China 20/20: The Future of Mobile Payment in China. The future of mobile payments in China through the eyes of 20 industry professionals.

Transcription

1 China 20/20: The Future of Mobile Payment in China The future of mobile payments in China through the eyes of 20 industry professionals. Report Authors: Arlyss Gease, Joan Qiu Published December 2012

2 When Maverick China Research first started covering e-payments in China in early 2006, credit card use was mostly confined to 5 star hotels in China s major industrialized cities. Public transportation in China s capital was still paid for in cash; in some parts of the country, bank transactions were still done with the use of a paper bank book; Alipay, China s largest payment provider, was only a recent launch; and most purchases, from mobile phones to automobiles, were still paid for in cash. Frankly, in those early days any form of widespread electronic payment networks being established in China seemed a vision of a distant future, but only 6 years have passed and it seems like that was decades ago. Table of Contents Introduction 3 China s MNOs: The Standard-Bearers? 8 Third-Party Payment: Moving into Mobile 11 The Future of Mobile Payment in China 15 In the years since, the use of bankcards have become widespread, credit card penetration is on the rise, and China s e-commerce sector is growing at a rapid rate along with companies such as Alipay, Taobao, 360Buy, and the like. In response to high demand we have provided our clients with insights into the Chinese Payments market and have covered the growth of online payment, mobile payment, prepaid card payments, contactless payments, as well as the use of virtual currencies and other related topics. We have published over 20 market reports covering e-payments in China, including the fifth edition of our Mobile Payment in China report that came out in I would like to thank Wirecard AG for making the release of this whitepaper possible and for their constant support. We hope you find this whitepaper valuable, and enjoy reading it as much as we enjoyed writing it. Thank you. Boaz Rottenberg Managing Director China 20/20: The Future of Mobile Payment in China Page 2 of 20

3 Introduction China is home to the largest mobile network in the world, with millions of new users added every month. In the past ten years, Chinese consumers have widely adopted electronic payment services, including bankcards, online payment, and contactless smartcards. The convergence of the mobile and e-payment industries is creating numerous opportunities for new services and inter-industry partnerships. Three high-speed broadband networks already operate in China's cities, with tens of millions of users have signed up for 3G services. It is no wonder, therefore, that optimism regarding China's m-payment sector is high. Although challenges abound in developing e-payment services for what remains a largely cash-based economy, the huge potential for mobile payment in China has been enough to garner sustained interest from multinational payment companies, mobile operators, and investors. In this whitepaper, we examine China s mobile payment market through in-depth interviews with 20 industry leaders, including executives at leading payment providers, telecom operators, technology companies, and card issuers; we conclude by providing an outlook for the future of mobile payments in China. China 20/20: The Future of Mobile Payment in China Page 3 of 20

4 A Late Start to e-payment China's modern banking system dates back to the "reform and opening up" policies in the late 1970s. Market growth was relatively slow due to a lack of consumer demand, an aversion to debt, and a relatively slow pace of reform in the financial sector. The first Chinese credit card was not issued until 1986 by the Bank of China, and it was not until 2002 that a nationwide interbank network was launched - China UnionPay (CUP). Bankcard use did not become widespread until several years later. Nevertheless, although adoption of e-payment has been initially slow, the speed of adoption has increased tremendously since 2006 and the future of these services looks bright. China s late start: Banking and e-commerce milestones 1950 Diners launches world s first credit card 1986 Bank of China launches China s first credit card 1995 ebay founded Bankcards Nearing 3 Billion Chinese consumers who grew up in a purely cash economy are quickly adapting to the newer methods of e-payment. According +15% Bankcard Growth ( ) to the People's Bank of China (PBOC), approximately 3.4 billion bankcards - both debit and credit - have been issued in China through 2012, up from 2.95 billion at the end of Although off to a late start, credit card circulation is growing as China s banks push these services more aggressively than ever before. According to the People's Bank of China (PBOC), approximately 318 million credit cards have been issued in China through 2012, up from 285 million at the end of PayPal founded 2002 China UnionPay founded 2004 Taobao founded 2005 PBOC issues the Electronic Payment Guidelines (No. 1), rules clarifying the role of third-party payment providers 2005 Alipay founded 2009 Telecom operator restructuring, e-commerce in China Taking Off As the Chinese population comes online and become more ready users of electronic payment channels, the e-commerce market is set to displace that of the US as the largest in the world. The market is maturing as it grows and China s online merchants are creating from scratch solutions to a unique set of challenges. A variety of payment options make it easy for Chinese consumers to shop online, and in many sectors Chinese companies have successfully captured the market against foreign entrants. 3G rollout 2011 First batch third-party payment licenses issued 2012 Over 200 payment licenses issued China 20/20: The Future of Mobile Payment in China Page 4 of 20

