dgroup • China’s Mobile Finance Evolution and How Western Banks Can Chase It

Although there is a lot of hype around the fintech industry, only few concepts have proven to significantly scale so far. One of the most important drivers of fintech are mobile payment solutions. As opposed to many other tech areas, the mobile payment revolution is not only driven by US companies: Chinese internet giants clearly lead the way in terms of innovation and scale in this field.

In 2015, the Chinese mobile payment market exceeded USD 1,5 trillion. Most dominant market players are Alipay, which is affiliated with Chinese ecommerce powerhouse Alibaba as well as Tenpay and WeChat Pay, both owned by Tencent. Alipay owns 69% of the market and has managed to cross the USD 1 Trillion transaction volume in only 8 years. With this amount It has achieved roughly 15% of the global transaction volume of VISA, the world`s largest payment provider.

Alipay does not only have twice as many user accounts as Paypal. It is also far superior in terms of innovation and services. Integration with offline retail and private banking as well as services like splitting bills in restaurants are just some examples where Alipay is ahead of the Western players.

We Chat, the other major player, was born at the periphery of WeChat, the largest messaging service in China with more than 700 million monthly active users. WeChat Pay allows its users to pay for goods and services (online and offline) as well as P2P money transfer from WeChat Wallet or attached credit or debit card. During our projects in China as well as our INSIDE CHINA SUMMIT we learned, that WeChat plays a crucial role in social life of Chinese people and is a prime example for a shift of internet usage towards messengers.

Alipay is not only a payment but rather a lifestyle app

From our standpoint, three major reasons have fueled the growth of the online payment landscape in China:

The Leapfrogging Phenomenon

Especially in underdeveloped parts of China, most of the people have never had access to telephones. With the digitalization and roll out of cellular technology, the Chinese were able to leapfrog traditional landline telephones and directly use mobile phones. The infrastructure boost and availability of low price smartphones devices have enabled almost 80% of the population to access the internet through mobile phones and thus use mobile payment solutions.

Booming ecommerce

With a total volume of more than USD 500 Billion, China has become the largest ecommerce market in the world. Only Alibaba, for instance, exceeded USD 400 Billion gross merchandise volume in the year 2015, more than ebay and Amazon together on a worldwide basis. Due to a rather low credit
card penetration in China, consumers need to adapt to mobile payment platforms in order to buy online or use Didi Kuaidi, the leading taxi platform in China.

Growing ecosystems

In no other country worldwide the dominance of ecosystems is as strong as in China. The integration of ecommerce, financial services, communication, games and plenty of other services in single platforms makes it very easy to drive adoption and usage of mobile payments. For instance, social games are a very popular WeChat feature. In order to purchase virtual items for these games, users need a payment solution which WeChat offers. As another example, WeChat utilizes its 700m user base to transform the “Red envelope” money gift tradition around Chinese new year`s eve into the digital age. In 2015, the red envelope campaign resulted in more than 300m sent red envelopes — obviously a gigantic generation engine for new accounts.

Challenges to Be Met by Western Banks

Western banks don’t only have to deal with home grown problems, such as overregulated markets, tailspin of core businesses due to low rate policy, agile startups entering the fintech market as well as own IT legacy systems not capable of adapting to evolving market and customer needs. They are also confronted with the international expansion of Chinese companies (Alipay launching in Europe in Summer 2016) which should generate an intense sense of urgency for Western banks.

Surely, Chinese business models can’t be applied to Western markets directly. Yet Chinese players have enormous technological and operational advantages and it’s going to take years of hard work until Western counterparts will be able to catch up with them.

Western Mobile Finance Evolution — How to Start Closing the Gap

Digitalization keeps transforming industries one by one. The financial industry is standing at the edge of disruptive transformation. Nevertheless, as trivial as it might sound, digitalization and mobile technologies in particular are more of a chance than of a threat, provided that businesses know how to deal with it.

These four steps are the starting point of the change process which has to be driven by the CEOs/MDs of financial institutions or banks in the Western hemisphere:

• CEOs should invest both time and money to understand what digitalization means to their core businesses and how it will affect them
• CEOs should define whether they want to achieve “best effort” with their digital activities or be “best-in-class digital disruptor” by implementing new market standards for services and rolling out new products
• CTOs / CIOs should re-assess the fit of legacy systems in regard to the fast-paced digital market environment and align the IT strategy with the overall digital strategy
• New forms of digital (more agile and therefore flexible) organization should be installed and new working methods should be implemented to achieve faster time-to-market.

If you are interested in learning more about the topic or need help in this area, please do not hesitate to get in touch.

Mischa Rogov is Senior Analyst for digital transformation at dgroup. His interests lie in the field of mobile and marketing technologies as well as new business models.

Originally published at www.d-group.com.