According to consultancy McKinsey, China is set to overtake the United States as the world’s largest online retail economy in 2014. Data from Chinese consultancy group iResearch showed that online and mobile payments rose 47% last year to roughly US$873 billion.
Other information collected by iResearch showed that the total transactions of China’s online shopping market, a combination of B2C and C2C markets, reached US$102 billion, 10% of total retail transactions in China in 2013.
China’s online shopping total transactions last year was US$307 billion, an increase of almost 60%. It’s expected to increase by over 45% this year according to iResearch estimations.
Third party payments
China’s third party internet payments totalled US$304 billion in Q1 2014, with a YoY growth rate of 84% according to iResearch. During the second quarter of 2014, 15.04 billion non-cash payment transactions worth US$74 trillion were recorded in China, up 23% and 17%, respectively, from a year ago.
The number of Chinese making payments through mobile phones reached 125 million people last year, up 126% from the previous year. Chinese consumers made over 1.6 billion financial transactions through mobile phones last year and this figure equalled to US$1.6 trillion.
It is quite clear that many people in China have become quite comfortable with the idea of purchasing products online using their mobile devices. The development of mobile payment services in China has grown rapidly, particularly in first and second-tier cities.
China’s mobile payment market was worth US$248 billion in the first quarter of 2014, up by 113% from Q4 2013. Gross merchandise volume (GMV) of China third party online payment amounted to US$303 billion in Q1 2014, rising 84% compared with Q1 2013.
A growing number of retailers are beginning to accept mobile payments in their bricks and mortar stores, making it easier for m-commerce to flourish. Mobile banking is becoming particularly popular among consumers who tend to manage their finances with a mobile device.
Payment platforms in China
There are a number of third party payment options in China, but three players dominate the market.
Alipay, Tenpay and UnionPay are also the top three in China’s mobile internet payment market holding 80% market share between them. With over 300 million users, Alipay remains the market leader in China’s third party payment market by total transactions.
Imagine PayPal; now imagine it entirely in Chinese. That’s Alipay, to some extent anyway. But Alipay differs from PayPal in some regards. And from my experience in China, most people have the Alipay app on their mobile phone.
Alipay is the system used for buying products at the most popular Chinese online shopping sites Taobao, Tmall and many others. What makes it unique is its third party status. Money is only transferred to the seller once the customer has accepted, and is satisfied with, the purchased product. Alipay currently supports 12 different currencies.
The vast majority of Chinese online shoppers are intimately familiar with the Alipay system and, most importantly, have learned to trust it. As the image above shows, in Q1 2014, Alipay ranked first with 51% GMV of China’s third party online payment market.
Recently US online payments firm Stripe announced an alliance with Alipay aimed at making it easier for people in China to buy things from elsewhere in the world.
Businesses in 14 countries use Stripe systems for accepting online payments from customers, but it has been little used in China where Alipay is the dominant player.
The second most popular third party payment platform is Tencent’s Tenpay. It holds just under 20% of the market share mainly due to the popularity of Tencent’s WeChat platform. The payment platform is the default payment method in the ‘wallet’ section of WeChat.
Tenpay is projected to grow well beyond the 20% mark in future. It is used to pay for the services integrated with WeChat, such as mobile top up; taxi ordering; movie tickets; air tickets and group buying, as well as for purchases from Tencent’s online store.
Tencent’s online payment service recently teamed up with IM QQ to launch another payment service called QQ Wallet. This is expected to intensify competition in the mobile payment market and make inroads into Alipay’s market share.
QQ Wallet hosted an event online during the World Cup, in which users could bet on the winning or losing teams during the competition. It was estimated that during the World Cup over one million users bet on the payment platform.
The difference between QQ and WeChat is that QQ users come from lower tier cities and even the countryside. In comparison, most of WeChat’s users reside in tier-one and two cities.
Data shows that the number of active users on IM QQ is 848 million. In other words, QQ Wallet will help penetrate the market in the remote areas into which WeChat has not reached.
It is expected that IM QQ and WeChat, which has 438 million active users, and Alipay with its 300 million users, will become the dominating forces in the Chinese mobile payment market.
In April this year, search engine giant Baidu announced its own online payment system called Baidu Wallet. Just like Alibaba and Tencent, Baidu has both payment and financing licenses that will enable it to offer similar types of services to the other two companies.
Baidu said that it will focus on mobile payments and the service will be integrated with other Baidu platforms and its 14 apps. The aim is to leverage all of Baidu’s existing services to popularise Baidu Wallet. Baidu claims to have 600 million users, which should start it off well.
China UnionPay, the country’s monopolistic credit card provider, is also the world’s largest card brand. It has established a system in China that will replace card swiping with QR code scanning during in store payments, helping further m-commerce.
As UnionPay isn’t a public company it doesn’t disclose financial results or details. But it is a still big player in the Chinese online payment market, by virtue of monopolising the credit card market.
China’s third party payment options
Until Baidu Wallet is fully developed and has gained a large user base, there are currently two viable options for online payment integration: Alipay and Tenpay. Once integrated, an online visitor will be able to pay for purchases directly with their Alipay or Tenpay account in RMB.
Both services allow cross border transactions and provide code for web developers to integrate the system into a website.
Once a transaction is completed with Tenpay, the funds will be exchanged at the same day’s rate and wired to merchant’s overseas account (minus the commissions).
With the Alipay plugin installed, once the transaction is completed Alipay will wait until US$5,000 has accumulated in the account before the money is wired to the merchant’s overseas account.
In order to apply for either Alipay or Tenpay, the merchant has to provide a copy of a business license from the country of origin, copies of the business owner’s passports and a completed application form.
The verification process of the application takes about one month. Once the application is successful, the agreement is signed and the instructions for technical integration are provided.
The future of online payments in China
Online payment has become the basic business for all payment companies in China, and has already moved into a mature stage. Even though it has a relatively mature online payment market, the Chinese government recently barred the use of virtual credit cards and QR codes for payments, at least temporarily.
Despite the ban imposed by China’s central bank on QR code-based mobile payments in March, third party payment providers appear unwilling to give up on the lucrative business.
Postal Savings Bank of China formally launched QR code payment services nationwide in August. China Post plans to invest 100 million RMB to build an electronic payment platform for mobile phone and internet payment services.