This year, Chinese consumers will spend the equivalent of US$10T using barcodes displayed on their smartphones.
That’s “T”, for trillion.
As a point of reference, the annual purchase volume on the entirety of the world’s credit and debit cards is about US$20T. Even more remarkable: barcode payments started just a few years ago.
The Quick Response barcodes, or “QR codes”, can be used in China to pay for a bowl of soup, groceries, utility bills, vacation packages and everything in between. Even street beggars accept QR codes.
But, wait. It gets even more interesting.
Until very recently, almost all of those trillions were running through the corporate bank accounts of two companies, Ant Financial Services Group and Tencent Holdings Limited. Together, they control 95% of China’s mobile payment market through their services, Alipay and Tenpay. Tenpay is better known by the names WeChat Pay and QQ Wallet.
Their rise has been dramatic.
Alipay was the dominant online payment service in China when Jack Ma personally spun it out of the ecomm giant Alibaba in 2010 and made it a service of Ant Financial. Within a year, Ant enabled purchases at physical shops by having the Alipay mobile app generate unique QR codes for every user. Buyers and sellers simply scanned each other’s codes to instantly transfer funds between their Alipay “wallets”.
Tencent followed in 2013 by provisioning a wallet and QR codes within its WeChat app, the ubiquitous equivalent of Facebook Messenger. WeChat Pay went on to take market share from Alipay with a series of creative “red envelope” gifting campaigns. Both companies continued to gamify their programs through coupon promotions and lottery-like giveaways. Usage boomed and, now, they split a huge pie roughly 50-50.
As the trillions flowed, a deposit float on the order of US$70B accumulated. Only Ant and Tencent knew where all of the money came from, where all the money went and what they were doing with $70B of other people’s money. Good times.
Within the last year, the Chinese feds stepped in.
Peoples Bank Of China, the country’s central bank, made two important moves. First, it required payment schemes to transfer their custodial deposits into government-controlled accounts. The shift will be gradual, starting with 20% of balances, but the expectation is that 100% will ultimately be moved over.
Second, PBOC set up Wang’lian Pingtai.
Wang’lian is a central clearinghouse for internet and mobile payments. It replaces the individual circuits that Tencent, Ant and others constructed with the country’s banks. With the clearinghouse also come the controls of a banking system: KYC, AML, transaction monitoring and regulatory oversight. Wang’lian is now operational and payment companies have until mid-2018 to redirect their traffic into it.
PBOC did something else, too.
By letting Alipay and WeChat Pay run unbridled, it showed the world what can happen when smartphones become an integral part of a payment system. Sufficed to say, the result has been a step up from paper tender and plastic cards.
Now Alipay and WeChat Pay are moving into new countries and allowing users to link non-Chinese bank accounts to their services.
Happenings in China are particularly important in a shrinking world. It’s incumbent upon tech providers to stay informed of developments there and to weigh them in the design of their own innovations.
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