In our earlier article, we have introduced six most innovative services that have developed around various concepts of Chinese sharing economy. Some of those companies, like DiDi, have grown enormous within record time, swallowing rivals and winning new markets. Others have  recently achieved infamous “unicorn” status (Tujia, Huochebang) while more startups are still small but full of potential.

5 distinctive features of Chinese sharing economy

#1: Smartphone proliferation

Perhaps the strongest driver behind wide adoption of shared services in new Chinese sharing economy is proliferation of smartphones, particularly in the cities.

Virtually every shared service “lives” on a smartphone is some shape or form. A smartphone enables users connecting with location based services while its camera serves as a scanning device which is essential for many such apps.

Moreover, many apps are either completely integrated with popular apps like WeChat or Alipay or are dependent on them for payment and authentication.

#2: Popularity of QR codes

While QR codes are much less common elsewhere, in China they are unambiguous and can be found practically everywhere. Moreover, virtually everyone knows what they are and what to do with them. In fact, WeChat, is single-handedly responsible for popularizing QR codes in China.

Alternative technologies like NFC have never achieved the same degree of recognition and popularity, mainly due to cost. Since printing QR code or generating it online is either extremely cheap or practically free, as long as security is not a concern, they always win over NFC or other technologies.

Many of the services of Chinese shared economy we discussed earlier rely on QR codes to connect users with a particular product such as in the case of unlocking shared bikes or shared umbrella locks.

#3: Convenient payment systems

Most of the shared services rely on a payment system for both payment and placing deposits. Two of the most common payment systems in China, Alipay and WeChat Pay, facilitate the process in the easiest and most secure way.

Since almost every Chinese city dweller is already a user of at least one or, more often, both of those systems, integrating them into the shared service apps is a natural fit. Essentially, those payment platforms have become the primary enablers of Chinese sharing economy.

Moreover, unlike Western equivalent PayPal (which is practically unheard of in China), both Alipay and WeChat Pay are transaction free services – they don’t charge users a single penny for payments as long as they are below a certain limit and are processed within China.

#4: Real name registration

The common misconception about sharing economy is that it is largely based on trust. If that was true – the concept would be a no starter in China. Luckily, with Chinese sharing economy trust is not an issue, or at least not to the same degree as it could be otherwise.

Why is that the case? The reason is that as long as people use one of the payment systems (Alipay or WeChat Pay) for transactions, they are automatically identified by their real name. In fact, WeChat and Alipay require real name registration that is connected to users’ Chinese ID or a passport for foreigners.

This arrangement minimized chances of service abuse (although it does happen, especially with bike sharing apps) or, at least, makes it easier to identify, track and punish bad behavior.

#5: Backing of internet giants

While being on good terms with the government officials is a pre-requisite for doing business in China in general, having the back of one of the BATs (Baidu-Alibaba-Tencent triumvirate) is a guarantee of success inChinese sharing economy.

Apparently, those internet giants are seeing great potential in many of shared services startups and have been generously financing them. In a rare display of cooperation within BAT, some of the services have been backed by more than one of them. Tencent and Baidu have been particularly enthusiastic in financing many such startups propelling some of them to unicorn status all within a couple of years.

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History

Union Pay is China’s state sponsored debit and credit card provider which has been enjoying complete market monopoly up until emergence of AliPay. It is still the most common payment method for offline transaction and its entry into online payment market is relatively recent.

In May 2017, UnionPay introduced its first QR code based payment method similar to the other two payment systems we have reviewed. It is, however, going to be an uphill battle against AliPay and WeChat Pay who already control about 90% of the market. Union Pay biggest advantage is its enormous user base – every Chinese with a bank account is already linked to Union Pay simply by virtue of being a customer of one of 165 participating banks. UnionPay has issued more than 5.4 billion cards and processed over 38 billion transactions within 2016 alone.

