Transactional Banking and Mobile Payments in China: An Emerging OpportunityPublished October 02, 2012 in Arabic Knowledge@Wharton
When Chinese shoppers flocked to Apple stores for the new iPhone launch earlier this year, news reports highlighted the reaction as another sign of the dynamic and rapidly evolving mobile market in China. Indeed, analysts said, China is now not only largest overall mobile phone market in the world, with more than 900 million subscribers -- it also is the largest smart-phone market in the world, moving past the U.S. Apple itself noted that iPhone sales in Greater China were up fivefold in the firstquarter of 2012, compared with a year ago.
Already, market researchers say that in China's biggest cities, smartphone penetration is approaching 50%, higher than many developed markets. But that's not the whole story. At the same time, the rapidly growing smartphone market in China is fuelling even bigger, more fundamental changes in how consumers interact and engage online - with each other, with service providers, with retailers and more.
One of the biggest beneficiaries of this trend, experts say, is mobile commerce. Although still a small fraction of total consumer payments in China, the gross transaction value of mobile payments, now at US$2.5 billion, is forecasted to grow to US$40 billion by 2014, with tickets and digital purchases of books and music showing the greatest growth. "What we are seeing is a dramatic take-up in mobile payments," says Egidio Zarella, head of payments transformation at KPMG. "While it's stalled in the U.S. and Europe, it's skyrocketing in China, and across Asia."
Of course, the Chinese mobile payments market is just beginning to take root, and still faces many challenges. Perhaps most notably, despite the large mobile user base, most Chinese mobile phone users cannot access mobile payments on their device. "High mobile handset penetration does not equal high m-payments adoption," says Chiel Liezenberg, co-founder of Innopay, an independent online transactions consulting firm. Illustrating the point, a 2010 study by telecom consultancy Maverick China Research found that 75% of surveyed mobile phone users didn't yet have access to mobile payments. Of the 25% whose phones enabled them to access m-payments services, less than 2% actually carried out transactions.
In addition, Liezenberg says, the fragmented market in China means that consumer needs and merchant capabilities vary widely. Affluent "big city" consumers increasingly want smartphone-based mobile commerce services (e.g., m-wallet, offers) that are very different from those that "rural" users need, including basic SMS-based payments for small purchases.
Nevertheless, the Chinese market also shows some positive signs for wide-scale take-up of handset-initiated payments, in many different ways. "When we take into account that credit card adoption in China is remarkably low, (we see) considerable room for versatile alternative payment methods," notes Monica Gaza, a senior editor at Paypers, a news and analysis firm covering the global payments industry.
Already, China's point-of-sale (POS) payments infrastructure is developing rapidly, with 3.3 million units installed in 2010, triple the number of units in 2007. In addition, the rapid spread of 3G mobile networks and the growth of e-payments acceptance in China's tier-2 and tier-3 markets means that there is significant market potential for mobile payments. By 2013, the Chinese m-payment ecosystem is expected to reach 410 million users, according to a report by Celent.
Mobile commerce, like e-commerce overall, covers a broad set of players, from mobile carriers and software companies, to banks and third-party payment providers. Put these companies into a large and rapidly growing market, analysts say, and the result is likely to be dynamic period of competition, collaboration, innovation and "empirebuilding" in the coming years.
Specifically, market watchers generally say there are three broad categories of players in China's nascent m-commerce and payments market, each with different strengths and strategic objectives:
1. China UnionPay and the banks. China UnionPay, or CUP, is the dominant player in China for credit- and debit-card payments and is collectively owned by the banks. Analysts say it now is the leader in bank-based mobile payment applications, and has recently won a long-running battle with China Mobile on key industry standards. According to McKinsey's report, CUP now has agreements with 157 banks, laying a solid foundation for its cardless payments services, and has launched a successful pilot in Chengdu. In May 2011, ChinaUMS, a CUP subsidiary, also received a government license for third-party payments. In June 2012, China UnionPay and China Mobile signed a partnership agreement on mobile payments, promising to collaborate in research and development, technology standards, business development, construction and marketing.
