Voice of the Industry

When a mobile wallet is more than just a wallet

Tuesday 28 August 2018 10:46 CET | Voice of the industry

Zennon Kapron, Director at Kapronasia, argues the importance and evolution of online payments platforms such as Alipay and WeChat on the Asian markets.

Launched in 2004, Alipay was initially an online payment system designed to solve the issue of trust in ecommerce transactions. By providing a method of escrow, Alipay digitised the traditional cash ecommerce transaction process that was prone to fraud. Since then, Alipay has become much more than just a platform for ecommerce payments. The system now processes millions of virtual and physical payments daily, becoming one of the ‘megaapps’ in China, used by hundreds of millions of consumers on a regular basis.

It is considered a mega-app not just because of how many payments it processes, but due to the many other ancillary services that it supports. In many ways, payment processes helped to provide the initial platform on which a variety of other products and services have been built. From within the Alipay wallet today, you can book a car, buy movie or plane tickets, invest in wealth management products, or even buy insurance.

The other dominant lifestyle platform is Tencent’s WeChat, which offers a similar variety of products and services. Tencent leveraged the social and entertainment aspects of the WeChat chat app to develop a payment business that is just about neck and neck with Alipay in China at the moment.

The two companies offer contrasting approaches to the same conclusion: Alipay used its initial footprint and lead in ecommerce to create a multi-faceted lifestyle platform while WeChat leveraged its heritage in social and gaming to capture market share.

This transition from a payments platform to a lifestyle platform is something that is nearly unique to China. In the United States, if you wanted to use ride sharing, you would open your Uber app. If you wanted to pay a friend, you would open Venmo or Paypal. In China, if you wanted to do any of those things, you would just open WeChat.

There was a special set of circumstances and developments in China that helped these payment platforms develop into the lifestyle platforms that they are today, but it is surprising that we have not seen similar products and services in other markets, especially in the US. Arguably, Paypal is one of the bestpositio ned payments companies globally to provide similar functionality but ended up acquiring Venmo, an app that understood social payments perhaps even better than Tencent.

Regulations in many jurisdictions may be part of the reason why growth has been limited. In China, the government took a very much ‘wait and see’ approach to fintech regulation by letting fintech companies grow and regulating them after they became a potential risk. An example is mobile payments themselves. Although Alipay was setup in 2004, the government only formally licensed payment platforms in 2011 and then implemented regulations in 2016. This allowed payment platforms like WeChat Pay and Alipay to grow and compete.

Using Europe’s GDPR as a counter-example, although GDPR would likely not affect the underlying payments functionality of any of these platforms, the business model for lifestyle platforms like Alipay and Tencent is shifting away from fees towards valueadded products and services. When the WeChat wallet knows that you have gone to see the latest documentary movie and have a penchant for fine Italian food, it might make the decision that you are a reliable borrower and offer to lend you money. It accomplishes this through data-sharing on the back-end that looks at the potentially hundreds of daily interactions you have with the WeChat wallet on a regular basis. This would be nearly impossible in a GDPR-Europe.

Beyond regulation, the most significant hindrance may be consumer habits. For consumers accustomed to using a different app for every task, the idea of having ‘one app to rule them all’ may seem a bit foreign, whereas in China, it is very natural due to the fact that smartphone is the device of choice. Furthermore, existing payment methods in China had a tremendous amount of friction. A card transaction in most stores in China involves chippin-signature, which is much slower than a QR-code payment, which has become the norm. Places like Europe and Australia have very user-friendly and frictionless tap-and-go payments that are just as convenient as mobile.

That is not to say that hope is lost for similar apps ex-China. We are now starting to see WhatsApp and Facebook roll out payments within their apps. Clearly, Amazon has designs for increasing its financial footprint, but it will be a long time before we see any of them reach the scope of functionality in a WeChat or Alipay wallet.

Although we have not seen these offerings from local domestic players in the United States and Europe, we may see them soon from Alipay and WeChat as the two players start to expand aggressively abroad. From the streets of Paris to the beaches of Thailand, millions of merchants around the world accept Alipay or WeChat Pay and an increasingly large number of countries, like HK, have local-currency Alipay and WeChat Pay wallets.

For years, western companies have come to China and misjudged the habits of Chinese consumers and failed. The question is now, will Chinese companies make the same mistakes in the opposite direction as they bring their ‘lifestyle’ digital wallets to an entirely new set of consumers?

About Zennon Kapron

Zennon Kapron is a Director at Kapronasia and has been involved in financial technology for over 20 years. Before Kapronasia, Zennon was the Global Banking Industry Manager for Intel and the CIO for Citigroup Portugal. He holds a B.S. in Computer Science from
Syracuse University and an MBA from INSEAD.

 

About Kapronasia

Kapronasia is a leading independent research and consulting company focused on the Asian financial services industry. We help financial institutions, technology vendors, consultancies and private equity companies understand the impact of business, technology, and regulatory issues in banking, payments, insurance and capital markets.
 

This editorial was first published in our Payment Methods Report 2018 – Innovations in the Way We Pay. The Payment Methods Report 2018 presents the key trends and developments in global and regional payment methods by highlighting the innovation, challenges, and developments in the use of the most important payment methods across geographies and verticals.


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Keywords: online payment, e-wallet, Kapronasia, Zennon Kapron, China, ecommerce, ecommerce platform, mega-app, Alipay, Tencent, WeChat, Paypal, GDPR, payment methods, WeChat Pay
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