Usage

Although, Union Pay issues credit cards, it is better known as China’s primary debit card provider. It is always linked to user’s bank account and requires using the physical card to process transaction. Up until introduction of the previously mentioned QR payment systems and a mobile app, that was the only way to process a payment.

UnionPay is still the most commonly accepted payment method in China with nearly every business being the network’s member. Most government services also accept Union Pay.

Unfortunately, the reliance on magnetic strip and the security pin, makes Union Pay a less secure payment method. Chinese social media is full of horror stories of emptied accounts as a result of copied or stolen Union Pay cards. In contrast, AliPay and WeChat are much more secure, thanks to its encryption, dynamically generated QR codes and linkage to users’ smartphones.

Supported devices

Union Pay payment system supports all types of mobile devices and website integration. It can also be linked to Apple Pay which is currently the only way to link Chinese bank account to Apple’s payment system in China.

For offline purchases using UnionPay card, a special card scanning device is required at POS.

Transaction fees

Transaction fees of UnionPay follow the same logic as credit card – the fee is charges to sellers (online or offline merchants) and there is no fee for buyers. The fees charged to merchants are combined of bank’s portion (0.7%) and UnionPay commission (0.1%).

Acceptance overseas

Union Pay is, by far, the most commonly accepted Chinese payment method outside of China. Thanks to Union Pay linkage to the banks, most ATMs in Asia and, increasingly in North America and Europe, accept UnionPay withdrawals. Large number of business overseas, including most large department stores, also accept Union Pay.

Also, unlike AliPay and WeChat Pay, UnionPay can process nearly all world currencies.

Chinese tourism boom has been a blessing for UnionPay: in 2015, 2.5 million Chinese who traveled to US spent more than $40 billion during the duration of their stay. Vast majority of those transactions were processed by Union Pay.

<< Overview of Chinese payment systems

<< WeChat Pay

<< AliPay

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History

WeChat Pay is a relative newcomer among Chinese payment systems but it managed to gain traction almost immediately, surpassing AliPay in the number of registered users, although not in total transactions volume.

The vast majority of WeChat users, the number that is quickly approaching one billion, are also WeChat Pay customers as long as they have linked their account to their banking. WeChat Pay has gained additional momentum with the introduction of the “red envelope” feature – a cherished Chinese tradition of gifting money to friends and relatives on special occasions. During holidays, this feature of WeChat is by far the most popular one with transactions volume running into billions within hours.

Usage

In terms of various uses, WeChat Pay closely follows AliPay. It can be used to pay bills, buy goods online and offline, order tickets, grocery deliveries, hail a cab and do just about everything else. In addition, WeChat Pay powers rapidly growing WeChat ecommerce ecosystem, making buying and selling products with WeChat online stores a smooth and secure experience.

Moreover, WeChat continues to expand its services to various financial products – from investment funds to insurance, allowing users paying for that with WeChat Pay and from within the app.

In offline settings, WeChat Pay works pretty much in the same way as AliPay – using system generated dynamic QR code. In fact, both systems have become so popular, that it’s a common site to see WeChat Pay and AliPay QR codes next to each other at points of sale.

Supported devices

Since WeChat Pay is an integral part of WeChat app, it naturally works with every mobile device the app can be installed on. 90% of smartphones in China have the WeChat already installed, making WeChat Pay to be the most convenient payment system to use anyway.

It is a bit clunkier to use on a website – rather than following a link, users have to scan QR code with their phone in order to process the payment. However, since most people nowadays are surgically attached to their phones anyway, this doesn’t present a major inconvenience.

Transaction fees

Transaction fees structure with WeChat Pay is very similar to AliPay – it is free for most transactions. The fees of 0.1% start at withdrawals over 10,000 RMB as well as overseas transactions such as in case of cross border commerce.

An easy work around to avoid paying those fees is to buy WeChat various wealth management products and then move the money from there back to user’s bank account.

