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How Alipay is killing cash in China, and wants to take the world stage

Ant Financial’s Alipay is valued at over USD 150 billion and is now expanding quickly outside of China.

Photo: provided to KrASIA

Currently, China has transformed into an almost cashless society where most payment transactions are done via mobile phones through QR codes. From buying groceries at the market to renting a shared bike, purchasing a ticket to the cinema, or even grabbing some snacks on the street, all you need is your phone, and one of these two apps: Alipay or WeChat Pay.

Alipay, a company that was born 15 years ago, on December 8, 2004, is the pioneer of China’s digital payment revolution. Alipay was first developed by Alibaba’s Taobao team as an escrow system to enable trustworthy payments in the e-commerce site. Quickly, the platform evolved into a seller accreditation system that partnered with major Chinese banks, offering daily payment options. By 2010, Alipay had established connections with over 200 banks in China, and started to allow “quick payments” services, and an e-wallet platform where users could keep their money on virtual accounts.

The e-payment revolution was starting. In October 2014, Alipay spun off from Alibaba and restructured as Ant Financial. Alibaba’s founder Jack Ma shared his vision about the firm and microfinance, saying that Ant Financial’s goal was to build a fair, transparent, and open financial system.

In June 2018, Ant Financial raised around USD 14 billion in what market watchers called the biggest-ever single fundraising globally by a private company, reaching a valuation of over USD 150 billion.

Today, Alipay and its rival Tencent’s WeChat Pay dominate more than 90% of the mobile payments market in China. Ant Financial chairman and CEO Eric Jing said in September that Alipay and its international e-wallet partners have collectively served 1.2 billion users worldwide by the end of June. The firm now also offers other services such as wealth management platform Ant Fortune, private online bank MYbank, and credit scoring and loyalty program system Zhima Credit, among others.

On its 15th anniversary, it is worthwhile to look back at what this company has experienced and what it has brought to Chinese people and to the rest of the world.

Shopping online

Alibaba’s C2C online marketplace Taobao went online in 2003 but it failed to take off immediately due to a lack of trust among buyers and sellers. People were once reluctant to buy as they needed to pay money to sellers in advance before they could even see the goods.

After Alipay went online, the system initially helped to build trust between buyers and sellers, as buyers would only need to pay money first to the platform, which would transfer the amount to sellers only when goods were received by the buyers, acting as a guarantee instrument.

E-commerce has since then boomed in China. By the end of 2018, a total of 610 million Chinese had shopped online, up 14.4% year-on-year, according to a report by the China Internet Network Information Center.

In the first ten months of this year, retail sales in the country reached RMB 33.5 trillion (USD 4.8 trillion), up 8.1% year-on-year, according to data disclosed by the National Bureau of Statistics of China. Meanwhile, online retail sales amounted RMB 8.2 trillion, up 16.4% year-on-year and accounting for 24.5% of the entire retail sales.

During this year’s 24-hour Singles Day e-shopping event, on November 11, Alibaba alone witnessed USD 38.4 billion sales on its platforms, an amount which is bigger than the USD 7.4 billion collected during Black Friday, and USD 9.4 billion on Cyber Monday, two of the biggest international shopping days of the year.

Going cashless

Alipay has gradually moved from being an infrastructure for e-commerce to become a payment tool all around.

Starting from October 2008, Chinese people have been able to pay their electricity, water, and gas bills via Alipay, according to Ant Financial’s website.

However, it was only from May 2011 that Alipay got a payment license designated for non-financial institutions from the People’s Bank of China, the country’s central bank. It was also at the same time that Tencent got such a payment license via its subsidiary Tenpay. Tencent rolled out WeChat Pay in August 2013, which soon waged a payment war against Alipay.

In the same year, Alipay introduced its proprietary QR code version, which allowed offline partnering merchants to accept payment in real-time by scanning an individual’s QR code in Alipay Wallet, quickly attracting over 200,000 offline partnering stores to its network. WeChat pay also launched its own QR proprietary code version the same year.