5 COD Payments Continue to Decline In Online Payment and e-commerce 2009, a report commissioned by Wirecard, we found that cash-on-delivery was the payment method for 22.4% of online transactions in In our 2012 update to that report, we found that today cash-on-delivery is used to process only half as many transactions, or 11.6%. (The drop was steepest in purchases of consumer electronics; see sidebar.) This decline in COD payments for online purchases signals Chinese consumers willingness to adopt alternatives to cash-based payments when convenience and appropriate incentives and are in place. Cash on Delivery Overall Percentage of Online Transactions 2009: 22.5% 2012: 11.6% In Clothing, Accessories, and Sporting Goods 2009: 21.9% 2012: 13.9% Mobile Subscribers over 1 Billion With over 1 billion people using mobile phones in China, the mobile phone is well established as the country's most important personal electronic device. Top-tier cities, like Beijing and Shanghai, hover around 100% mobile phone penetration. Healthy and steady growth in the mobile and internet sectors have long added to the optimism surrounding m-payment in China. In Consumer Electronics 2009: 31% 2012: 12.5% Mobile Subscribers in China, 2001-Nov 2012 (M) 1, Nov 2012 Source: Maverick China Research/China Mobile/China Unicom/China Telecom, 2012 China 20/20: The Future of Mobile Payment in China Page 5 of 20

6 Strong 3G User Base China's 3G subscriber base grew dramatically in 2011 and 2012, and now by official counts numbers over 220 million. Overall monthly subscription growth has remained strong with the majority of net new subscriptions for 3G, a trend which suggests further 3G growth ahead. While data prices remain high and speeds low compared to networks in other countries, 3G in China has vastly improved the mobile internet user experience. Mobile Devices are Ready The experience of shopping and purchasing through a phone is more compelling than ever, thanks to the iphone and the generation of handsets and smartphones it has inspired. The introduction of the ipad, also popular enough to be widely imitated in China, has broadened the range of internet-connected devices that will be used for m-payments. Moreover, mobile apps are making it easier for users to customize their phones with software and services. Third-party payment providers have been quick to release their own end-client software; this substantially simplifies the process of getting current online payment users to give m-payments a try. Mobile Internet Usage on the Rise For many Chinese, the mobile phone has become a key device for music, entertainment, and communications, especially among younger users. In the past few years, more Chinese mobile users are using their mobile phone for internet browsing as well; according to the CNNIC, mobile internet users numbered 422 million at the end of The continued growth of mobile internet users is good news for those mobile payment platforms which require users to have mobile internet access. Beijing : 28.5M mobile users 145% penetration rate Shanghai: 27.3 M mobile users 116% penetration rate Guangdong Province: 110.8M mobile users 106% penetration rate Hong Kong: 12.6M mobile users 180% penetration rate China 20/20: The Future of Mobile Payment in China Page 6 of 20

7 It is difficult to stress just how fast China has moved into e-payments from what was until just a few years ago a largely cash-based economy. Hundreds of millions of Chinese consumers are making electronic payments when shopping online, swiping bank cards to pay for meals, and riding public transit with contactless cards. The success of these other methods has provided a large user base who, while not entirely sold on m-payments yet, are certainly more comfortable with the idea than they were just a few years back. Mobile Internet Users in China, (M) Source: Maverick China Research/CNNIC, 2012 China 20/20: The Future of Mobile Payment in China Page 7 of 20

