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China’s e-wallet success is an example for Southeast Asia players

Time: 2019-08-02

Southeast Asia’s slow adoption of e-wallets may seem odd, given that its neighbor China has perhaps the most robust mobile payments sector in the world. Tech giants Alibaba and Tencent have dominated the field with Alipay and WeChat Pay.

In some ways, the success of e-wallets in China highlights aspects of the Chinese market that would be difficult to recreate elsewhere. But Southeast Asia can pick up some lessons if it hopes to push consumers towards a cash-free world.
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1. China’s e-wallet duopoly reaps network effects

After launching Alipay in 2004, Alibaba had a virtual monopoly on China’s e-wallet market for years. Enter Tencent’s WeChat Pay in 2013, and the market really heated up.

As the archrivals went head-to-head to solidify their platforms in the growing consumption economy, other competitors were largely locked out. China got Apple Pay in 2016, but consumers had little reason to be excited about it.

Alibaba and Tencent now control 92 percent of China’s mobile payments market, according to Mary Meeker’s Internet Trends 2018 report from Kleiner Perkins.

While Chinese consumers know they can get virtually anything they want using Alipay or WeChat Pay, options aren’t so simple in surrounding countries.

There are a number of local and regional players in Southeast Asia’s various markets, where the e-wallet race has attracted an eclectic mix of companies.

Two ride-hailing services have their own payment platforms: Indonesia’s Go-Jek has Go-Pay and Singapore’s Grab has GrabPay. Malaysia alone reportedly has 40 e-wallet providers, while Singapore has 27. Vietnam and the Philippines also have their own homegrown solutions.

Having so many options can make it difficult for consumers to choose. However, both Alibaba and Tencent benefited from network effects that gave consumers a reason to use their mobile payment platforms in the first place.

2. Alibaba and Tencent hooked consumers early

Alipay began as a payment platform for Alibaba’s Taobao, China’s largest ecommerce marketplace. By the time it was competing with WeChat Pay, it still enjoyed first-mover advantage. At present, Alipay accounts for 54 percent of mobile payments in the country.

Tencent was able to push its way into mobile payments because it controls WeChat, the largest social network in China. When WeChat added an e-wallet, it became simple for people to send money to all the friends and family members that they were already connected with on the app. Rolling out the red envelopes feature for Chinese New Year in 2014 popularized WeChat Pay by mimicking the age-old tradition of giving physical red envelopes with money inside as gifts.

alipay wechat icons smartphoneAfter the introduction of WeChat Pay and QR payments for offline merchants, Alibaba and Tencent started competing for merchants. Now there are very few holdouts in major cities that only accept payments from one platform.

In Southeast Asia, though, cash and cards remain the norm as mobile payment platforms struggle to convince consumers to ditch the plastic when they spend in stores.

In Malaysia, Nielsen found that 72 percent of people had security concerns about mobile payments in 2016, while 55 percent said rewards could get them to use e-wallets more often. 63 percent and 58 percent of respondents in the Philippines and Singapore, respectively, said the same thing about rewards.

Another reason to use mobile payments is faster checkout times. Indonesia, Thailand, and Vietnam each had 65 percent of respondents say this would better incentivize use of mobile payments. This has already been implemented in restaurants across China, for example, where consumers are able to scan a QR code to order immediately while waiting in line or sitting at a table.

Without a hook, consumers have little reason to switch to e-wallets, so providers are trying to make their services enticing. WeChat, GrabPay and Go-Pay offer peer-to-peer payments, making it easy to transfer funds between users. Razer Pay, now available in Malaysia, lets people top up their e-wallets with PINs purchased at 7-Eleven stores. Go-Pay has also started to use 20 percent and 50 percent cashback offers in November to get people to try out mobile payments.

Getting new users can still be a challenge, though. Credit and debit cards are simpler and are sometimes more reliable than e-wallets. Most of the time, e-wallets serve as intermediaries for those cards as well.

3. Alibaba and Tencent got the merchants onboard

E-wallet providers can’t draw in users without having merchants onboard, of course. This is something Alibaba and Tencent have done exceptionally well since their e-wallets started competing in physical retail.

