What Asian Markets Can Teach Us About New Business Models for Payments

What Asian Markets Can Teach Us About New Business Models for Payments

What Asian Markets Can Teach Us About New Business Models for Payments

Steve Mott

Steve Mott

Steve Mott is a 25-year veteran of the electronic payments industry, specializing in transaction economics, innovative uses of debit networks, authentication and security technologies, and emerging alternative payments types and venues.

More Info

Once upon a time, in a region of the world far, far away, people had an intriguing idea — to figure out how to conduct payment transactions based on how it could be rather than how it's been.

Payments for the future of democratic transacting, no longer held hostage by the past? What a novel idea!

Most of the payments ecosystem has justifiably been captivated by what's been happening in China. Two decades ago, a team from a startup called Alibaba recognized that as China opened itself up to an incipient, controlled form of capitalism, transactional parties would have to learn to trust each other and overcome various forms of friction in transacting.

A brief history

In 2002, American card payments companies scrambled to get established to tap the huge potential market of Chinese consumers. At the same time, the People's Bank of China (PBOC) — which regulates financial services there — decided that it didn't make sense to adapt to the U.S. model. 

Instead, the Chinese decided the country was better off with just one domestic network and one acquirer — a national bank card association called China Union Pay (CUP) — and since then permitted only baby steps from U.S. card companies to participate in the country, mainly for international transactions. Only in the past two years has the United States been able to prod China to open its doors to the U.S. card companies, and that door has just been slightly cracked so far. Meanwhile, CUP's card payment business has dwarfed that of both Visa and Mastercard combined, and has expanded into dozens of other countries.

In 2003, Alibaba extended its services to participants in its fast-growing ecommerce marketplace, Taobao. A year later, Alibaba expanded to other business facilitations, including Alipay, which was originally designed for businesses to pay each other expeditiously. By 2011, Alipay had become so successful that it was spun off as a separate company called Ant Financial and marketed to other nations around the world.

As the wealth of the country and its consumers grew, the advantages of ecommerce — facilitated by Alibaba/Alipay — were fully captured, prompting tremendous growth. Today, the Chinese ecommerce market is larger than that of even the United States.

Top 10 Countries, Ranked by Retail Ecommerce Sales, 2018 & 2019 (Source: eMarketer, May 2019)

Unconstrained by legacies

The Chinese market, unconstrained by a legacy card-swipe POS terminal infrastructure under a disparate set of routing and processing arrangements, simply leveraged the internet to funnel domestic transaction authorizations, approvals and declines through a single connection to the issuers (China Union Pay). Further, interchange rates charged to merchants were set at just about half of those in the United States. So the costs of card and bank payments have been lower across the board, contributing to China's impressive electronic payment growth and penetration.

By the early 2010s, China was also committed to leveraging the increasingly omnipresent mobile phones to make financial transactions, and the ability to use Quick Response Codes (QR codes) instead of card swipes or dips. QR codes enable both merchants and consumers to initiate purchase transactions simply by flashing their handset cameras on a POS reader, or alternatively by the consumer taking a picture of a merchant's QR code — no terminal required.

This innovation was important for enabling the vast rural areas of China to conduct secure and efficient in-store and online transactions, but it also set the stage for China leading the world in mobile transacting, with more than 80% of the world's mobile payment users.

In 2011, an eventual Alibaba contender called Ten Cent debuted mobile-only WeChat, a messaging and social media platform that quickly became an 'app for everything.' WeChat was focused on stimulating ecommerce, and its marketing events (e.g., red envelopes) have attracted tens of millions of new users to internet transacting. In 2013, WeChat Pay was introduced, enabling — as Alipay does — bank accounts, as well as bank cards, to be easily used (via QR codes) for payments. Fueled by its marketing prowess and span of services, WeChat now boasts more than a billion users.

By 2017, WeChat Pay and Alipay had become the dominant formats for mobile wallets and digital payments, and even China Union Pay agreed to support QR code payments.

Payment methods in China by percentage of adoption (Source: Bain/Research Now Retail Banking NPS Survey 2018)

New models of innovation

In recent weeks, a number of new developments worldwide are furthering the emergence of new business models for payments:

  • Earlier this year, Japan announced collaborations of several non-network payment participants to foster QR code standards as an alternative to network-pushed near-field communication (NFC) and contactless.