8 China s MNOs: The Standard-Bearers? China s mobile number operators - China Mobile, China Telecom, and China Unicom - were active in the mobile payment market in 2011 and Each MNO launched its own payment company, and on December 31 st 2011, all three received mobile payment licenses allowing them to legally provide mobile payment services. China s MNOs are not the only players in the mobile payment market. Mobile internet payment is handled in large part by China s third-party payment providers. Most major players in online or mobile payment use SMS for payment verification. However, near field communication (NFC) and contactless payments remain the least-developed and most-discussed form of payment in China. Mobile operators, device makers, existing contactless network operators, and others all aim to take a leading role in what they expect to be a highly lucrative future market. China 20/20: The Future of Mobile Payment in China Page 8 of 20

9 Payment Standards: NFC vs. RF-SIM NFC uses a 13.56MHz standard frequency. While NFC appears to be the consensus for contactless payments in China, this has not always been the case. China Mobile also looked into a similar contactless payment solution, known as RF-SIM, which uses a 2.4GHz frequency. The 2.4GHz standard has higher transmission power, allowing it to penetrate through a phone's battery; in contrast, the NFC 13.56MHz standard requires users to purchase specific handsets with contactless payment capabilities built in. After aggressive moves in 2010, including ordering over one million RF-SIM cards, in 2011 China Mobile joined the other two mobile operators and China UnionPay in publically announcing support for the 13.56MHz NFC standard. It was widely believed that the government, which did not want two competing standards, played a major role in pressuring China Mobile to give up on RF-SIM. Government Regulation In November 2011, China's Ministry of Industry and Information Technology (MIIT) announced that it is drafting national standards for contactless payment using SIM cards and NFC terminals. Speaking at an industry conference, an MIIT representative stated that while both 13.56MHz NFC and 2.4GHz RF-SIM standards will be used in China, that only NFC will be used to process financial transactions in the general market. The 2.4GHz frequency will only be used for closed application environments. China Mobile Mobile Wallet RFID-SIM 2.4GHz: Public Transit, Merchants SIMpass 13.56MHz: Public Transit, Merchants China Telecom Bestpay RFID-SIM 13.56MHz: Firms, Campuses SIMpass 13.56MHz: Public Transit, Merchants China Unicom Woyifu RFID-SIM 2.4GHz: Public Transit, Merchants SIMpass 13.56MHz: Public Transit NFC 13.56MHz: Public Transit The new 2.4GHz based mobile payment products that were launched during the last year by China Mobile and China Unicom are applied in Shenzhen and Guangzhou, and are mainly used in public transportation closed environment (buses and subways). However, these specific products are also used with some small merchants. There is thus still an attempt of some of the MNO s, mainly China Mobile, to expand the use of the 2.4GHz standard. China 20/20: The Future of Mobile Payment in China Page 9 of 20

10 NFC Implementation with SIMpass All three of the Chinese MNOs have developed 13.56MHz mobile payment products using SIMpass. SIMpass is an NFC implementation developed by Watchdata, and is one of the most practical ways to apply widely accepted NFC technology. SIMpass has low introduction costs compared to other NFC implementations; most mobile subscribers need only change their SIM card to a SIMpass card. The SIMpass antenna is either integrated into the phone battery or the main board, which can be modified by mobile phone manufactures without the need for any major changes to the device. The majority of mobiles handsets currently out in the market today are compatible with SIMpass. It claimed to have 30 million users by March So far, the MNOs mobile technologies have been implemented in individual products with local partners. Below are some contactless payment products that incorporate the MNO s technology Mobile Shenzhentong: Run on the China Mobile RFID-SIM 2.4GHz standard, this product replaces the transport cards in Shenzhen. It is offered in partnership with Shenzhentong and ICBC. Partnerships In order for NFC to become a reality, China's MNOs and financial institutions will need to cooperate. China Mobile has recently entered into two such partnerships. Example 1: China Mobile and SPDB In November 2010, China Mobile bought a 20% stake in Shanghai Pudong Development Bank (SPDB). The relationship is intended to facilitate the development of both mobile payment Beijing Mobile Citizen Card: using the SIMpass 14.56MHz standard, China Unicom phones with the card can be used at automatic fare collection terminals throughout the city. and mobile banking products. The partnership has not yet been followed by any bold moves into the mobile space. In November 2011, SPDB and China Mobile introduced credit and debit cards that support small mobile electronic payments, but like many products offered by China s MNOs, the release of these cards was regional; the cards were only released by SPDB s Guangdong branch in Guangzhou. Still, China Mobile s intention to move into mobile payment is clear. Example 2: China Mobile and China UnionPay In June 2012, China Mobile and China UnionPay signed a cooperation agreement for the development of mobile payments in China. Both mobile banking and contactless payments are on the agenda. China Unicom described the partnership as an opportunity to link China Mobile SIM cards to users' financial accounts; the press release also emphasized that UnionPay sees 2012 as a key year in the development of mobile payment in China. This is a partnership to watch: if China Mobile and China UnionPay choose to move quickly, the results could be significant. China 20/20: The Future of Mobile Payment in China Page 10 of 20