The internet giants understood early on that vendors in less-developed markets may not be very receptive to mobile payment options that require a big investment in upgrading equipment. In the US, many payment terminals had to be upgraded to be compatible with near field communication or NFC to accept Apple Pay and Google Pay.

In China, anyone could print out a QR code and ask people to scan and pay. Many payment terminals have also been upgraded to accept payments by scanning QR codes on consumers’ phones, expediting the process. This has become such a ubiquitous form of payment in the country that automated kiosks at McDonald’s include QR code readers. It’s a simple but effective way of implementing mobile payments.

Tencent has also been able to win over merchants by giving them a direct link to consumers’ everyday lives. When people pay through WeChat, they are automatically subscribed to a store’s official WeChat account, where they can get deals and coupons sent to their phone, enticing them to spend more money at the store.

One sticking point for merchants has always been the interchange fees from credit card companies that take a percentage of each transaction. Apple Pay and Google Pay work by saving credit card info and charging directly to cards stored in the apps, meaning the interchange fees remain. This process makes e-wallet appsless revolutionary than presented, and it gives merchants no reason to go out of their way to adopt the new technology.

Alipay and WeChat Pay, on the other hand, have the ability to draw funds directly from bank accounts, bypassing UnionPay, China’s biggest payment card issuer. This makes mobile payments more practical to use for any expense, even a 3 yuan (US$0.50) bottle of water. With more use cases for both wallets, Chinese merchants have more opportunity for sales.

This avoids interchange fees, though doesn’t necessarily make things cheaper for Chinese merchants. Alipay charges merchants 0.55 percent of the transaction – assuming a merchant isn’t able to negotiate a lower fee.

In 2016, bank card interchange fees for merchants in China were standardizedto 0.35 percent for debit cards and 0.45 percent for credit cards. This is much lower compared to the 1.51 percent plus US$0.10 for Visa cards in the US.

Since platforms elsewhere rely more on card transactions, even within e-wallets, tackling interchange fees could be one way to win over merchants. While the fees are normally set by governments, Malaysia has already started to take action. In 2015, the country’s central bank introduced the Payment Card Reform Framework, which lowered rates to just 0.21 percent for international debit card transactions and 1.1 percent for credit cards. Malaysia has also banned merchants from issuing surcharges for card payments.

Major players in Southeast Asia like GrabPay and Go-Pay have followed Alibaba and Tencent’s lead by enabling users to top up their e-wallet balance through direct bank transfers, thus avoiding interchange fees.

In addition, GrabPay, Go-Pay and even newcomers in the region like Razer Pay have already adopted QR payments. When more merchants are ready to embrace the technology, they will at least have a cheaper option than NFC.

Going their own way

Ultimately, not everything that works in China will be applicable to other markets. Most systems in the US use NFC that’s not as susceptible to the types of phishing scams that have emerged through the use of QR codes in China. That kind of security may be worth the extra cost for some markets.

The future of payments in Southeast Asia is mobile, whether that future resembles China’s or not. Mobile payments in the region are expected to grow to US$31 billion by 2021 from less than US$10 billion in 2016, according to Euromonitor International data, with Thailand and Indonesia leading the pack.

This trend could benefit the region’s ride-hailing companies as they move into mobile payments. Like Alibaba and Tencent in China, Grab and Go-Jek are best positioned to benefit from network effects of building up large user bases across multiple countries in Southeast Asia.

Go-Jek now operates in Singapore, Thailand, and Vietnam, in addition to its home market. Grab’s footprint is even larger, expanding from Malaysia and Singapore to cover Indonesia, the Philippines, Thailand, Vietnam, Cambodia, and Myanmar.

Both companies are also forging partnerships to expand their merchant networks and boost the adoption of their e-wallets.

However, despite the existence of Grab, Go-Jek and their myriad of competitors in the region, the speed with which consumers ditch cash could hinge on on regulation and market consolidation. Hastening change could have its benefits, but it may not come easy to places where cash remains king.