- China's online payments market may be a duopoly but it is one in which Alipay dominates upstart rival WeChat Pay, according to FT Confidential Research's latest consumer survey.
- We believe Alipay will maintain its lead thanks to its integration with Alibaba's dominant e-commerce platforms and Yu'E Bao, though regulatory pressure is building on that big money market fund.
- Alipay stands a greater chance globally than WeChat Pay, which will struggle against the dominance of Facebook and WhatsApp beyond the Great Chinese Firewall.
The story of China's march towards a cashless society is about Alipay versus WeChat Pay. Among respondents to an FTCR survey of 1,000 urban Chinese, 82.6 per cent chose Alibaba's Alipay as one of their three main payment methods, while 64.3 per cent picked Tencent's WeChat (see chart).
Other forms of payment were also-rans; UnionPay QuickPass, owned by the state-run card payment system, was chosen by just 6.6 per cent. Apple Pay's popularity may have surged in China during the past year but it was still chosen by just 3.2 per cent of respondents (Apple is now intensifying its marketing push in China in co-operation with UnionPay).
Our survey also found that China has not left cash behind completely, although its popularity as a payment method has fallen sharply since 2016. While we do not believe that China has leapfrogged credit cards in its move to a cash-free society, our survey also suggests that card issuers are not moving fast enough to resist the challenge posed by Alipay and WeChat Pay.
This is big business: Rmb58.8tn ($8.75tn) was transacted via third-party payment platforms in China last year, according to iResearch, an internet research firm in Beijing. That is 50 times the amount transacted in the US, where credit cards remain king. Our latest survey shows the extent to which China's third-party payments market has become a duopoly as WeChat Pay's popularity has surged. However, our research suggests Alipay's dominance is unassailable (see chart).
Settling in at number one
More users said they preferred WeChat Pay for ease of use (see chart) - this is a 900m strong peer-to-peer network in which users can transfer amounts as small as Rmb1. In January 2014, WeChat pioneered the digital red envelope, transforming the traditional lunar new year cash gift into a marketing phenomenon and turning China's most popular messaging app into a direct Alipay competitor. Since then, WeChat Pay's growth has been fuelled by transactions between individuals, and with online and offline vendors.
However, more respondents to our survey favoured Alipay's larger range of online and offline merchants. This reflects the dominance of Alibaba's Taobao and Tmall in online shopping. These sites have an 83 per cent share of the mobile online shopping market, according to iResearch, and only accept Alipay. WeChat has a tie-up with Alibaba rival JD.com, but does not have the exclusivity at the point of sale enjoyed by Alipay. Respondents also said they considered Alipay the more secure service, probably because it is a standalone app, whereas WeChat Pay comes bundled into the popular messaging platform.
Alipay's trump card
Ant Financial, Alibaba's financial services arm, established a fund in 2013 to pool and invest funds sitting idle in Alipay accounts. This was a masterstroke; Yu'E Bao - "leftover treasure" in Chinese - has grown to Rmb1.43tn and is now the world's biggest money market fund. Yu'E Bao offers returns of nearly 4 per cent, incentivising users to move funds from their bank accounts, where the equivalent benchmark rate is 1.5 per cent. WeChat Pay offers a much smaller money market fund and allows users to purchase financial investment products, but Alipay provides a seamless experience allowing users to access their Yu'E Bao funds for on or offline purchases.
Because WeChat users were less incentivised to keep their funds on the platform, users would make transfers to their account, with Tencent absorbing the associated costs. In response, the company began imposing charges last year on transfers to bank accounts above Rmb1,000 (Alipay followed suit but its fees don't kick in until Rmb20,000). This may have contributed to a slowdown in Tencent's payments market share in the second half of last year. Helped by rising interbank market rates, Yu'E Bao's assets have surged in that time (see chart).
China's traditional banks have not sat idle as Yu'E Bao threatens their core business. In response to lobbying, the People's Bank of China has warned of the risks associated with Yu'E Bao, prompting the company to lower its investment limit from Rmb1m to Rmb250,000. Given that this is still much greater than the amount in most personal current accounts, the PBoC may take more stringent action to slow the volume of inflows into the fund.
We also expect Alipay to be more successful worldwide than WeChat Pay. Its current ambitions are more global in scope; it has been concentrating on emerging markets, where credit cards have low penetration rates and the possibility of leapfrogging is greater. It bought a 40 per cent stake in PayTM, the leading payments processor in India, where adoption of services has soared in the wake of the government's sudden cancellation of most banknotes at the end of last year.
In the US, Alipay has signed an agreement with payments processor First Data to offer its services at 4m points of sale. Although this will predominantly cater to Chinese users overseas, the company's 10-year goal is for 2bn users - up from 450m now - with 60 per cent to be outside China, versus 10 per cent now.
In contrast, WeChat's global plans are still firmly limited to those outbound Chinese users. WeChat Pay is in 15 countries and supports 12 currencies but remains bundled within the WeChat messaging app. As such, it faces tough competition from the giant networks of Facebook and WhatsApp, which dominate beyond China's Great Firewall.
This article was first published on August 1 by FT Confidential Research.
FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. A team of researchers in these key markets combine findings from proprietary surveys with on-the-ground research to provide predictive analysis for investors.