of QR codes offered a level of convenience that is unrivalled in the world of payments at the time. Simply by pointing their mobile phones toward a seller’s QR code, buyers will be directed to the payment page for that seller instantly. On the other hand, sellers, especially small shops and restaurants, can now skip over buying and setting up expensive equipment for mobile payments. Instead, all they have to do is print out a sign with their personal QR code that is linked directly to their bank account.
Unsurprisingly, this inexpensive and convenient mode of payment soon became ubiquitous among retailers, street vendors, and even taxi drivers. In fact, according to the FinTech Development Plan (2019-2021) issued by the People’s Bank of China recently, QR code payments will be interconnected with a universal code before the end of 2021. This will enable aggregate payments to be made using QR codes, which would further expand the digital payments market in upcoming years.
A rising middle class
China’s rapid economic growth in the past decade has also paved the way for a rising middle class. With more people shifting to urban living and increasing their consumption, following a rise in purchasing power, China has seen an increase in bank and smartphone ownership. Both of these trends have in turn contributed to the feasibility and popularity of digital payments among Chinese consumers.
Firstly, the advent of digital payments was able to piggyback on high levels of bank account ownership in China that resulted from a rising affluence on the middle class, according to an article by CGAP. This served as a foundation for users to set up and fund their mobile wallets, as Alipay and WeChat Pay were able to tap into pre-existing financial infrastructure such as bank accounts and bank cards to facilitate their own payment systems. Being classified as “third-party” payment methods, both Alipay and WeChat Pay rely on an underlying bank account to operate.
Additionally, a rising affluence of China’s middle class has also been met with a synchronous increase in smartphone ownership rate. From 2013 to 2016, the Pew Research Center reported a nearly twofold increase in smartphone ownership rate, from only 37 percent in 2013 to 68 percent in 2016. Moreover, smartphone penetration is no longer concentrated in urban cities, but has spread to many rural areas as well, granting consumers in these areas access to e-commerce options that were previously unavailable. This has driven rural consumption and boosted digital payments, which consumers generally use to pay for products bought via e-commerce platforms.
Recognizing this trend in rural areas, the government has prioritized support to measures aimed at completely digitizing payments and increasing the accessibility of digital payment methods in rural areas. In fact, a statement jointly published by five of China’s top regulating bodies, including the central bank, the Banking and Insurance Regulatory Commission, the Securities Regulatory Commission, the Ministry of Finance and the Ministry of Agriculture and Rural Affairs, highlighted plans to make mobile payments ubiquitous in rural areas by the end of 2020.
What are the key takeaways from China’s success?
Being the leader in the new revolution of digital payment, China’s success story offers many important takeaways. Apart from an added convenience, digital payment services have the potential to dramatically improve living standards for large segments of the population, especially those living in rural areas. As seen in China’s case, digital payments can lead to an increased accessibility to resources, heightened security and financial inclusion of the country’s rural population.
Moreover, China has shown the rest of the world that digital payment services are able to complement and enhance the e-commerce experience. E-commerce firms and social networks can therefore leverage on this relationship to incorporate digital payment into their current platforms and services, in order to attract users and promote consumption. Furthermore, with rapid developments in smart technology such as Artificial Intelligence and the Internet of Things, it is likely that digital payment has even more room to grow in the upcoming years.