China’s Banks Losing Mobile Payments Race

by Raymond Pucci 0

The winners so far in China’s mobile payments race are Alipay and Tenpay—with the country’s major banks far behind. Not only are the two digital platform companies grabbing most of the mobile payments market’s transaction fees, but the banks are even worse off since Alipay and Tenpay retain for themselves the treasure trove of customer data, which can be mined for its analytics value.

Despite years of trying with pilot mobile payment programs and roll-outs in major cities, China’s banks and UnionPay have largely been left out of China’s mobile payment revolution. According to Analysys China, in Q3-2015 UnionPay controlled about 1.8% of the mobile payment market by transaction volume through its China Mobile Pay JV and its Merchant Services arm. Basically, very very little. At the same time, China’s mobile and internet payment markets grew more than 40% from 2014-2015 and were dominated by digital payment providers Alipay and Tenpay.

This led to a RMB 150 billion (~$23 billion) ‘loss’ in potential transaction fees for China’s banks and UnionPay in 2015 as overall consumer spend continued to shift from traditional card payments where banks are strong, to online payments, where they are weak. This number was based off of Kapronasia’s analysis of industry market share information, transaction value data, and typical card-based transaction fees. Extrapolating that out based on our growth formula, Kapronasia found that this number will increase to RMB 400 billion (~$61 billion) in 2020.

The challenge is that Alipay and WeChat Pay transactions do not go through banks or across the UnionPay card network. Basically Alipay and Tenpay (the platform behind WeChat Pay) have their own payment network or ‘rails’. As a user pays, money moves from the user’s bank to the user’s account on the Alipay platform, then to the merchant’s account on Alipay and then eventually to the merchants bank.

China’s banks are eager to get into the mobile payments game, and have partnered with the recently launched Apple Pay. During the opening days, an estimated 40 million Apple Pay accounts have been opened with payment accounts at 20 Chinese banks. That’s one small step in a long journey to catch up with Alipay’s estimated 400 million users.

Overview by Raymond Pucci, Associate Director, Research Services at Mercator Advisory Group

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