  • In the past decade, India, the second-most populous nation and the fastest-growing major nation in ecommerce, has defined its participation requirements for remote payments on the basis of its national interest, and promoted its own full-blown ecommerce platform and QR code-based payment wallet, Paytm — with a reported 300 million users.

  • In July, Alibaba announced it would provide digital tools to build ecommerce storefronts on its platform for potential use by millions of U.S. small businesses.

  • In preparation for a planned IPO, Alibaba restructured its investment in Alipay in late September and announced it now has 900 million users, and 300 million more through partnerships in other countries.

  • Also in late September, in Bangladesh, (the eighth-most populous nation) Visa announced support for a QR code capability in order to foster financial inclusion for electronic payments.

Clearly, there are major differences between the highly political and polarized U.S. payments marketplace and these populous, rapidly modernizing countries in Asia. But the overall implications are obvious: much less costly financial inclusion can be achieved with a little government support, and that achievement can be accelerated with technology like QR codes versus NFC/contactless and mobile phones.

The Chinese new-technology goliaths are expanding in the United States (and for more than just Chinese tourists) and more than three dozen other countries, and Paytm is operating in Canada now. The winds of true payment innovation are clearly blowing in from the Far East. Will the United States be ready and able to make the most of them?

The statements and opinions of the writer do not necessarily reflect those of TSYS.

Other Articles by Steve

Steve Mott

Steve Mott is a 25-year veteran of the electronic payments industry, specializing in transaction economics, innovative uses of debit networks, authentication and security technologies, and emerging alternative payments types and venues such as stored value, online and mobile commerce and transacting over social networks.

As principal of BetterBuyDesign, a payments consultancy, Steve conducts strategy, product, technology and market assessments for banks, processors, networks, technology providers and merchants, and advises a number of investment firms on industry trends and developments. You can reach him at stevemottusa@gmail.com.

Share this story via email or social networks

  1. You Know You've Been Part of the Payments Industry Too Long When…

    Tue Oct 30, 2018 09:00 AM

    You Know You've Been Part of the Payments Industry Too Long When...

    Categories: Articles and Blogs
  2. Winning at the point of sale in the convenience sector

    Mon Mar 18, 2019 12:02 AM

    Winning at the point of sale in the convenience sector

    It’s quite possible that there has never been a more pivotal time in the convenience-store industry. With the obvious exception of e-commerce, the convenience-store and club sectors are the only two other retail channels expected to grow over the next three years – and not nearly as briskly as e-commerce.more...

    Categories: Articles and Blogs
  3. Will Globally Popular Regulatory Sandboxes Ever Crack the U.S. Payments Market?

    Tue Jan 29, 2019 08:59 AM

    Will Globally Popular Regulatory Sandboxes Ever Crack the U.S. Payments Market?

    Categories: Articles and Blogs
  4. Why Your Business Needs to Accept Chip Cards

    Wed Mar 6, 2019 12:06 AM

    Why Your Business Needs to Accept Chip Cards

    It feels like forever ago that the EMV® Liability Switch took place on October 1, 2017. But even now, many businesses have not switched over to taking exclusively EMV (colloquially known as chip cards). more...

    Categories: Articles and Blogs
  5. Why the Payments Industry Needs to Hire More Veterans

    Tue Jul 2, 2019 09:00 AM

    Why the Payments Industry Needs to Hire More Veterans

    Tags: purdy
    Categories: Articles and Blogs
  6. Why It Pays to Be a Payment Facilitator

    Mon Jun 3, 2019 01:02 AM

    Why It Pays to Be a Payment Facilitator

    Payment facilitators. You already know of them and what they do, even if you’re not familiar with the term. In fact, PayPal®—which might be described as the original payment facilitator—is sometimes referred to as a kind of “Super Facilitator,” with Square® being a more recent player.   more...

    Categories: Articles and Blogs
  7. Why Isn't Mobile Pay Usage Spreading Faster?

    Fri Apr 13, 2018 05:52 PM

    Why Isn't Mobile Pay Usage Spreading Faster?

    Categories: Articles and Blogs
  8. Why is Fintech So Focused on New Payment Rails?

    Fri Apr 13, 2018 05:36 PM

    Why is Fintech So Focused on New Payment Rails?

    Categories: Articles and Blogs