2. Mobile carriers. China's leading mobile carriers - China Mobile, China Telecom and ChinaUnicom - have each established their own mobile payments subsidiaries. All three have large mobile subscriber bases, control access to millions of handsets, and see payments as an additional revenue stream. Nevertheless, the carriers also are pursuing different paths. In May 2010, China Telecom and China Unicom aligned with CUP's 13.56 GHz standard, while China Mobile continued to push its 2.4GHz solution. (In addition, China Mobile made a major move to acquire a 20% stake in Shanghai Pudong Development Bank, with which it recently launched a mobile banking/payments platform.) At the same time, all three carriers are also vying to acquire a third-party payments license, which would strengthen their hand.
3. Online third-party providers. Analysts say online payments providers and other payments start-ups in China stand out as the most active innovators and pioneers in the market, able to bring their online experience to bear in the mobile market. For instance, Alipay, Tenpay, and YeePay all have large active user bases and are looking to use the power of smartphones and applications as a relatively easy way to break into offline mobile payments. Alipay, for example, processes more than 50 million transactions online each day, surpassing the daily volume of traditional card point-of-sale transactions. Meanwhile, 99bill, QFPay, YeahKa and others have launched mobile remote payments solutions targeted at merchants with lower interchange fees. Alipay, for instance, has been aggressively rolling out bar code readers at small to medium-size merchants, while gaining 10 million users for its latest mobile payments applications. Tenpay consolidated credit-card repayment business across dozens of banks to form a seamless mobile payment experience for credit-card customers.
Notably, China's payments market remains largely closed for international payments firms such as Visa, MasterCard and PayPal, analysts say. Most leading players are Chinese. Even in the less regulated and more dynamic third-party payments space, foreign investment is closely scrutinized, and all players have been asked to qualify and apply to the People's Bank of China for explicit payments licenses for pre-paid card issuance, online, mobile payments and merchant acquisition. Even so, China's overall regulatory landscape is fragmented. Technology providers, China UnionPay, banks, mobile networks, POS suppliers and third-party payments entities are all overseen by different government ministries, and each ministry is focused on its own interests.
Nevertheless, progress is being made on several fronts, and in particular the overarching question about mobile payments standards appears to be answered, analysts say. In June 2011, an industry consortium led by CUP established the 13.56 GHz NFC standard as the national standard over the 2.4GHz standard advocated by mobile operators. Banks that had hesitated are now likely to align themselves with the CUP standard, analysts say.
All in all, experts say, the m-commerce market in China is still evolving. As it does, the emphasis is shifting from completing transactions to a wider view of engaging consumers all the way from marketing, comparison shopping and personalized offers, to purchase and post-purchase reviews. "If you want to understand the Asian consumer, you have to understand their tech-savviness," says KPMG's Zarella. "They are behind the growth (in mobile payments) because they are demanding it."
The Role of Banks
Banks will play a central role in bringing mobile payments to the mass market in China, experts say, but questions still remain about what additional services they can provide to consumers beyond straightforward transactions. "Technology leaders -- including Apple and Google -- are developing business models that focus on maximizing the consumer appeal of mobile payments through mobile marketing, where consumers are lured into adopting the technology by incentives tied to their individual preferences," says Sirpa Nordlund, executive director of the Mobey Forum, a mobile financial services trade group. "These players are so big and so powerful that they could dominate the market, effectively squeezing the banks into a 'transactions only' role within the mobile payments ecosystem."
"To defend their ground, banks need to collaborate and develop business models that play to their strengths," Nordlund adds. "Failure to do so could result in the banks being left behind in mobile payments, which would have a negative cumulative effect on their customer relationships, and ultimately their market share."
Indeed, instead of competing with technology companies, banks can concentrate on doing what they do best: providing customers a safe and trusted environment through which to manage their money. Generally, consumers everywhere trust their banks to deliver basic financial services and they will extend this trust to mobile payments technology - particularly to services that the consumer finds convenient and familiar. "Banks are a critical link in China's emerging m-payments market," says Gaza at Paypers. "They are licensed to handle large transactions, are able to provide complex financial products and bring their own experience, market penetration and brand recognition into the mobile equation."
