Alibaba, the Chinese e-commerce firm, raised $25 billion from its initial U.S. public offering (IPO) in September 2014 putting China on the e-commerce world map. This exemplified China’s ongoing transformation from a low-skilled, cheap labor manufacturing assembly economy to a higher-skilled, innovation-based service economy. China’s 12th five-year plan defined the communications sector as a central tenet in its new economic developmental model with the Financial Industry Reform Plan sharing center stage.1 At the same time, the adoption of mobile technology within China has been remarkable in acting as a catalyst in changing consumer behavior, creating access to goods and services and targeting marketing and expansion of the consumer base for businesses. With the promise of inclusiveness, mobile technology is increasingly permeating various sectors covering financial inclusion of banking the unbanked; assisting farmers in rural areas by providing market information regarding price, demand, and information on weather, fertilizers and pesticides; creating virtual classrooms in the education sector; spurring online commerce in retail and wholesale; and expanding delivery of health care services.
Our specific focus in this article is how mobile technology is transforming the landscape of the payments industry in China. This research has been motivated by a confluence of several recent events:
- In 2011, the China Banking Regulatory Commission (CBRC) planned to increase the number of rural commercial banks and has been encouraging banks, both domestic and foreign, to establish tangible links across the nation and meet the financial service needs in the rural areas.
- The 12th five-year plan outlines financial inclusion programs that deliver full financial services with a greater emphasis on the finance industry serving the real economy, as well as support for technological innovation, economic restructuring, manufacturing, and above-average growth rates in lending in rural areas, specifically to small and micro enterprises (in rural and urban areas).
- The number of subscribers to mobile phones in China has grown from seven percent of the population in 2000 to almost 90 percent in 2013.2 We argue that mobile technology’s ubiquitous nature, as well as its capacities in the financial services sector, make it a perfect mechanism to align commerce and payments. In China, where consumers often lack access to other noncash forms of payments, such as checks or credit cards, and where e-commerce is rapidly on the rise, mobile payments (mPayment3) and mobile commerce (mCommerce) are gaining traction and are rapidly transforming the payments industry.
Banks, given their experience in the industry and governmental support, have a distinct advantage. However, the financial service sector is expanding to offer both traditional payment and settlement services alongside non-financial services.4 Thus the financial sector is increasingly faced with competition from technology companies in the areas of remote account access; online commercial transactions such as people to people, business to business and business to consumer (P2P, B2B, and B2C); and outreach to remote rural areas in mCommerce and mPayment arenas. In addition, banks are heavily regulated compared to the technology companies, limiting their easy transition to mobility.
Mobile Technology in China – a brief background
Although limited, recent literature has shown evidence of relationships between mobile penetration and economic growth in both developing and developed nations.5 While the pervasive nature of mobility has helped include the disenfranchised in developing countries, the focus has largely been in communications and information-gathering. Researchers have noted that increases in mobility result in increased productivity thus creating a competitive advantage in nations with large investments in technology infrastructure.6
Up until 2004, the Chinese mobile communication market was dominated by two large companies, China Mobile and China Unicom. The dynamics of this changed in 2007 when China joined the World Trade Organization (WTO), opening this market for foreign companies to compete thus changing the mobile landscape. With a large number of Chinese companies entering the mobile ecosystem to support the increasing mobile subscriber base (expected at 700 million smartphone subscribers by 20187), the market for mobile holds great promise in China. It is estimated that by the end of 2018, the population of smartphone users will increase from 38 percent to 51 percent. Companies in China are increasingly able to penetrate the rural and urban markets simultaneously, using mobile technology innovations.
The payments industry is at a tipping point around the world largely due to mobile technology. New non-banking players such as PayPal, Apple, Alipay, and Google have entered the payments arena, changing the financial services landscape. The radical changes in this industry in China have been thrust forward largely because of two events: the Chongqing Rural Commercial Bank (CRCB) IPO in 2011 and Alibaba’s IPO in 2014.
In July 2011, CRCB introduced the first mobile banking product in western China to expand mobile financial services and products for corporate customers.8 CRCB raised US$1.48 billion in an IPO in Hong Kong. This company is one of China’s largest lenders to farmers and small businesses, and is expected to be the first in a wave of listings by smaller rural-focused Chinese banks. With the mission of being financially inclusive of agricultural and rural areas and supportive of small, medium and micro businesses, CRCB centered its innovative efforts on developing mobile payment services.