WeChat Pay gained great momentum during the Chinese Spring Festival in 2014 due to its “red packets”, a social feature allowing WeChat users to send a small sum of money to their contacts via the instant messaging app directly. Its competition with Alipay soon expanded to many areas, including shopping malls, small brick-and-mortar stores, public transportation systems, ride-hailing, and bike-sharing industries.

Cash is still a payment tool in China but it has turned increasingly irrelevant in daily life. Even street vendors and poor baggers have started to collect money via Alipay and WeChat Pay.

In 2018, the market share of mobile payments in China accounted for 83% of all payments, representing a critical growth from 3.5% in 2011, according to data portal Statista, which added that around 92% of consumers in Chinese big cities use Alipay or WeChat Pay as their main means of payment. According to a report by the China Internet Network Information Center, 72.5% of China’s 829 million internet users have adopted online payments.

Going into fintech

Yu’e Bao, a platform inside Alipay allowing users to buy money market funds, starting from RMB 1, went online in 2013. Soon after, similar money market funds were offered on WeChat Pay. These online asset management tools have almost zero entry barriers and allow their holders to gain extra returns on their savings, while also allowing instant withdrawal.

The new technology has drained deposits in traditional banks. At the end of 2018, Tianhong Yu’e Bao, one of the 20 funds on Yu’e Bao platform, was managing assets worth RMB 1.13 trillion (USD 168 billion), surpassing JP Morgan’s government money-market fund at USD 150 billion.

After Yu’e Bao, Ant Financial also launched Xiang Hu Bao, a mutual help platform within Alipay. The platform, which provides basic health plans to cover costs related to 100 critical illnesses, has gained 100 million users as of November 22 since its launch in October 2018. These plans bear similarity to health insurance albeit with substantial differences. Xiang Hu Bao does not ask for in-advance payment and yearly premiums, and when a participant makes a claim to cover a medical bill, the user receives a one-time payout where the cost is shared equally with all other members.

Nearly 12,000 patients have benefited from such plans, said the company. The majority of Xiang Hu Bao’s participants are from middle or low-income communities who are at great risk of falling into poverty if they become critically ill.

Global impact

Alipay and WeChat Pay are also expanding overseas, first targeting Chinese travelers abroad. Alipay is now available in over 54 markets worldwide.

Alipay’s head of Europe, Roland Palmer, said in an interview with CNBC in June that the company has tripled its number of European merchants, with “tens of thousands” joining in the past year.

The firm has also connected with more than 300,000 merchants in Japan since 2015, said Ant Financial’s chairman and CEO Jing in May.

Alipay has also started a collaboration with Barclaycard, which handles almost half of Britain’s debit and credit card transactions, allowing Alipay users to pay UK merchants through smartphone transactions. In February 2019, the company bought London-based payments firm WorldFirst, to better serve smaller businesses worldwide, including in the US, Alipay said in a statement, as reported by Bloomberg.

In March 2019, Ant Financial led the C Round financing of Blue Mobile, a vending machine provider and payment platform with subsidiaries in countries such as Malaysia, Indonesia, Thailand, and Vietnam, to foray into the SEA market.

Since the middle of November 2019, Alipay started to allow global travelers in China to use the platform to pay for services when visiting the country through a prepaid card service provided by the Bank of Shanghai. Rival Wechat Pay also rolled out a similar service through a partnership with Visa, MasterCard, American Express, Discover Global Network, and JCB, after the country’s central bank asked payment platforms to clear obstacles preventing international tourists to use their mobile payment services in China.

Ant Financial has also been investing overseas, bringing Chinese capital, technologies, and expertise to a slew of companies such as Indian fintech decacorn Paytm.

The Hangzhou-based unicorn said it may apply for a digital banking license in Singapore, to provide a variety of financial services and take deposits from retail customers with digital full bank license.

China’s payment system has evolved into a structure based on non-bank payment platforms and QR codes, in contrast to the Western bank-centric model relying on bank cards, according to a report by The Brookings Institution, which adds that the future looks bright for Alipay, since its payment system will be more integrated into global payments, and the company will continue to grow domestically and globally.