11 Third-Party Payment: Moving into Mobile China UnionPay, China's sole interbank network, and China Mobile, the world s largest mobile operator by customers, remain the two most important players in China's m-payment industry, but their influence is weakening. Operator restructuring and the careful allotment of 3G wireless standards have had their intended effect of increasing competition between China's three operators. And while China UnionPay maintains its monopoly on payment processing, Alipay and other third-party payment providers have become the clear channel of choice for consumers due to their constant innovation, attentiveness to user demands, and ability to handle a wide range of payment methods outside of bankcards. China 20/20: The Future of Mobile Payment in China Page 11 of 20

12 e-payment Regulatory Reforms Even with the gradual opening of China's economy to foreign investment and competition, China's central government continues to wield an enormous amount of power to develop, regulate, and control China's industries; this is especially true for "sensitive" industries such as the telecommunications and the finance sectors. Recent regulations issued by China's central bank have finally clarified the government's attitude towards third-party payment providers. In June 2010, the People's Bank of China (PBOC), China's central bank and chief financial regulator, issued the Administrative Measures on Payment Services Provided by Non-financial Institutions. This long-awaited statement stipulates that non-financial institutions providing third-party payment services, including online payment and prepaid card issuance, must obtain a license from the PBOC. The requirements, which took effect on September 1, 2011, include a minimum registered capital, a two-year profit record, and a significant background in payment services. License Requirements for Third-Party Payment Providers Registered Capital - Nationwide: 100 million RMB - Provincial: 30 million RMB Industry Experience - Two years recorded profit - Five senior executives with extensive knowledge of payment services China s largest third party payment providers, including Alipay, Tenpay, and 99Bill, received licenses when the first 27 were issued in May Since then, over 200 payment licenses have been released, the most recent being the fifth batch released on January 6, These batches have included licenses for MNOs, local transportation card providers, prepaid card providers, and other payment channel providers. Legal Record - Senior managers not penalized for any illegal payments in past three years China 20/20: The Future of Mobile Payment in China Page 12 of 20

13 China s Third-Party Payment Providers Although there are currently more than 200 licensed payment providers operating in China today, the majority offer prepaid card services, though some still service niche markets and offer other limited services; only eight or so payment providers have managed to gain actual traction. Alipay sits comfortably in first place amongst payment providers, by far the largest provider in China in terms of users, merchant partners, and transaction volume. This position is in part due to Alipay s status as the sole payment platform for Taobao, China s largest online marketplace. Following Alipay are Tenpay, 99Bill, and YeePay. Tenpay is the payment platform for Tencent, one of the largest web companies in the world. 99Bill s is an independent platform for China s online merchants whose popularity originally derived from the sale of discounted China Mobile pre-paid cards. YeePay s main focus is on online and telephone payment, but offers an e-payment platform that includes m-payment, online payment, and telephone payment services. Payment Provider Recognition Alipay 99% Tenpay 70% 99Bill 39% YeePay 27% PayPal 19% Moving into Mobile China s large payment providers all have taken steps towards offering mobile services, like tailoring their online platforms for smartphone use. However, relatively few have made a major push into mobile. 99Bill and Alipay offer some of the most innovative services. 99Bill has a new mobile payment product that supports multiple operating systems and turns the user s mobile phone into a portable POS device to carry out remote payment, mobile receipt of incoming funds, management of incoming funds for SMEs and P2P payments. Alipay has introduced China's first major barcode-based payment service, Barcode Pay. Barcode Pay a user generates a unique barcode on his mobile phone screen; the merchant gets the user's account information by scanning the code with a barcode scanner or smartphone camera and the user confirms the transfer of funds. China 20/20: The Future of Mobile Payment in China Page 13 of 20