Acceptance overseas

Compared to AliPay, WeChat Pay is much less common outside of China, although recently, it’s been making inroads into new markets. It currently support 9 currencies (still short of 18 supported by AliPay). WeChat Pay has to comply with the same restriction faced by AliPay and imposed by China’s central bank on money outflow.

In recent years, WeChat has struck new deals with operators overseas, namely in South Africa, Philippines, Thailand as well as other countries to facilitate cross border transactions. They have also partnered with global payments technology company, Adyen, helping businesses worldwide to access new customers in foreign countries.

<< Overview of Chinese payment systems

<< AliPay

>> Union Pay

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History

AliPay was developed by Alibaba as the expansion of its ecommerce platforms – Taobao and Tmall. It has been around almost as long as Chinese online shopping, in other words, not too long. Up until the explosive rise of WeChat Pay, it has dominated the online payment landscape in China. Nowadays, almost every Chinese with a smartphone and a bank account is an AliPay user.

Ali Pay is the main payment method on ecommerce sites where it also serves as a type of escrow, keeping the money safe until the transaction has been completed to the satisfaction of both parties.

Usage

AliPay is used for almost all types of online and offline transactions. For offline, it relies on QR code system – paying party either scans merchant account’s QR code with Ali Pay app or the merchant scans QR code generated on buyer’s phone.

Multiple services are already integrated within AliPay app allowing users to pay utility bills, buy airplane or train tickets, book a cab etc. all from within the app.

Supported devices

AliPay supports virtually every type of mobile devices as well as smooth integration with online assets such as an ecommerce website. Many payment plugins already support or in the process of developing support for AliPay.

Transaction fees

One of the most attractive aspects of using AliPay from consumer’s perspective is that there are no transaction fees except on large withdrawals. Currently, the fee is set to modest 0.1% for withdrawals of over RMB 20,000. This way, Ali Pay is attempting to keep as much cash as possible circulating within the system.

On the other side of sale, merchant are charged 0.55% transaction fee. Comparing it with 3-4% fees applied by credit card companies helps explain AliPay’s appeal to all types of vendors.

Acceptance overseas

AliPay can currently handle 18 different currencies and is attempting to widen its reach beyond China’s borders. The biggest obstacle so far has been related to China’s own regulation – Chinese central bank imposes heavy restrictions on all types of cash outflow. Nevertheless, through negotiations and enhancing its verification process, Alibaba is making progress in rolling out its payment service outside of China.

In its early days, AliPay has enjoyed the first mover advantage  and managed to expand internationally before banking restriction came into effect. Some of that progress was scaled down in 2016, particularly in Europe and North America, but South East Asia still remained its stronghold.

Currently, in semi-independent territories, Hong Kong and Macau, the service is already fairly common. In other parts of Asia, especially those accepting large number of Chinese tourists such as Korea, Thailand and Philippines,  Ali Pay is becoming a common sight as well. It is also making a come back to North America in Europe.

<< Overview of Chinese payment systems

>> WeChat Pay

>> Union Pay

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Relying on traditional payment systems such as credit cards or PayPal is simply not going to work in China. In fact, if you are planning to sell anything to Chinese consumers, there are only three viable options.

In the next series of posts, we are going to give an overview of three main Chinese payment systems that dominate the market: AliPay, WeChat Pay and Union Pay. Integrating any of them, or, preferably, all of them to your website will give you an instant access to Chinese customers’ wallets.

AliPay and WeChat Pay together represent over 90% of payment systems market. Union Pay overlaps with the large part of that market by the virtue of being older, semi-official system that is linked to every bank account in China by default. In fact, Union Pay is closest equivalent to plastic in China.

Main Chinese Payment Systems

>> AliPay

>> WeChat Pay

>> Union Pay

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The rapid adoption of digital payment systems continues to transform Chinese economy and society in unprecedented ways. Nowadays, handling cash seems like a thing of the past with nearly everyone in China using one of the two main payment systems: AliPay or WeChat Pay.

