Chinese payment methods: Trends, developments, and innovation

Zennon Kapron, Kapronasia: ‘The footprint of China’s ‘techfins’ continues to grow as they expand their financial and non-financial ecosystem’In 2019, a common challenge for any foreigner visiting China without an Alipay or WeChat Pay account is how to pay. A decade ago, shop owners would wave away cards or any other type of payment besides physical cash. Consumers and businesses would walk into banks with huge stacks of cash as it was just simpler to use physical currency than it would be to make a B2C or C2C payment. Cash was king back then. 

Today, cash is the payment method that is being waved away as vendors ranging from local fruit sellers to car dealerships have made a massive shift to digital payments. QR codes and digital P2P payments are the norms as the usage of cash in retail has dropped dramatically; digital has dethroned cash to become king.

This increased acceptance of digital payments has been the basis for what has become a gigantic digital finance ecosystem, where more and more consumers and SMEs are handling their finances through their smartphones, and more specifically the WeChat and Alipay apps. From within one app, users can pay, invest, and borrow – creating a ‘super app finance ecosystem,’ and shifting consumer’s financial relationship away from their traditional providers. Indeed, Kapronasia studies have shown that millennials are more likely to say they ‘invest with Alipay’ than ‘invest with their bank/traditional provider.’

Fintechs to Techfins

This dramatic shift to digital has increased the balance sheets of Ant Financial and Tencent to the point that the government has (unofficially) deemed them systemically important. It’s not a hard argument to make when you look at a product like Ant Financial’s Yuebao, which has become the world’s largest money market fund. Indeed, the China fintech market is the leading market globally when looked at my nearly any measure: AUM, transaction volume, lending etc. 

Through direct regulation and indirect ‘suggestions,’ China’s regulators have somewhat curtailed the reach and breadth of the big fintechs. Payments that used to go across the tech giant’s own payment rails now need to go through a centralised payment switch called Net Union. The digital wallet balances that the big fintechs could once invest how they saw fit now need to be deposited at a custodial institution, cutting off a significant revenue stream. Finally, payments themselves have been limited to specific daily and monthly transaction limits depending on the level of KYC completed.

China’s big techs have had little choice but to comply with those regulations. Also, as they have no desire to be regulated like a bank, and to address the perception issue, in 2018, they started referring to themselves as ‘technology providers’ rather than financial providers, or more colloquially as ‘techfins.’ However, beyond the marketing push, what is very interesting is how this transition is playing out on an operational level.

As an example, when an SME or individual wants to borrow from Ant Financial’s digital-only bank MyBank, that loan will be syndicated out to one of the traditional financial institutions in China. MyBank provides the distribution channel and some credit-scoring guidance, but the actual financing is provided by the traditional banks. In this way, rather than completely losing their business, the fintech giants Ant and Tencent are working with the banks to create symbiotic relationships that resonate with their core competencies. Similarly, the banks are better able to lend to a swathe of ‘thin-file’ consumers and SMEs that they may not have lent to in the past. The fintechs provide the technology and the banks provide the balance sheets. 

As the revenues around their payment businesses slow, ‘techfins’ are increasingly looking at value-added products and services they can layer on top of basic payment services. Credit scoring was one of the first. If you know a person’s payment, shopping, and social habits, you can make a fairly strong assessment of their credit risk – often much better than a bank.

Platforms, value-add, and the future 

These value-added services are likely to define the future of payments in China. On the financial product side, payments have become the ‘lubricant’ in situational finance or, in other words, in being able to sell the right product, to the right person, at the right time. On the non-financial side, in say, ride-hailing, or even in-store transactions, the act of paying become the mechanism that helps you obtain the product or service that you were looking for without worrying about the payment itself.

This trend is unlikely to change soon. Although the initial set of regulations and requirements has largely accomplished many of the government’s original goals, the footprint of China’s ‘techfins’ continues to grow as they expand their financial and non-financial ecosystem. Regulators and the government will keep a watchful eye on developments to ensure things don’t expand too rapidly or in the wrong direction as they have in China’s P2P lending space. 

In many ways, the development of fintech in China is very unique for consumers in this country, and it is unlike any other ecosystem globally. However, the case study of how China’s digital payment giants have transitioned to fintech giants, and then ‘techfin’ giants is illustrative. There has been a lot of industry talk about how fintechs can co-operate with traditional incumbents. In this respect, fintech in China may also be leading the way.