14 A Place for Smaller Providers? Other innovative products are being developed by China s smaller payment providers. Start up providers with less than 1% market share rely on the development of innovative products to carve out a role in the competitive third party payment market, and mobile is one area where they are focusing their efforts. Such payment providers should be wary, however; if mobile services distinct from the web platforms offered by Alipay, Tenpay, and the rest become significant payment channels, these giants are sure to roll out their own competing products. To avoid getting eaten for lunch, small payment providers will have to have clear business models and be very focused. China 20/20: The Future of Mobile Payment in China Page 14 of 20

15 The Future of Mobile Payment in China Mobile payment has a bright future in China, but 2012 is going to be a year of great uncertainty. In many ways, the stage seems to be set for mobile payment in China. The experience of shopping and purchasing through a phone is more compelling than ever, thanks to the generation of smartphones and the availability of 3G networks. In past editions of this report, one recurring theme was how China's mobile operators had shown little interest in promoting m-payment development, primarily because they had greater issues to deal with at the time. Many of those issues no longer exist. Operator restructuring is in the rear view mirror, and all three operators have several years of experience running their own networks. 3G licenses have been issued, networks rolled out, and, in the past year, user growth has picked up. At this point China's carriers are becoming more focused on differentiating themselves from their competitors, and all have stated that mobile payment is one such area in which they hope to do so. China 20/20: The Future of Mobile Payment in China Page 15 of 20

16 In contactless and NFC in particular, operators are playing a leading role, but the large payment companies are showing signs of interest in the mobile payment field as well. Some of them launched new apps to be used in unlimited fields, while others have designed products for closed environments only. In 2005, when the first wave of buzz about m-payment spread through China, the lack of clear government oversight was actually a boon to the industry. The lax regulation allowed for the emergence of a wide range of startup companies offering m-payment platforms based on different technologies and payment models. Later on, as it became clear that the government would impose licensing requirements, many companies began delaying new projects and partnerships until the new regulations and licenses were issued. We now know which companies have these licenses, and the companies themselves know they are no longer operating in a regulatory gray area. It has therefore not been surprising to see the rush of new activity and m-payment announcements in the second half of 2011 and into Third-party providers and others have had plenty of time to decide on their strategy, and now that they know the basic rules of the game, they are spending the time and money to put these plans into action. That being said, there are several steps that need to be taken in order for mobile payment to become a significant payment channel in China. China 20/20: The Future of Mobile Payment in China Page 16 of 20

17 Challenges for the Development of m-payment in China Hurdle 1: Standards The de-facto establishment of the 13.56MHz standard in 2010 will be helpful in the long term, since all the main players will be using the same standard. However, this long-term unity may have come at the cost of several more years of delay in meaningful NFC deployments. Prior to the announcement, China Mobile was aggressively moving to roll out its RF-SIM plan. Since then, operators have returned to the now familiar cycle of trials and optimistic forecasts for the future. With their strong revenue and huge user bases, operators are better suited than other industry players to make a major investment into NFC. However, many of those interviewed for this report say that operators are still not yet willing to make those investments. Xmobo has not yet been developing NFC technology because the standard has not yet been confirmed, and it will hinder large-scale promotion if we all do our own technologies. Zhang Sheng, Xmobo Hurdle 2: Complex Industry Alliances While contactless smartcard payment systems have yet to be integrated to mobile phones in China on a significant scale, the technology to do so already exists. The issue lies in industry players' reluctance to take the initiative. Handset makers are not interested in providing integrated handsets until operators make the orders, yet operators are not yet willing to make large orders without testing the waters through small city-scale trials. Banks are the most reluctant participants in mobile payment. For banks, opportunities in mobile payment are balanced by concerns about security. China Mobile s 20% investment in SPDB and partnership with China UnionPay open up new possibilities, but both relationships are still at relatively early stages. The strongest backers of m-payment services in China remain the third-party m-payment providers, each of whom relies on a network of partnerships with banks, merchants, and mobile operators. However, partnerships often need to be negotiated separately for different cities and provinces, and the result is spotty coverage for various payment services. China 20/20: The Future of Mobile Payment in China Page 17 of 20