When is comes to digital payments, China is, undoubtedly, the technological leader. Once Chinese payment systems have become the primary payment method online, brick-and-mortar stores started to adopt them for offline payments as well.

Today, practically every business in China, big or small, finds it much more convenient to settle bills via AliPay or WeChat Pay compared to traditional cash.

Several factors are responsible for such universal adoption of digital payments in China. The fact that it is backed by ecommerce giants such as Alibaba and the top tech innovator, Tencent, was the most critical component. Also, as it turns out, having digital cash is a much safer way to handle money in China – it is harder to lose, there is no problem with fake bills and there is almost always a recourse to get money back in case of a fraudulent transaction.

Another big reason for wide adoption of digital payments in China is the fact that those platforms integrate seamlessly with a bank accounts using real name authentication. This is another reason why the fraud with those system is rare and much harder for criminals to pull off (although it does happen).

Two if the largest Chinese payment systems are AliPay, backed by Alibaba and WeChat Pay, introduced by WeChat maker Tencent. Although, WeChat Pay was a relative late comer, it quickly catches up with AliPay in terms of market share.

In fact, most Chinese have both AliPay and WeChat Pay wallets and use them interchangeably. Other payment systems platforms have sprung up as well, achieving a fare amount of success, although nothing on the magnitude of AliPay or WeChat Pay.

QQ Wallet is a system used by QQ, an ecosystem of apps and digital products by the same Tencent. Baidu has it’s own system called Baidu Wallet which was launched even earlier then WeChat Pay.

Out of non-Chinese payment systems, only ApplePay has reached some degree of recognition, although it enjoys much less popularity. Since it uses NFC technology, it often cannot be used with more popular Android phones. QR code based Chinese payment systems of AliPay and WeChat Pay are much more flexible as they don’t require any special reading devices besides a simple camera.

AmazonPay, PayPal and others remain relatively unknown and are unlikely to gain any meaningful market share in China. One of the issues with those platforms are high transaction fees when funds are withdrawn back to a bank account. AliPay and WeChat Pay don’t charge anything for the amounts that most people use them for (some fees start to kick off when a certain transaction limit is reached).

Here is the chart put together by Statista showing the market share of various Chinese payment systems:

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Chinese online shoppers also grew to trust online payments and the vast majority is quite comfortable using it to pay for purchases on the internet. Alipay, the most popular Chinese online payment system by Alibaba, holds the largest market share. It powers two largest ecommerce platforms, Taobao and Tmall and is extensively used in large number of third party applications and platforms.

Main Chinese Online Payment Systems

As of the end of 2015, Alipay accounted for almost 70% of the entire Chinese online payment market. It is fair to say that almost everyone in China with a cellphone and a bank account has Alipay account which is somewhere around 700 million.

Alipay transaction fees are also much lower than PayPal. In general, cross border transactions are the most expensive but it depends on the type of contract a merchant has with Alipay as well as the volume.

The second largest online payment system is TenPay developed by Tencent. In fact, TenPay also powers WeChat Pay, the payment system used by WeChat users. Thanks to this app’s explosive growth, TenPay was able to increase its market share quite significantly during 2015 to about 20%, primarily on the account of Alipay.

WeChat Pay is now extensively used for many types of transactions. With web payments, customers simply scan the QR Code on their mobile phone with WeChat to make a payment to a website. For mobile users, WeChat Pay is used for payment within WeChat Official Accounts to enable sales from within the app.

Both Alipay and WeChat Pay are increasingly used for offline transactions at traditional stores and restaurants in China and even abroad. A customer simply opens the app in order to allow the merchant to scan their QR code with a special scanner or, often, just another smartphone. As many phones now have fingerprint scanning sensor, placing a finger on it is all it takes to complete a transaction (otherwise, a customer has to type in their secret code on their phone). Alternatively, a customer can scan a merchant’s QR code to send the payment but this way is becoming less common at the traditional point of sale.