Ultimately, analysts say, choosing and developing an infrastructure that not only incorporates mobile payment systems, but also can support mobile marketing is one of the biggest barriers standing in the way of even greater global mobile payments adoption. To do this, all stakeholders -- from banks to operators and device manufacturers -- will need to find a way to work together and align their efforts, while still finding ways to differentiate.
The recent China Mobile-China UnionPay is a perfect example of the collaboration that will be required, analysts say, as well as one China Mobile signed a few days prior with Shanghai Pudong Development Bank. In that deal, the two companies agreed to jointly launch new mobile payment products, including a co-branded bankcard, Near Field Communication (NFC) mobile devices, mobile transfer and direct debit services for consumer bills. Sha Yuejia, a vice president at China Mobile, said mobile finance and m-commerce is a key focus area for China Mobile. Already, customers of both companies are able to use mobile payments for more than 400 everyday expenses and bills, including water, gas, electricity, television, heating and more, covering 95 large cities nationwide.
Opportunities for Action
"It is important to remember that mobile needs to be thought of strategically, not defensively," adds Marc DeCastro, research director for IDC Financial Insights. "Many times financial services organizations find themselves taking a wait-and-see approach, and then responding rapidly once they see what the competition is doing. While this approach reflects the conservative nature of the industry, it often leads to poor decision making."
One such mistake, he argues, has been to simply make mobile an extension of online banking and bill pay, while opportunities are missed where the customer may be willing to pay for value-added services. For instance, one such service could involve security and fraud protection -- that is, alerts tied to the mobile device to warn users about potential fraudulent or high-amount transactions and payments. These same services can also be deployed to small businesses and corporate cash management customers.
Financial institutions that fully take advantage of integrated mobile technology (including touchscreens, cameras, location, social media, and so-called near field communication) for payments will be in a position of strength, DeCastro predicts. After all, the great benefit of a mobile device is the convergence of technology. "Taking advantage of this convergence to fully integrate the mobile device into the financial ecosystem takes the self service model to the next level. The only thing that banking customers cannot conceivably do on a mobile device is deposit cash."
And while most mobile banking technology and applications have been aimed at retail customers, some banks in other markets are already taking the concept to business clients, a lesson that can be applied in China as well. As an example, RBS Citizens in the U.S., in 2010 began allowing its commercial customers to access their banking information and to initiate transactions from mobile devices. "We wanted to offer corporate customers the same conveniences they get in their personal banking," says Matt Richardson, head of product solutions at the bank. "Mobile technology makes it easier than ever to work remotely, from home or on the road. If Treasury employees need to get information or updates, or complete critical transactions, our services allow them to connect to the bank even when they are not in the office, so their businesses can keep moving."
More fundamentally, experts say, the key step for companies is to take a wider view of the business case for mobile payments in China. According to McKinsey's analysis, although direct revenues may be limited due to high acquisition cost and low merchant interchange rates, the sheer size of the emerging affluent customer base in China, marketing opportunities, brand loyalty and consumer data can create enormous strategic value. In fact, the firm says, experience to date in other markets has shown that these additional revenue pools can be as large as the revenues from direct payments services. "China is at an inflection point," the report said. "With a protracted battle over contactless payments standards apparently settled, smartphone penetration hitting critical mass, and online payments leaders shifting to mobile payments, a major breakthrough seems imminent."
The final key success factor, experts say, is again strategic partnerships. "With the ecosystem changing quickly, it is critical for players to choose the right strategic partners, as well as structure their pilot programs' go-to-market plans carefully," McKinsey added. In particular, although the playing field is far from even, analysts believe that international payments players still have much to offer the Chinese mobile payments market, in terms of technical expertise, go-to-market capabilities and capital. Experts say these assets will be highly appreciated by a growing number of innovative Chinese financial and non-financial institutions that are embracing mobile payments and related opportunities.
In fact, for many companies pursing these opportunities may now be an imperative. China's fast-growing mobile market, combined with a large and growing consumer economy mean that it now is poised to become a global force in mobile payments. "The stakes are high," McKinsey concluded in its report. "Whoever wins in China has the potential to become a global leader in mobile payments."