18 Hurdle 3: Users The biggest challenge to making the mobile payment service successful in any market is getting users on board, and the Chinese market is no different. Millions of people in China have gotten past their concerns about security and decided to give m-payment a chance. For many of them, however, the complex process of setting up m-payment services is often daunting enough to make them give up. Mobile internet payment often requires a trip to the bank in addition to registration on the provider s website. With mobile internet payment in particular, users must enable m-payment services with both bank and m-payment provider separately. Contactless mobile payments offer the most hope of improving this situation, especially if NFC-enabled SIM cards won't require a mobile phone upgrade. Unfortunately, NFC payments are the furthest away from mass adoption. Learning from other Markets Mobile payment is still a fledgling service in most economies around the globe. In the Americas and Europe, few mobile payment services have gained a significant customer base. When successes in mobile payment occur, they can take dramatically different forms. Densely populated and highly developed Japan is a global leader, and in Africa mobile payment is a payment solution for consumers in rural areas where bank branches are sparse. The table below compares the drivers for mobile payment in Japan and Africa to China. Japan Africa Drivers in Successful Markets Extensive 3G networks High mobile internet penetration Consolidated value chain Cooperation in the value chain Clear leaders in the market Developed financial sector Phone users under-banked Clear leaders in the market Consolidated value chain Chinese Market Limited bandwidth 3G Low mobile internet penetration Unconsolidated value chain Cooperation limited Leaders unclear Developing financial sector Phone users banked Leaders unclear Unconsolidated value chain Source: Maverick China Research, 2012 China 20/20: The Future of Mobile Payment in China Page 18 of 20

19 China s market differs in important respects from both the Japanese and African markets. In Africa, the success of mobile payment has been primarily driven by a lack of adequate banking services. For large portions of the population, sending money via text message is the only practical form of electronic payment. In China, mobile payment services have been successful in some rural areas, but traditional banking solutions are widely available throughout the country. In Japan, mobile banking was driven by focused cooperation between MNOs and banks. Convenient and powerful products have been on the market for over a decade, and have been well received by the early adopter Japanese youth. In China, cooperation between MNOs and banks has so far been limited and setting up services is far from convenient. Mobile operators getting licenses helps to push mobile payment forward. And MNOs are now promoting the SIMpass model, so it s possible that it will become a leading model in the future. Sean Kou, Cardinfolink We believe that this could be a big year for mobile payment in China, and we think that it s up to the MNOs to make it one. If China's mobile operators begin to offer advanced SIM cards equipped with contactless payment functionality, they will be able to integrate the smartcard payment model into their existing payment systems. However, we have not seen signs from the MNOs to suggest that they will move beyond city-scale product trials. A push from the MNOs will be a sign that mobile might take off. They will have to pay attention to their target audience and offer simple and convenient solutions and address users security concerns. If they do, we think that the Chinese could pick up on mobile payment as fast as any population in the world. Closed field applications are a great place to demonstrate how convenient mobile payment can be, and promotions like coupons or discounts will speed adoption. There are still a lot of pieces to get in place, but mobile payment is a puzzle today s China could very well complete. China 20/20: The Future of Mobile Payment in China Page 19 of 20

20 About Maverick China Research Maverick China Research is a China-based market research firm founded in We provide business-to-business research and market entry services for clients seeking opportunities in China. We have published over 20 major market reports on key industries and companies in China and provide customized research and consulting services covering a broad range of sectors, including e-commerce, payments, medical devices, and cleantech. Typical projects include market entry feasibility studies, partner searches, and business due diligence. To learn more about our company, please visit our website at China 20/20 Whitepaper Series Maverick s China 20/20 whitepapers are a series of sponsored reports that provide a crisp, focused look at specific sectors in China. Through 20 interviews with industry professionals and experts, these whitepapers evaluate the state of the sponsor's chosen sector and discuss trends of future development. Our next whitepaper is on the future of water treatment in China. For further information, contact inquiries@maverickchina.com. With Compliments of China 20/20: The Future of Mobile Payment in China Page 20 of 20

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