Emerging Markets Equity
Leave Your Wallet Behind in ChinaCarrie Wang, Associate Product ManagerMarch 25, 2021
In 2014, when I arrived at the airport to visit my family in China, I noticed taxi drivers did not take cash. Instead, everyone paid their fares by scanning QR codes, or Quick Response codes, on their smartphone. At restaurants, customers scanned a code before ordering food, and they left whenever they wished without waiting for the check. From shopping malls to fruit stands on the street, every business had a QR code for customers to make purchases. Even beggars asked for money via a QR code, it seemed. Everyone appeared to survive without carrying a wallet. I wondered, “Am I the only one using cash?”
The Rise of Mobile Payments
Mobile payment could not happen without QR codes, which are a digital data storage system. Although the QR code was created in 1994 for the Japanese automobile industry, it did not become popular in other industries and countries until 2010. China’s mobile payment popped up in the early 2010s, exploded in 2014-2016, and has now reshaped China’s payment landscape. By 2020, there were over 850 million1 people actively using mobile payments in daily life for anything and everything, by simply scanning and walking away. In fact, this method has become the preferred way to make payments in big cities. I was told by my Chinese friends, “You don’t need cash if you travel in big cities. You only need to carry a credit card as backup in case you lose your phone.”
Growth of China's Mobile Payment Users (in million)
Source: China Internet Network Information Center.
Transaction Scale of China Mobile Payment: 2013-2020E
Source: Macquarie Research.
During the COVID-19 pandemic, people scanned even more to curb viral transmissions. My parents, both in their early 70s and not tech-savvy, prefer touchless mobile payment even when they go shopping at the farmer’s market. As my dad would say, “You don’t know who has touched the cash or whether it is contaminated.”
Credit Cards Have Curbed Adoption in the U.S. and Europe
For people living in the U.S. and Europe, cashless payments mean using credit cards issued by banks. The credit card was invented in 1950 by the Diner’s Club in New York City and has since spread across western countries, but it only arrived in China a decade ago. With slower than expected development of the consumer credit system, the entire country quickly turned to mobile apps, powered by fintech, for cheaper and better solutions. Thus, China skipped the credit card era and is making a fast transition to a cashless society. According to Oliver Wyman, a leading management consulting firm, 75% of people 18 or older in China did not own credit cards at the end of 20192.
Compared with China, the U.S. has been slow to adopt mobile payments. On one hand, with the world’s best financial infrastructure, American banks have managed the credit card business smoothly and profitably for many years. Credit cards have dominated the payment market, so the payment industry has higher barriers to entry. On the other hand, American consumers are satisfied with credit cards. Swiping a card to make a payment does not require much effort either. People are so used to this practice and thus reluctant to switch to other payment options, since there is little incentive to change their payment habit. Besides, mobile payments are still viewed as less safe due to security issues such as fraud and theft. A similar situation exists in European countries. The contactless transactions during the 2020 pandemic finally pushed mobile payment to grow in western countries such as Apple Pay and Google Pay in the U.S. and Mobile Pay and Swish in Europe. But there is still a lot of catching up to do.
The Battle Between the Predominant Market Players in China
With the prevalence of smartphones, Chinese tech giants seized the opportunity to create mobile platforms for cashless payments without going through the banks. Chinese merchants started to use QR codes for fast readability, large storage capability and smaller transaction fees. Customers enjoy its convenience, efficiency and no-fee services.
Ali Pay and WeChat Pay, the two dominant payment platforms in China, control over 90% of the mobile payment market3. Each one is backed by the two giant tech firms, Alibaba and Tencent, respectively. The mobile payment rivalry is an essential battleground for their parent companies in the race to own the e-commerce space. In recent years, they have expanded cashless living by offering new services such as peer-to-peer payment, supporting different currencies and offline transactions.
Two Platforms Dominate China's Mobile Payment Market: 2020E
Source: Macquarie Research.
Concerns Exist but Future Developments Like Crypto Are Encouraging
Mobile payment is not flawless. Concerns are rising about personal freedom, privacy and discrimination against using cash. However, those concerns have not dampened the enthusiasm for going entirely cashless. China continues to create a vast, efficient, digital-payments ecosystem.
In recent years, some big cities are exploring alternative fintech solutions, such as digital currency and payment by facial recognition. In December 2020, my hometown Suzhou, an eastern coastal city as well as a major economic center, launched a pilot program to circulate cryptocurrency for use in retail. The city of Ningbo, a major port within the Zhejiang province and the home of e-commerce giant Alibaba, experiments with AI-based facial recognition for payments to museums and parks.
In just 30 years, China has shifted from a cash-only economy to a nearly cashless one—late to credit cards, early to QR codes, and now experimenting with cryptocurrency and payment by facial recognition. What’s next?
I’m looking forward to my next visit to China—with or without a wallet.
1 Source: China Internet Network Information Center. December 2020.
2 Source: Oliver Wyman. December 2019.
3 Source: Macquarie Research. 2020.
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Authored byCarrie Wang
Associate Product Manager