By Cameron Caldwell (University of Glasgow) and Jennifer Liu (McGill University)
Synopsis
Two of China’s ‘Big Tech’ players, Tencent and Alibaba, owners of WeChat Pay and AliPay respectively, have revolutionised the payment industry in China with the introduction of an alternative payment ecosystem. As far market leaders in terms of user base and number of transactions, it's likely they will remain prominent and at the forefront of the payment industry in China for the foreseeable future. However, as the fintech industry continues to grow, so too will the rising popularity of newer alternative payment methods which could potentially challenge the dominance of WeChat Pay and AliPay in the coming years.
Table of Contents
Trend Summary
Chinese organisations, namely WeChat and AliPay, were pioneers in new payment technology that uses QR codes and in-app features to pay for goods and services.
As the organisations that own WeChat and AliPay grow, so too these platforms now dominate the Chinese payment industry, with large usage nationally.
Trend Overview
WeChat Pay and AliPay have experienced consistent usage growth as a result of growth in their owners business models.
Leveraging their business models and because of cost advantages to the seller, WeChat Pay and AliPay were able to attract merchants easily.
There is still demand for both platforms, despite their similarities, because of how they evolved and consumers’ lack of incentive to deviate to only one provider.
Trend Drivers
WeChat and Alipay gained first mover advantage by entering the digital payment market early and using appropriate strategies to attract users
Rapidly growing e-commerce businesses will sustain the expansion of both platforms.
Further Trend Analysis
Rising alternative ways to pay including the digital currency and small online payments platforms will challenge the dominance of WeChat Pay and Alipay.
Both platforms need to consider potential costs associated with government interruptions and concerns about user privacy.
WeChat Pay and Alipay have incentives to further develop their own integrated platforms in order to increase customer stickiness.
Trend Summary
Over the last decade or so, western world countries continued to develop card-based payment technology and have largely stayed away from emerging digital payment technology, until recently. However, in China, alternative ways to pay, such as wallets and QR codes, were being explored and introduced. 10 years on, in 2021, the amalgamation of WeChat Pay, linked to the popular social networking site WeChat, and AliPay, owned by Jack Ma’s Alibaba, control this new and alternative payment ecosystem that has completely revolutionised the Chinese payment industry.
Instead of using card machines and cash registers to process transactions, both apps use quick pay, QR code payments, in-app web-hosted payments, and in-app payment technologies to process payments in a fast and convenient manner. Ditching traditional payment processors for smartphones, saving costs using simple technologies, and removing banks as intermediaries has created different relationships and interactions between merchants, consumers, payment providers, and banks; this has completely changed how retail and person to person transactions occur.
Comparing WeChat Pay and AliPay to western alternatives, such as Apple Pay, the Chinese adopted platforms are much more developed, with greater features, and greater usage statistics. Alipay reached 1.2 billion monthly users in 2019 and WeChat Pay surpassed one billion users in 2018. With both platforms now levelling the same amount of users as the Chinese population, it is clear they are collectively dominating the market.
Trend Overview
For a new payment technology to become largely adopted you need enough people using that technology on a regular basis and enough merchants willing to accept payments via the new technology. Both WeChat Pay and AliPay have experienced relatively consistent growth (Figure 1) in terms of active users since 2013. In addition, given greater reliance on their payment technology year on year for everyday consumer purchases and transactions, over one quarter of China’s GDP is transacted on the 2 payment providers annually. Their ability to generate large adoption and usage numbers stems from their existing business models and brand awareness. WeChat (owned by Tencent) is one of the world’s most popular social media platforms and is China’s number one social media by active user base. Integrating payment technologies within their current product offering proved to be a seamless transition that was convenient for users. On the other hand, Alipay was launched in 2003, and it wasn’t until after 2008, when Alipay introduced E-Wallets, that usage began to increase substantially. Similar to WeChat, Alibaba was able to seamlessly integrate AliPay into their online marketplace and easily acquire new users by cross-marketing it with their current service offerings.
Figure 1: Alipay and WeChat Pay Number of Active Users (millions) (Global China)
Both organisations also provided strong incentives for merchants to accept payment via their respective platforms. Fighting off competition from Unionpay, China’s most prominent bank card services company, was relatively easy given the low or nil fees for both buyers and sellers compared to the standard processing fee of ~2% on card machine payments. While the margin is slim, SMEs in China realised that by switching to AliPay or WeChat Pay and adopting the new payment technology - provided customers were willing to transact on these platforms - they could save ~2% annually. For larger merchants, AliPay and WeChat Pay used incentives which included free advertisement on their digital platforms. Avoiding card machines altogether saved significant costs since maintenance and transactions costs were mostly removed. Both WeChat and AliPay have accelerated the cashless transformation in China; through strongly incentivising merchants and buyers and by beating out chip and pin competitors like Unionpay they have been able to dominate the Chinese payment industry.
