China Blazes a Trail in Mobile Payments

  • Print

mobile phone

In June, we wrote about how China’s world-leading innovation in social commerce is being driven by one of the greatest transformations in history: two decades of unprecedented economic growth and wealth creation. That growth has created massive social dislocation — a generation of migrants made their way from the countryside to the city in search of factory employment, leaving behind all the support and family structures of traditional rural life.

This migration has been the largest movement of humans in the history of the world, and it has created unprecedented needs — and opportunities for those who are meeting those needs, both economic and social.

Just as this transformation was happening, another transformation was underway — the arrival of the internet and of mobile devices to access it. As the adage goes, necessity is the mother of invention. China has become the world’s most vibrant laboratory for the application of mobile internet technology.

China’s E-Commerce Leapfrog

This flowering of mobile internet technology is making China an excellent example of “leapfrogging,” a common theme throughout the developing world. Leapfrogging occurs when an emerging-market economy skips technological steps that the developed world had to work through. The classic case is in telecommunication. Rather than go through the lengthy and laborious and capital-intensive stage of building wires, developing countries in Africa and Asia skipped landlines and went directly to wireless.

Check out Goldman's Tousley on Global Economic Expansion, International Small Caps

China’s development as a capitalist economy, and particularly the growth of Chinese retail, essentially leapfrogged the century-long development of brick-and-mortar retail in the developed world. China has entered e-commerce in the first flush of its emergence as a consumer economy. This is one of the fundamental drivers of the rapid development and innovation of Chinese e-commerce, and it also explains why it may be challenging for some successful Chinese e-commerce firms to replicate their success outside China.

The Next Step: Fintech

“Fintech” refers to the intersection of technology and finance — and to the disruptive innovations being created by firms at that nexus. Unsurprisingly, some of the most creative fintech projects and startups are occurring in China.

As we described in June, China’s e-commerce leapfrog has created some of the world’s most innovative e-commerce firms — companies such as Alibaba [NYSE: BABA], JD.com [NASDAQ: JD], Baidu [NASDAQ: BIDU], Tencent [Hong Kong: 700], YY.com [NASDAQ: YY], and others.

What these firms have in common is their fierce ambition to build holistic experiential ecosystems in which their users can meet all their economic, commercial, and social needs. They blend e-commerce, social media, and entertainment, including video games and live streaming.  Increasingly, they are adding financial services to this mix — and these may prove to be the most disruptive and lucrative elements of their strategy.

The Ubiquity of Mobile Payments In China

One of the most remarkable manifestations of the fintech boom is the rapidity with which mobile payments have become ubiquitous in urban China. In China’s first-tier cities, almost everyone pays for almost everything using a smartphone — not using cash or a credit card. What Apple Pay, Android Pay, and other mobile wallet applications have been struggling and failing to achieve in almost all of the developed world, Chinese firms have achieved in the space of three years — largely because they were meeting the unmet needs of unbanked, or underbanked, consumers and businesses.

With mobile payments relying on scans of QR codes, even a card reader is unnecessary. And with balances residing within the payment system, transaction costs can be driven down relentlessly.

BABA recently debuted facial recognition technology at KFC stores in China — where users can “smile to pay,” have the system recognize their face and debit their Alipay account without even a smartphone being necessary.

The dominant leader in mobile payments is BABA, with Tencent coming in second. BABA’s Alipay was a natural development of its online marketplaces, and Tencent developed WeChat Pay as an extension of its mobile communication platform. Alipay gained traction because it functioned as an escrow service for online payments when consumer trust was low — a purchaser would only be debited for goods after indicating that they were acceptable.

Taken together, Ant Financial (BABA’s financial affiliate) and Tencent are set to surpass Visa [NYSE: V] and Mastercard [NYSE: MA] in total daily global transactions in the coming year.

Jack Ma Shows Off Alipay’s New Facial Recognition Software
jack ma smart phone software

Of course, these developments must be seen within the ambition of BABA and Tencent (and BIDU, who is partnering with Paypal [NASDAQ: PYPL]) mentioned above — to build comprehensive ecosystems in which consumers and businesses will spend more and more of their time. With $170 billion in assets under management in the first quarter of 2017 and 300 million users, BABA’s money-market fund, Yuebao, is the largest in the world. It offers users security, liquidity, and better returns than they can get from a bank. BABA can triangulate data from consumers across its entire sprawling platform, with unprecedented insight into spending and saving habits, creditworthiness, social habits and preferences, and so on — giving them tremendous leverage and understanding in developing and selling and delivering new services to consumers and businesses. This also explains why Chinese firms are spending big to position themselves as global leaders in artificial intelligence.

You may also like Is China Killing Crypto? No. This Is What Is Happening

For now, also, although the first clouds of negative consumer and antitrust sentiment are gathering on the horizon for the U.S. tech giants, the Chinese government is highly favorable to Chinese tech, and figures such as BABA’s Jack Ma enjoy congenial working relationships with politicians and regulators. China may be the wild east, but companies such as BABA and Tencent are eager to be good citizens.

Investment implications: You would have to roll together Amazon [NASDAQ: AMZN], Facebook [NASDAQ: FB], PYPL, and a few other US firms in order to arrive at the total commercial presence that BABA and its competitors are creating in China, and to us, the theme of these burgeoning internet conglomerates looks likely to endure for years to come. We continue to like big-cap US technology firms, but we think that many Chinese firms are positioned with extremely powerful social, economic, and technological tailwinds behind them. We believe that emerging markets, in general, may be poised for a year or two of significant outperformance; and within emerging markets, Chinese internet tech is also riding the wave of China’s rapidly expanding middle class. 

Co-Authors: 
Tony Danaher

CLICK HERE to subscribe to the free weekly Best of Financial Sense Newsletter .

About Monty Guild

Quantcast