Simultaneously, Alibaba – through its platforms, Taobao (similar to eBay for C2C) and Tmall (similar to Amazon for B2C), with payments facilitated by Alipay – has dominated the development of e-commerce in China. With its recent IPO, Alibaba is now a global contender in e-commerce around the world. Morgan Stanley estimates that while still in its initial phase, China’s e-commerce industry will be about 18 percent of the country’s retail sales by 2018, up from eight percent in 2013.9 The Morgan Stanley study also purports smartphone penetration will increase online shopping, especially in the lower-tier cities in China where a majority of the active mobile devices are registered and where most internet access is via mobile usage. Furthermore, the internet provides a level playing field for small entrepreneurs, who make up a majority of Chinese firms, since they can compete better in the online market compared to offline commerce. Concurring, the Boston Consulting Group notes that small and medium-sized companies in emerging markets are largely leapfrogging older generations of technology used in developed nations.10
In many ways, e-commerce has stimulated the growth of the e-payment arena in China. Because of rapid growth of internet users, improved online services coupled with lifestyle change due to rising incomes, China lends itself to creating a huge market for ePayment services outpacing even the United States.11 A new industry of mobile operators and technology companies are entering into the payments industry once monopolized by the financial services industry, which is rapidly expanding from ePayment to mPayment.
Examples of mobile payment system in China
Tencent’s WeChat’s e-red envelope and mobile payments12
Distributing “red envelopes” is a famous tradition in the Chinese New Year. In 2014, the popular application WeChat promoted the WeChat Red Envelope [Weixin hongbao 微信红包 ]. Users only needed to link their bank cards to WeChat to be able to distribute or claim an e-red envelope that then could be used to send money to friends, or to pay bills, hail taxis, pay for parking, buy movie tickets and book flights. Even though Tencent did not reveal how many new bank cards had been linked with WeChat, it announced that from December 30th, 2013, until January 8th, 2014, more than eight million Tencent WeChat users participated in e-red envelope distribution. More than 40 million e-red envelopes have been claimed, and on average, each user claimed four to five e-red envelopes. WeChat’s success with its e-red envelope largely depends on the social network built by Tencent. Despite the surge in the use of WeChat e-red envelope, ZhiFuBao, the liaison payment company (similar to PayPal for eBay) from Alibaba, remains the market leader for online payment, especially in the mobile payment market. Alipay has become increasingly used to pay for theater tickets and is also used more recently to invest in money market funds called Yu’e Bao. By the end of 2013, ZhiFuBao had three billion users and more than one billion of these users paid over 900 billion RMB through their mobile devices.
These micro-payment businesses are increasingly being used in online markets, the sales of insurance products, stock exchanges, P2P lending, and have become some of the greatest competitors for traditional banks in China.
Taxi booking and mobile payment13
Consumers in China can now book or hire taxis through smartphone apps in real time. The two biggest apps, KuaiDi and DiDi, claim 97 percent of the taxi booking app market in China. By the first quarter of 2014, KuaiDi had as many as 6.23 million orders a day, covering 261 cities. DiDi had 5.21 million orders a day, covering 178 cities. To be able to cultivate and sustain a large market base for mobile payments, marketing strategies of such apps often focus on discounts in payment schemes such as consumers bundling their bank cards into their mobile devices.
Perhaps due to the novelty, these applications have raised concerns. First, the apps allow consumers to raise prices of hiring a taxi, or tip the driver in real time, creating concerns about illegal and irregular competition. Second, it excludes the elderly who seldom use mobile devices, and creates increasing difficulty for the elderly to hire a taxi. Third, it lures away consumers from the government’s official taxi booking platform. This latter concern resulted in the government quickly launching new regulations covering pricing and information sharing between different platforms, among other restrictions.
Mobile technology in China has created a value chain that includes financial institutions, operators, third party providers (TPP), device vendors and technology providers, with increasing collaboration among these participants. Alongside competition, there are also concurrent alliances being created among the various participants in the mobile technology network. The biggest breakthrough is seen in the online banking platforms. Banks have a relationship advantage with their customers, as well as trust due to the in-built capacity of data security centers. Because of infrastructure limitations in offering physical wired banking services to remote and rural locations, banks can work closely with application and solution providers to deliver integrated technology and security in the mobile banking space. Given the wide coverage of mobile networks and the high penetration of mobile phones in the countryside, banks in China are now able to circumvent geographic barriers and expand business coverage by offering mobile payment and financial services to remote rural locations. These services include money transfers to credit card management to wealth management and other online banking services. In addition, non-financial services are increasingly becoming commonplace, ranging from payments of utilities to business travel and hospital registrations, to managing phone accounts, among others. Many national commercial banks have introduced various financial IC (integrated circuit) cards with special features in 30 provinces and there is a push for alliances with public service departments such as transportation, health, and education.