While it’s almost certain WeChat Pay and AliPay have the equivalent of a monopoly for non banking institutions in China, there are questions with regards to why there is such demand for both services and not one front runner or distinct market leader, which is common in many industries worldwide. While both platforms currently offer very similar functionality, accepting in-store, online and a vast range of other payment types, their services were not always like this. When WeChat integrated payment into its social networking app, it primarily specialised in in-app purchases and person-to-person transfers. On the other hand, AliPay was more e-commerce focused, integrating with a market that Alibaba already controlled. Given the fierce competition between China's Big Tech, both Tencent and Alibaba have made multiple strategic acquisitions to try and achieve true competitive advantage and to realise potential revenue synergies. Ultimately, with both players adopting a tit for tat strategy and largey developing similar features, both platforms have evolved to be very similar. Albeit, both AliPay and WeChat Pay are widely and relatively, equally accepted in China so consumers have no incentive to deviate to only one payment provider for now.
Trend Drivers
Before the introduction of WeChat, QQ was the most popular social messaging app among Chinese users. However, users were amazed by the clean interface and convenience of WeChat and soon realized WeChat is the better tool for professional communications. WeChat was officially released in January 2011 and WeChat Pay was introduced in 2013, which perfectly corresponds to the evolution of digital payments in China. The number of its monthly active users reached 355 million in Q4 2013 (Figure 2). The large user base guaranteed a portion of stable users of WeChat Pay at the time of its launch, which is crucial for the rapid expansion of WeChat Pay in the future. Statistics from Ipsos show that the market share of mobile payments in China increased from 3.5% in 2011 to 83.0% in 2018 (Figure 3). WeChat catched the trend of prosperous mobile payments in China and leveraged its customer base to expand and dominate the market.
Figure 2: Number of monthly active WeChat users from 2nd quarter 2011 to 3rd quarter 2020 (in millions) (Statista)
Figure 3: Market share of mobile vs non mobile payments in China (Ipsos)
Alipay started as a third-party mobile and online payment platform. Besides acting as a method of in-store payments, Alipay operates with other financial institutions including Visa and MasterCard and provides financial products through a sub-platform Yu’ebao. As two of the earliest companies entering the digital payment markets, WeChat Pay and Alipay enjoyed the first mover advantage and became the most recognizable brands for digital payments.
Rising e-commerce businesses have and will continue to nurture the growth of WeChat Pay and Alipay. Taobao, the most active Chinese online shopping website, was launched in May 2003, almost the same time as Alipay. Taobao, where people can find almost everything they need, has reshaped Chinese consumer behavior and vitalized e-commerce, express delivery industry, as well as online payments in China. The volume of Taobao’s gross merchandise steadily grew in the past few years, reaching 3,387 yuan in 2020. The COVID-19 pandemic and livestreaming offerings boosted Taobao’s revenue in 2020, where we anticipate a promising future. As the only acceptable payment platform of Taobao, Alipay consolidated its monopoly position in digital payments since every consumer needs to have an Alipay account to place an order on Taobao.
Another short-term catalyst driven by the pandemic is the public’s fear of using physical money, a potential factor in transmitting COVID-19. WeChat Pay and Alipay remain to be the main processors for in-store payments because of their established recognizable brands.
Further Trend Analysis
Although the dominant positions of WeChat Pay and Alipay are hard to shake in the near future, there are some rising prominence of alternative ways to pay, including the digital currency backed by China’s central bank, other small online payment platforms, and even cryptocurrencies. China’s central bank has been developing the digital yuan and recently handed out 10 million yuan (US$1.5 million) in a limited trial during the Lunar New Year. Although the digital currency is not expected to widely circulate in the next few years, this test sent a signal that Chinese digital currency is a potential competitor to WeChat Pay and Alipay, which currently processes about 95% of digital payments in China.
The Chinese government is interrupting Alipay and WeChat Pay’s dominance, aiming to increase competition in the mobile payment market. The government has been supporting the growth of smaller online payment platforms by partially protecting them from giant players. Rising small players include Gopay, Yeepay, 99bill, and more. They have similar functions as WeChat Pay and Alipay but focus on more niche areas catering to unique customer needs.
Serious concerns about transaction safety and user privacy arise with the prosperity of Chinese digital payment markets. China’s central bank argues that WeChat Pay and Alipay are leveraging their dominant market shares to quash competition - antitrust agencies should consider launching a probe. Increased security and regulation has been increasingly brought to users’ attention, and any negative news on WeChat Pay or Alipay using users’ information in an inappropriate way will dampen users’ confidence and trust in them. Short-term effects may not be severe because of heavy reliance and brand effects; however, ignoring such issues will likely bring unpredictable costs to WeChat Pay and Alipay in the future.
Since establishing the foundation of Alipay, the company has constantly added more features, trying to create a more integrated platform. Besides mainly serving as a third-party payment platform, Alipay now offers a wide variety of financial products to help users manage their deposits. Alipay also added interesting features such as donating energy (energy is automatically accumulated as users make transactions) to plant real trees in order to slow desertification. At the same time, WeChat Pay followed the step and started to diversify its product offerings. Developments above suggest that Alipay and WeChat Pay strive to create an integrated platform and own payment ecosystems, increasing users’ reliance and loyalty while securing their dominant positions.
User reliance and integrated platforms sustain WeChat Pay and Alipay’s dominance; however, they will face endogenous and exogenous challenges with changes in industry landscape and rising competitors in the future.