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State of Pay

Chinese e-commerce giant Alibaba saw its Taobao Marketplace and Tmall platforms bring in a total of Rmb19.1bn (USD3bn) in merchant transaction volume during its Singles Day holiday event, making history as the biggest online sales day ever. This colossal shopping frenzy, however, is but a microcosm of the growth realised by Chinese e-commerce. According to consulting group iResearch, the gross market value (GMV) of China’s e-commerce industry hit just under Rmb2tr (USD321bn) in Q3 2012, up 21.9 per cent year-on-year. The Chinese government has acknowledged the industry’s massive economic potential, setting a target for growth in its 12th Five Year Plan at RMB2.8tr (USD443.7bn) by 2015.

The numbers surrounding the e-commerce industry in China have always been impressive, but behind the scenes, it is really China’s e-payment service providers are rolling in the dough. “The trading volume of the e-payments market in China experienced 120 per cent year-on-year growth to RMB2.2tr (USD353.4bn) in 2011, and is expected to reach Rmb12tr by the end of 2015,” says Fox Hu, director at global consultancy Frost & Sullivan. iResearch calculates that China’s online payments alone hit USD157bn in Q3 2012, up 53 per cent year-on-year.

Reigning supreme in China’s domestic online payments market with a 48 per cent market share is Alibaba’s e-payments affiliate, Alipay, which has over 700 million registered users. Boaz Rottenberg, managing director of consultancy Maverick China Research in Beijing, says, “The role Alipay plays in China is greater than the role Paypal plays in the US. The amount of online users that have made purchases using an Alipay account is much higher than those using credit cards.”

Florence Shih, head of international corporate affairs for the Taobao Companies, explains their success by stating, “When the platform was first launched, a big obstacle that e-commerce faced in China was the lack of trust, especially over the Internet, where one did not know who was on the other side of a transaction. The Alipay escrow function helped to resolve those concerns and helped to build mutual trust between consumers and sellers.”

But with two domestic titans so clearly dominating China’s intertwined e-commerce and e-payments industries, it requires some market expertise to see where exactly the growth opportunities for third-party e-payment companies lie.

The Mobile Frontier

“The most attractive sector is mobile payments,” says Hu, citing the nation’s 531 million internet users as the main driver of growth. The China Internet Network Information Centre records China’s Internet penetration at 38.3 per cent, just over half that of the United States. However, the proportion in China of Internet users that connect via mobile devices is relatively high at 69.3 per cent.

Ray Chen, director of Alipay, acknowledges that the opportunity is viable. “Mobile payments are expected to grow by more than 80 per cent year-on-year according to iResearch, and this is an area that we will continue to focus on to enhance user experience and functionality,” he says. Indeed, Alipay already has established a strong presence for that service.” The mobile Alipay application has been installed more than 40 million times. During the 11 November Online Shopping Festival hosted by Taobao and Tmall, Alipay processed more than 9 million mobile payment transactions, five times that of the same day in 2011. These payments accounted for more than 8 per cent of all payments facilitated by Alipay on that day,” Chen adds.

Room for Improvement

According to Zennon Kapron, managing director of advisory firm Kapronasia, “China has built a very strong e-payment infrastructure to support what should be a rapid development of the e-payments industry. At the end of 2011, there were 2.9 billion bankcards in circulation, 531 million internet users, and 976 million mobile phone users in China.” Reading between the lines, however, Kapron emphasises that although China is the biggest smartphone market worldwide, the actual penetration of smartphones is still low. Kapronasia’s research puts the figure at only 10 per cent, while Boston Consultancy Group counts just 193 million online shoppers out of the mainland’s Internet users.

Similarly, Bob Gilman, CEO of Pinpoint China, a bankcard loyalty marketing company, says, “You need to peel the onion. Eighty per cent of expenditure is generated by only 20 per cent of cardholders.” China’s credit card penetration rate is even lower than that of its smartphones. “Card ownership in China is still immature when compared to overseas markets. In China about 8 per cent of the adult population have a credit card, compared to 71 per cent in Hong Kong, 80 per cent in the US and 82 per cent in Australia,” Gilman says.

Legislation is another wild card. As Kapron states, “Some of the market participants are awaiting the finalisation of standards before they make heavy ca pital investments. But at the moment, the priority for them is still to expand business quickly and obtain more customers.” Hu adds, “Government regulation is another uncertain factor. If the government chooses to support some monopolies in the e-payment market, it will harm the development of the industry.”

These infrastructural hurdles, however, offer a stimulating undercurrent. In addition to shedding light on the massive potential for growth in China, they also motivate companies to look beyond the mainland. “Competition in China’s top-tier cities is increasingly stiff, which makes it harder to compete and gain market share. And the rural market is still economically undeveloped, so there is not as much interest in e-payments,” says Kapron, explaining the logic behind looking outward. Rottenberg offers another reason. “Domestically, e-payment service providers are not competing on anything but price, and now both banks and online merchants are squeezing payment providers with the fees that they charge, So payment providers instead can achieve higher margins by charging higher fees on cross-border transactions,” he says.

The e-payments sector has witnessed plenty of movement recently, with partnerships being announced between Allied Wallet and Dinpay, Western Union and ChinaPay, and Trunkbow and UnionPay. By providing services to Chinese people travelling abroad and connecting Western consumers to Chinese retailers, these partnerships will expand e-payment markets transnationally, consolidating and fuelling an industry set to experience further monumental growth.

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