Will China’s preference for digital wallets spread to the West?
Will we see a future where every payment is made with the press of a button or wave of a smartphone? In the West, we’ve grown accustomed to using our debit and credit cards to buy goods and pay bills. There was a time when they represented convenience compared to traditional payment options. Cash and checks were dangerous to carry and cumbersome to deal with. For many of the same reasons, China has seen a rapid adoption of digital wallets that looks similar to western adoption of debit and credit cards.
Today, the mobile payments market in China is huge, totaling more than $9 trillion in 2016, more than 80x the size of the U.S.’s $112 billion dollar market. The growth has been extremely rapid. Take a look at this chart that plots the rapid adoption of mobile payment in technology in China and the U.S.:
The bulk of digital payment processing in China is handled by two companies — Alibaba and Tencent — the companies that develop Alipay and Tenpay. Together, they account for more than 85% of the total market share with a number of competitors vying for their slice of the pie.
These companies are fueled not only by the standard 0.6% fee that they collect on processed transactions but by the consumer data they are able to collect. This data helps to transform their apps into platforms that cater to consumers with a growing array of services.
What led to rapid digital wallet adoption in China?
To understand whether the U.S. will see a similar boom in digital payments in the coming years, it is important to examine the events and circumstances that led to the rapid adoption of mobile payment technology in China.
China’s preference for digital wallets can be traced back to when Chinese company Alibaba first launched their digital payment service, AliPay. It was launched as an escrow service that was similar to PayPal and quickly began to dominate the payments market in the country. The service caught on among consumers who had waning trust with vendors and banking institutions to deliver as promised.
The giant leap in adoption came as Alipay (and later Tenpay) made their way to smartphones. Alibaba integrated their payment processing technology in their popular chat app, WePay and Tenpay followed close behind with their own solution. Although digital payments had been gaining a lot of steam as desktop browser-based payment processors, the ability to send and receive payments from smartphones made it possible for businesses of all sizes to accept mobile payments from consumers.
Another prominent reason for the adoption of digital wallets is that credit and debit cards were not nearly as accessible in China as they are in other nations around the world. Many of the largest banks didn’t even offer debit cards and many businesses lacked the equipment required to accept them as a form of payment.
It wasn’t until the 2000s that credit cards began to become more accessible to average Chinese citizens, but cultural distaste for taking on debt and a general uneasiness with banking institutions severely hampered their growth. By 2008, AliPay debuted and banks saw credit card usage begin to fall. Although U.S. credit networks did gain regulatory access to Chinese markets in 2017, the change doesn’t appear to be enough to make a dent in the adoption of mobile wallets.
Chinese businesses also fueled the adoption of mobile payment technology. In accepting mobile payments, they didn’t have to worry about counterfeit currency, which has always been a larger problem in China than in other developed countries. Accepting mobile payments meant that they could count on the money that they received and use fewer resources evaluating the physical money they collected.
Additionally, carrying cash on your person was seen as a dangerous activity in China. Since the rise of digital wallets, Chinese consumers are using less cash in both coin and paper form. They spent 66 trillion yuan in 2016, down more than 10% in just two years according to reports from China’s central bank.
The reasons for China’s rapid adoption of digital wallets and mobile payment tech are numerous. It’s part convenience, part safety, and part trust in the institutions that provide the payment processing. These factors came together to create a perfect storm that reshaped the payment processing industry in China more quickly than anyone anticipated.
Will the West follow suit?
There has been no shortage of speculation about the future of mobile wallet technology in the U.S. In fact, it seems to many analysts it seems to be a foregone conclusion that mobile payment technology will become a bigger part of the payment processing picture, but it remains to be seen how large and how quickly it could potentially become. It seems many companies agree, with companies like Apple, Google, Samsung, and other companies all pushing their own apps in the space.
The conditions that led to the rapid adoption of digital wallets in China don’t really exist in most western countries. Debit cards and credit cards are readily available, and businesses are equipped to accept them. In most countries, carrying moderate amounts of cash doesn’t present a huge risk, and counterfeit currency isn’t a plague for small businesses. Although the financial collapse of 2008 did erode consumer confidence in banking institutions, they are still generally trusted.
Expecting the West to experience a mass exodus from the current system to digital wallets is unrealistic. It was the underdeveloped banking system in China that spurred the rapid growth of mobile payments. Those systems are much more entrenched in the U.S. and other western countries.
However, there is a chance that international growth could come from the Chinese payment processing companies themselves. With a strong grip on the Chinese market, Alipay and Tenpay have set their sights on international growth.
Recently Alipay and WeChat opened their payment processing service to foreigners that visit China. Chinese tourists are also allowed to use Alipay when traveling abroad, which could spur companies in areas with high levels of Chinese tourism to begin accepting Chinese mobile payments.
Both Alipay and Tenpay have stated that they intend to open their service to markets in Asia first and will then set their sights on other international markets. Countries like New Zealand and Australia that enjoy high levels of Chinese tourism would be excellent first steps for bringing the brands to the international stage.
The future of payment processing
China’s explosion of digital wallet usage provides western companies with a clear vision of the potential for the technology. It seems to be a foregone conclusion that digital wallets will continue to see growth in the U.S. and other Western countries, the only question is how much of an impact the technology could have. With a reliable and established banking system, western markets are more difficult for mobile payment processing apps to disrupt and penetrate.
Younger consumers are more willing to adopt the technology, and getting retailers on board is another giant hurdle that has to be reconciled before we begin to see significant growth. While the U.S. has experienced growth in mobile wallet adoption, it pales in comparison to that of China. Will China’s preference for digital wallets start to bleed into Western culture? Possibly, but at a much slower rate and likely within the current banking system rather than as a disruptive force.