Since those type of transactions are free to customers, Alipay and WeChat Pay serve as substitutes for carrying cash or credit cards and offer both security and convenience.

Alipay and TenPay (WeChat Pay) account for almost 90% of current mobile payment with other players, such as Lakala, JD wallet, YeePay, 99Bill and others quite far behind.

As for foreign alternatives, PayPal was not able to get any meaningful user base so far and is unlikely to do so in the future. Apple Pay still barely registers in China mobile payment market, although it is still quite new.

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According to the most recent data, three quarters of B2C market belong to just two platforms – Tmall and JD, while Taobao enjoys complete dominance of C2C market with 95% market share.

None of the foreign e-commerce players were successful in gaining any meaningful market share: this year Amazon has finally decided to open its branded store on Tmall and Macys and Neiman Marcus decided to shutdown their China online ventures.

With such high market saturation of China’s e-commerce, there seem to be hardly any opportunities left for smaller competitors, especially foreign one. However, one segment in particular still shows promise and this is cross-border online shopping. China’s traditional and online markets have been plagued by series of scandals in recent years – from contaminated baby milk powder to fake cosmetics and medicine. Despite the efforts of online marketplaces, such as Tmall, to ensure that only genuine products are sold there, the public trust has been damaged.

This situation makes large number of Chinese online shoppers turn to foreign markets that are perceived as more trustworthy. One of the companies that is trying to capitalize on this trend is Yihaodian which is partly owned by Wallmart.

According to the company, from 2012 to the end of 2013, the number of registered users grew from 29 million to 57 million. The company has doubled the inventory from 2012 to 2013 during the height of health scare in China and it has sold 250 million imported food items that year. In 2013, approximately one in every three imported baby milk formula cans was sold on Yihaodian.

The site prominently features baby products and brands itself as a primary source for concerned parents who may mistrust goods found in retail or other online stores.

Yihaodian also serves as an online supermarket and claims to offer better quality produce delivered quickly. However, Tmall and JD have also opened their versions of supermarkets leveraging their much larger user base.

It is still not clear whether Yihaodian can be successful in holding up to its niche, especially considering the fact that food safety situation seems to be gradually improving in China – there were no major scandals this year yet.

Another interesting ecommerce opportunity that was gaining momentum outside of Tmall and JD universe was online shopping for alcohol. In 2013, 99% of booze was still sold offline which leaves plenty of room to shift to online sales.

Chinese are increasingly acquiring taste for fine wine, although traditional beverages and beer still dominate alcohol sales. One such e-tailer, WineNice,  has recently raises over $15M in funding and was rumored to involve Rothschild support.

The site initially grew slowly after launching in 2008. WineNice mostly sells foreign wines, but also has a selection of Chinese rice wines and overseas liquors. Most of its stock is in the pretty affordable sub-200 RMB ($32) category, though I spot a 1988 Pétrus for a cool 30,000 RMB ($4,740).

WineNice is also planning to open 100 brick and mortar stores in China and already has its own branded stores on TMall and JD.

There are definitely some e-commerce opportunities left that can be exploited outside of dominant players or pursued in combination with traditional strategies. Mobile segment may further change the ways people search and shop for products online as well as offer new marketing possibilities. We will explore those in the upcoming posts.

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Presently, none of the common Western online payment solutions, particularly PayPal, managed to achieve any significant presence in China. In addition, Chinese skipped credit cards era almost entirely and jumped straight to online cash. This means that credit cards are not nearly as popular as in the West and are rarely used for online transactions, especially for local purchases.

At the moment, approximately half of all online transactions in China are handled by Alipay, which is not surprising considering that Alibaba, the company that owns Alipay, also runs largest online shopping platforms – Taobao and TMall.

In mobile, the fastest growing sector of China’s ecommerce, Alibaba’s dominance is almost absolute, although Tencent is working hard to popularize its own Tenpay system.

Here are some more figures from Go-Globe’s infographic:

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