China's Costly Wars to Go Cashless

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Customers at a market in Hangzhou, China, swipe their cellphones to pay for fruit and vegetables

Customers at a market in Hangzhou, China, swipe their cellphones to pay for fruit and vegetables


Photo:

Stella Yifan Xie/The Wall Street Journal

The biggest battle between China’s two Internet giants is taking place in shopping malls, street-food stalls and nail salons across the country—anywhere you might pay with the swipe of a phone.

For the past year,

Alibaba Group Holding
Ltd.


BABA 0.50%

and

Tencent Holdings
Ltd.


TCEHY -1.05%

have been locked in a costly rivalry over mobile payments. This spring, Alibaba affiliate Ant Financial Services Group posted a rare quarterly loss after spending aggressively on discounts and financial rebates to expand users of its Alipay network keep abreast of the pay function in Tencent’s enormously popular messaging app WeChat.

The explosive ascent of mobile payment in China means the stakes are high. Hundreds of millions of Chinese now use their smartphones to pay for everything from bus and taxi rides to meals and movie tickets–making wallets with cash or credit cards increasingly superfluous.

Some $15.4 trillion worth of payment transactions were conducted on third-party Chinese mobile platforms last year, compared with roughly $2 trillion in 2015, according to data provider iResearch.

For perspective, credit-card giants Visa and

Mastercard

processed a combined $12.5 trillion in transactions last year–globally.

Chen Jianwei, who works at a Shanghai-based mutual fund, uses both WeChat Pay and Alipay and says he last used cash three weeks ago, when he needed to top up his subway card.

In the U.S., mobile payments are nowhere near as ubiquitous: Such transactions–which includes those using

PayPal

and Apple Pay–reached $377 billion in 2017, according to estimates from consulting firm Javelin Strategy & Research.

For Alibaba and Tencent, it’s not just about transaction fees. Payments let them amass a vast trove of data on the spending and financial habits of millions of individuals and businesses, information that can be used to pitch other products like loans, investments and insurance policies.

Xing Zipeng, 24, offers both Alipay and WeChat Pay at his hotpot restaurant in Hangzhou.

Xing Zipeng, 24, offers both Alipay and WeChat Pay at his hotpot restaurant in Hangzhou.


Photo:

Stella Yifan Xie/The Wall Street Journal

When Xing Zipeng, who lets patrons of his hotpot restaurant in Hangzhou pay the check via both systems, needed more cash for his business earlier this year, he spotted an offer in his Alipay app for a 30,000 yuan ($4,717) loan.

Minutes after applying, the 24-year-old said the money had arrived in his account at an interest rate lower than for a bank loan. He said he figured Ant knew roughly how much money his restaurant collected a day and used that information to offer him the loan.

Alipay was set up by Chinese billionaire

Jack Ma

in 2004 to facilitate transactions on Alibaba’s e-commerce websites, and now has over 520 million active users, according to its most recent figures.

Despite starting nearly a decade after Alipay, its rival has quickly caught up, much thanks to WeChat’s central role in Chinese life. Tencent said the instant-messaging app surpassed 1 billion monthly active users in March.

Both systems let users transfer money instantly to other people and businesses via so-called QR codes, a type of black-and-white matrix recognized by digital scanners.

In 2015, Alipay handled 74.3% of the industry’s transaction volume. By the end of 2017 its advantage had narrowed to 54% of the market while WeChat Pay’s market share topped 39%, according to data from research firm Analysys.

Tencent has cited more than 600 million monthly users of WeChat Pay to say it is already the top mobile-payment services provider in the country.

The average Chinese citizen spends more than an hour a day on WeChat and a significant proportion of users spend over four hours on the app, according to data from venture-capital firm Kleiner Perkins Caufield & Byers and research firm eMarketer.

That gives WeChat an advantage when it comes to payments.

“Consumers are lazy. They are already on WeChat, and they don’t want to click away to use Alipay,” said

Kathy Xu,

the founder of Capital Today Group, which oversees funds that invest in emerging Chinese tech companies.

Related Video

Chinese tech companies Alibaba and Tencent have emerged as global leaders in mobile-payment technology. This animated video charts the key steps along their rise to the top.

The convenience factor has won over users like Mr. Chen in Shanghai, who prefers using WeChat Pay for daily, small-ticket payment such as meals and groceries.

“It’s too much trouble to open up Alipay just to pay for a carton of milk or vegetables, given my WeChat is always open,” said Mr. Chen, 35 years old.

On mobile investment products, however, Alipay has a leg up.

Mr. Chen has invested about 15% of his savings buying mutual funds on a platform run by Ant Financial, products designed to help Alipay users earn returns on funds in their online accounts. Tencent recently started selling investment products as well, but its scale remains small in relation to Ant.

In search of more customers, Alipay and WeChat are duking it out on the ground, visiting shop owners all over the country and offering streetside fruit vendors and breakfast sellers daily and monthly transaction reports as well as low-cost business loans from Ant.

Ant Financial last week said it raised around $14 billion from investors, including, for the first time, foreign ones. To buy shares, investors had to commit not to provide capital to Tencent-linked companies.

Ma Yaolin, who runs a motorcycle store with her husband in downtown Shanghai, said she began displaying Alipay’s QR code in early 2017 following a visit by a salesperson. Ms. Ma said most customers now use their mobile phones to pay for services like changing flat tires. “My customers barely use cash anymore,” said the 39-year-old.

Alipay in February last year started offering merchants a new type of QR code that allows customers to pay with credit or electronic cash. By the end of 2017 over 40 million small businesses were using it, according to Ant.

Tencent doesn’t disclose how many businesses use WeChat Pay and neither company has revealed how much they have spent to attract more vendors.

To incentivize people to use Alipay last year, Ant paid for some of their bus rides. And in Hangzhou, where Alibaba is headquartered, taxi drivers said they prefer to accept payments made via Alipay, which unlike WeChat Pay doesn’t charge them a withdrawal fee, they said.

Tencent said in an earnings call in May that it expects to keep spending to build market share in payments, facing “great pressure” from rivals’ heavy subsidies.

An Ant Financial spokesman wouldn’t say to what extent the group’s recent loss was a result of spending to promote Alipay. “We are fortunate that as a private company we can continue to invest in and focus on capturing long-term growth opportunities,” he said.

Ma Yaolin, 39, who runs a motorcycle store with her husband in downtown Shanghai, said she began displaying Alipay’s QR code in early 2017 following a visit by a salesperson. Ms. Ma said most customers now use their mobile phones to pay for services like changing flat tires. “My customers barely use cash anymore,” she said.

Write to Stella Yifan Xie at stella.xie@wsj.com

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