The growth of the mPayment sector in China holds tremendous promise due to strong program support from the central and local governments, who have developed policies to support and advance e-commerce and mobile technology. The 12th five year plan places emphasis on expanding the scope of e-commerce to industries such as heavy industry, logistics and tourism, improving online sourcing and retailing capability, boosting cross-border and mobile e-commerce, and creating a more secure online e-commerce system (Xin, Chen, 2011).14, Chinadaily.com.cn, Available from: http://www.chinadaily.com.cn/bizchina/2011-07/13/content_12893796.htm, (Accessed 22 October 2011).] In addition, the People’s Bank of China (PBC) in 2006 published the China Payment System Development Report, which for the first time publicly disclosed the data and policy leanings of the payment system. Weighing in, Su Ning, Deputy Governor of the PBC stated, “The payment system was an important component of a country’s economic and financial system, and the foundation of economic and financial operation. The development of the payment system and the improvement of the payment efficiency could boost the economic, financial, and social developments, influence peoples’ lifestyle, and enhance the quality of life.”15 The PBC has also developed the Measures for the Management of Payment and Settlement Organizations, which created a licensing regime for ePayment service providers. Hence this sector is becoming regularized and institutionalized.
Penetration of technology in the countryside is a boon to financial inclusion. Yet the daunting task of investment in mobile networks and the viability of the mobile value chain remain a bane to the adoption and diffusion of mCommerce and mPayment. As China shows signs of an economic slowdown, one concern is that this may cause the government to rethink some its investment priorities, possibly impeding some of the mobile growth initiatives.
mPayment is primarily used to mitigate transactions’ costs by offering a gamut of services for a lower average cost by bundling goods or services. From the business standpoint, this allows for cost savings via increases in scale and scope. From the consumers vantage point however, in order to achieve these economies, the consumer may need to increase his/her purchase size and limit choices to a few goods/services to take advantage of the economies of scale.
Many challenges remain, and policies and legal infrastructure are still being refined and promoted. Banks and non-bank operators are separately regulated, and the expansion of mobile financial services is still a work-in-progress. Technology companies are threatening the banking turf in the areas of remote account access, online commercial transactions such as P2P, B2B, B2C and outreach to remote rural areas in mCommerce and mPayment arenas promoting financial inclusion. Given their unique accessibility to their client information, banks have the advantage of offering a multitude of services including brokerage, insurance, real estate services, and trust services, among others, while remaining leaders in the mobile financial services industry. The development of mCommerce and mPayment appears to be the next frontier for banks with an established mobile internet presence. However, while banks are protected by the government and are relatively safe from bankruptcy – unlike technology companies – the latter face less regulatory scrutiny and have a freer rein in developing products and offering innovative solutions.
Regulators have to walk a thin line between fostering innovation and promoting self-regulation while protecting the safety and soundness of the financial system. This causes them to limit banks’ strategic choices in transitioning to mobility. One such example is seen in the highly restrictive bank technology rules that were recently announced by PRC banking regulators wherein all banks are required to prove that their computer technology and software are “secure and controllable.” The extreme measures taken in this regard require banks to provide all sensitive intellectual property, such as their source code for all software to government regulators in China. In trying to address cyber-security issues, China has announced plans to become more self-reliant in its lagging chip and server industries. China has also tightened restrictions for internet companies in the past year, as it seeks to secure control over its online environment. These restrictions may negatively affect the mPayment industry that includes several foreign players in the banking and non-banking sectors.
Given that financial inclusion has increasingly become a policy priority and is seen as a complement to financial stability goals, the outreach capacity of mobile payment services, combined with the rapid growth of e-commerce, is becoming more commonplace in China. The Chinese government has aided in the development of mobile technology and is working to correct issues with poor infrastructure, logistical limitations and government restrictions.
Concurrently participants in China have enthusiastically invested in technology, capital and human resources needed to gain competitive advantage in the mPayment industry. However, investors should also be aware that the e-commerce business model for China has been tweaked and the internet sector regulated, enabling domestic incumbents to grow without much foreign competition. Potential deregulation of the internet industry in the long term could also change the competitive dynamic over time. In addition, mobile devices cause ongoing concern for security as sensitive information can be easily stolen or lost. In this regard, the Chinese government has been imposing regulations regarding online transactions as noted in the recent bank technology rules. With recent concerns around the world about data security issues in some large firms, this may limit the growth of the mCommerce and mPayment industry. Thus the future landscape of the payments industry in China, while transforming, remains uncertain at this juncture.
