Fintech is Blossoming in China: Chinese Players are Making Silicon Valley Look Like the Laggards

China Fintech BlossomingWhen I initially arrived in China towards the end of the summer of 2011, I felt like I was going back in time in terms of payment methods. Few vendors accepted credit or debit cards. Carrying cash felt strange as most payments in the U.S. were made with my card. In the past 6 years, China’s uptake in mobile payment has been incredible. It’s now both a cashless and cardless society. From buying a soda from a vending machine, a mango on the side of the road, or booking a hotel, QR codes are omnipresent. Leaving home without one’s wallet is no problem. Now when I return to the U.S. I feel like I’m walking back in time in terms of payment methods. China’s mobile payments market reached US$5.5 trillion in 2016, approximately 50 times larger than the size of the U.S. market. For a market that was nonexistent a few years ago, it is impressive that 425 million Chinese (65% of Chinese mobile users) utilize their phone as a wallet.
Chinese consumers have become accustomed to rapid change. In a country that is growing at China’s speed, a year’s time can yield a level of change that is difficult to fathom in developed countries. Consumer behavior and habit still have Americans reaching for their plastic cards instead of mobile phones. Mobile payment providers in the U.S. have realized that consumer behavior is difficult to break once habits are developed. China has in effect skipped the credit/debit card culture and has gone from cash directly to mobile payment.


International news outlets tend to focus solely on Apple Pay, Google Wallet, PayPal, or Amazon Pay when it discusses the rise of mobile payment. All of these companies represent a negligible percentage of the Chinese mobile payment market. For a company that prides itself on innovation, Apple entered the mobile payment market in China entirely too late. In the 4th quarter of 2016, Apple Pay failed to reach the top 10 in terms of market share.

China Mobile Payment Market ShareTo even further display Apple’s disconnect with the modern transformation of the Chinese economy, Apple partnered with UnionPay (the Visa of China). WeChat and Alipay dominate the mobile market with a combined 91% share of the mobile payment market. Apple Pay represents less than 1%. On China’s artificial holiday dubbed Single’s Day last year (November 11th), Alipay processed a staggering US$17.8 billion in online, mobile payments.


QR Codes are King in China
QR PaymentQR codes are by far the most preferred technology for completing a transaction. Consumers and vendors have two options for completing a transaction via scanning QR codes. The consumer can scan a QR code present at the shop, or the vendor can scan a QR code that is uniquely generated for each transaction on the customer’s phone. Near-field communication (NFC) is another means of completing a payment, but it’s adoption is very small in China. WeChat offers payments through the use of QR codes while Alipay and Baidu Wallet offer payments through the use of QR codes and NFC. Apple Pay only offers payments through the use of NFC, further limiting user uptake.


Two Giants: Apple and Tencent
Apple WeChat

Apple recognizes they’re losing in this arena but can’t seem to gain traction when it comes to breaking into the mobile payment or services market. Its latest move will only continue to push Chinese consumers away as it enforces a 30% tax on WeChat “tips” made on Apple devices. WeChat has an option that allows for users to tip writers of posts. WeChat is THE app to use when in China. Apple takes a 30% cut on in-app purchases so it argues that since WeChat was downloaded through its store, Apple should receive 30% of the tips. This is not sitting well with Tencent (the creator of WeChat). Apple is used to being the top dog; however, in China, Tencent is the more dominant company.


Apple has threatened to remove the WeChat app from its store. However, Apple needs WeChat to continue to grow in China. Chinese consumers can do away with an iPhone, but WeChat has almost become a necessity in China. The battle that is beginning to take place between Apple and Tencent will be even more interesting than the battle between Uber and Didi.


Apple is in a precarious position in China as it’s a brand that excels in China due to its perception as being innovative and as a symbol for affordable luxury. However, sales have slumped recently. China sales in 2016 totaled US$46.5 billion, representing a 24% dip from 2015. This year isn’t starting off well either. The first quarter of 2017 was down 14% compared to the same quarter in 2016. Apple succeeds in China largely due to its hardware design and not due to its services or software. This is Apple’s weakness.


Chinese consumers who do own Apple products rarely utilize the services such as iTunes or the App Store. Relying on these services makes it cumbersome for Americans in the U.S. to switch to an Android device after becoming dependent on Apple’s services. In China, only 50% of iPhone users who bought another phone in 2016 stayed with Apple. Hardware alone will not keep the Chinese consumers invested in Apple. The brand’s image is no longer sought after as much as just a few years ago. As more Chinese are able to afford the phone, the brand is beginning to lose its luster. The is not entirely different from Louis Vuitton’s rise and plateau in China as its widespread popularity has given it the title of the “secretary’s bag.”


Additionally, areas such as Shenzhen have taken the world’s best hardware and now are creating mutants that are giving Silicon Valley a run for its money. Companies such as Huawei are delivering reliable products with a beautiful design and innovative features. Huawei introduced a second camera on its P9 phones six months prior to Apple releasing the second camera on the iPhone 7. One thing China has proven time and again is that when it wants to produce hardware well, it has the capacity.


Keeping Consumers in the WeChat Ecosystem

Consumers have multiple options when it comes to mobile phones. Personal preferences are mostly subjective. However, one app that Chinese consumers increasingly cannot do without is WeChat. The app has penetrated the market in ways that Facebook can only dream of. This market penetration has allowed for WeChat to rapidly close in on Alipay’s market share.


It’s changing the way that Chinese users interact socially and professionally and even the way we think about using our mobile phones. Everything in China can be done through WeChat, from making an appointment with your doctor to booking a flight to ordering food delivery to paying for your electricity. WeChat is accomplishing what Facebook only dreams it can do in the U.S.


To further entice users to stay within the WeChat ecosystem, WeChat has added “mini programs” (Apple won’t allow for WeChat to use the term app) where users can use apps within WeChat without having to download a separate app. These apps are attractive to developers as they can work across Android and Apple devices.


Entering an Era with Real Innovation in China

Western companies have been attempting to emulate WeChat’s success in China. Facebook is trying to “copy” WeChat by integrating shops with its platform. WeChat has been offering integrated checkout since 2013. Additionally, chat bots seem to be all the craze in 2017. WeChat has also been offering chat bot services since 2013.


As China’s economy cools in some sectors, fintech and the internet of things will continue to accelerate. Copycats in China will continue to exist. The new challenge that western firms will have to compete with in China is not iteration but true innovation.


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