Dr. Vijaya Subrahmanyam, Professor of Finance, Stetson School of Business and Economics, Mercer University-Atlanta; email@example.com
Dr. Juan Feng, Associate Professor, Department of Information Systems, City University of Hong Kong, Hong Kong; firstname.lastname@example.org
Murthy Nyayapati, Former Director and co-organizer of GMIC (one of the largest mobile internet conference) in China and Silicon Valley; email@example.com
- See the 12th Five-Year plan for the Development and Reform of the Financial Industry. http://www.csrc.gov.cn/pub/csrc_en/newsfacts/release/201210/ W020121010631355001488.pdf ↩
- Gary Coleman, Ira Kalish, Dan Konigsburg and Xu Sitao, Competitiveness: Catching the next wave: China, Deloitte, September, 2014, http://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/gx-china-competitiveness-report-web.pdf ↩
- ePayment (electronic payment) is largely used in e-commerce transactions for buying and selling goods or services offered through the Internet. mPayment (mobile payment) is a point-of-sale payment made through a mobile device, such as a cellular telephone, a smartphone, or a personal digital assistant (PDA). Mobile payments can be funded in a variety of ways: (1) directly from a bank account (through automated clearinghouse (ACH)), a system for direct electronic transfers between bank accounts or an account at a non-bank payment provider; (2) with a traditional credit, debit, or prepaid card; (3) through a mobile carrier, either by drawing on a prepaid account with the carrier or adding the purchase to the monthly phone bill. A consumer could also consolidate multiple funding options on a mobile device, through an application known as a “mobile wallet.” (Mobile Payments: What’s in it for Consumers? F. Hayasho, Economic Review, Federal Reserve Bank of Kansas City, 2012). ↩
- Financial services include account inquiries, remittance and transfer, wealth management services (bonds, funds, insurance), foreign exchange management, financial information inquiry, etc. Non-financial services include payment services (payment of utilities, lottery tickets, hospital registration, hotel travels), account top-up, game cards, business travel services, payments collection, etc. Non-financial services are delivered by banks in partnership with third parties on the banks’ platforms. ↩
- Economic Impact of Broadband: An Empirical Study,” LECG Ltd (2009), http://www.connectivityscorecard.org/images/uploads/media/Report_BroadbandStudy_LECG_March6.pdf.
Kpodar, Kangni and Andrianaivo, Mihasonirina, ICT, Financial Inclusion, and Growth Evidence from African Countries (April 2011). IMF Working Papers, Vol., pp. 1-45, 2011. Available at SSRN: http://ssrn.com/abstract=1808446; Williams, Chris, Davide Strusani, David Vincent, and David Kovo, Deloitte LLP. The Economic Impact of Next-Generation Mobile Services: How 3G Connections and the Use of Mobile Data Impact GDP Growth, Chapter 1.6 in The Global Information Technology Report 2013, World Economic Forum. http://www3.weforum.org/docs/WEF_GITR_Report_2013.pdf; What is the impact of mobile telephony on economic growth? http://www.gsma.com/publicpolicy/wp-content/uploads/2012/11/gsma-deloitte-impact-mobile-telephony-economic-growth.pdf ↩
- The 32nd China Internet Development Statistics Report, CNNIC, June, http://www.cnnic.net.cn/ hlwfzyj/hlwxzbg/hlwtjbg/201307/t20130717_40664.htm.; The Mobile Economy 2013 A. T. Kearney, http://www.atkearney.com/documents/10192/760890/The_Mobile_Economy_2013.pdf ↩
- http://www.chinainternetwatch.com/11769/china-smartphone-users-to-be-574-2-mln-2015/ ↩
- Trends and Prospects of Mobile Payment Industry in China 2012-2015- Creating Innovative Models, Boosting Mobile Financial Services, Deloitte, 2012. ↩
- eCommerce: China’s Consumption Growth Engine, Morgan Stanley, Nov 7, 2014. http://online.barrons.com/articles/ecommerce-chinas-consumption-growth-engine-1415323378?autologin=y ↩
- Ahead of the Curve – Lessons on Technology and Growth from Small Business leader, Boston Consulting group, Oct. 2013. http://www.bcg.com.cn/en/files/publications/reports_pdf/BCG_Ahead_of_the_Curve_Oct_2013.pdf ↩
- http://www.forbes.com/sites/russellflannery/2013/09/02/lifestyle-changes-are-driving-big-growth-in-china-e-commerce-spending/ ↩
- Online Finance Report, No. 12, Feb 10, 2014. Sohu Finance. http://stock.sohu.com/s2014/olfin12/ ↩
- “KuaiDi and DiDi Occupies 97% Market in Taxi Booking Apps.” 15/5/2014, People.cn. http://auto.people.com.cn/n/2014/0515/c1005-25022304.html; “Ministry of Industry and Information Technology Discusses the Market for Taxi Booking Apps.” From Sina Finance, June 5th, 2014. http://finance.sina.com.cn/chanjing/cyxw/20140605/165619325858.shtml ↩
- Xin, Chen. (2011) “E-Commerce to quadruple by 2015, official says,” [Internet ↩
- http://www.pbc.gov.cn/publish/english/955/2022/20225/20225_.html ↩