On Thursday, Apple announced a partnership with Chinese payment giant UnionPay to bring Apple Pay into China, according to Forbes. UnionPay cardholders will be able to link their bank cards to their Apple devices and pay with their iPhones, Apple Watches or iPads “as early [as] 2016.″
Previously, Chinese social media reported on Apple Pay with enthusiasm spotting Apple Pay implemented in the latest iOS 9.2 update for China. Some Internet users tried it out, and found that Apple Pay was already working in China’s UnionPay portals in store.
Apple soon closed down its verification channel when the leak spread to thrilled Chinese Apple fans but the revelation proved that, on a technical level, Apple Pay is ready to venture its business in China.
According to a report by the Wall Street Journal in November, Apple was in negotiations with China’s UnionPay and the big four state-run banks to make inroads into China and was close to a final deal. It was also reported that the California-based company planned to have its payment solution launched in China before the most significant of Chinese festivals the annual Spring Festival.
However, the end of Apple Pay’s tangled path into China may just be the beginning of another harsh battle for it in the Chinese market.
The mobile payments market in China is already divided between Alibaba-backed Alipay, Tencent-backed WeChat Wallet and the ambitious late comer Baidu Wallet chasing behind. Against such robust rivals, Apple Pay will find it difficult to bite into the Chinese market and change its overall stagnant market adoption in the world.
Offering you a glimpse of Apple Pay’s possible future in the Chinese market, AllChinaTech estimates the obstacles Apple Pay will have to face and the payments industry status quo for you to project into Apple Pay’s future performance.
The advantages and disadvantages of Apple Pay’s partnership with China’s UnionPay.
According to Bloomberg, Apple Pay’s entry to China will be based upon China’s UnionPay’s point-of-sale network. China’s UnionPay is a state-owned VISA and MasterCard-like clearing and settlement association among Chinese banks.
Technically, Apple Pay isn’t in direct competition with Alipay and WeChat Payment as it can incorporate online payments into its feature set as well. However, as UnionPay and the online payment tools have direct conflicts in the market, collaboration with one party implies an impossibility to cooperate with others in the near future.
But a partnership with UnionPay is still the most rewarding choice Apple Pay has at the moment. Both supporting NFC technology, Apple can save a lot of effort and cost upgrading the system; instead, it can build upon UnionPay’s technical infrastructure.
NFC technology, or Near Field Communication, is the technology both Apple Pay and Quick Pass are built on. With NFC, transactions can be made without direct contact between devices making the need to insert cards into a POS machine redundant.
UnionPay began to incorporate its NFC technology into mobile phones as early as 2012. Samsung’s GALAXY SⅢ was the first model that supported the NFC technology of UnionPay. It also began to issue Quick Pass, a contactless NFC card, in the same year. But because of the slow and pricey upgrading process and low recognition and adoption among users, UnionPay’s Quick Pass hasn’t become the prevailing payment method in the Chinese market.
“In fact, because the number of terminals is still limited and it takes time for users to change their payment habits, none of the mobile payment methods have really been popularized in China yet,” a high executive at a leading third party payment platform told AllChinaTech.
Compared with other mobile payment solutions, Apple Pay, at least, has high recognition among users. A possible collaboration with Apple Pay, a well-recognized payment tool, next year, could be a game-changing moment for UnionPay in the competition against the Alipay-led online payment solutions. Though Apple’s market share in China dropped to third place in Q2 of this year, it’s still always the center of attention in China.
With Apple as an ally, UnionPay is attempting to rage a new war against Alipay and WeChat Payment in the latter half of 2015. It has partnered up with more retailers, launching a partnership with 7-11, the convenience store chain with the biggest market share in China in November.
“UnionPay cards have a low market penetration rate. We tested a small amount of signature-free payments with McDonald’s two years ago but didn’t generalize it to more businesses. Now we’re trying to promote it to retailing chains,” said Liu Jian, the Associate Manager of UnionPay’s business development department, to Beijing Business Today in November.
According to Liu, now Quick Pass has more than six million terminals covering chain brands including McDonalds’ and Burger King in China. The existing infrastructure for Quick Pass will be available to Apple Pay if the two reach a deal upon its entry.
UnionPay also launched a new service called Cloud Quick Pass with over 20 commercial banks in China last Sunday. The new service has a similar mechanism to Apple Pay in terms of operation. Users scan their credit card and generate a digital credit card in app form. The new service is now only available on Android devices with NFC technology.
The similarity between Cloud Quick Pass and Apple Pay will make it easy for UnionPay users to adapt after Apple Pay enters China. But apart from the infrastructure support, as a local partner, UnionPay can’t contribute much to Apply Pay’s market acquisition in other aspects.
Union Pay attempted a promotional campaign earlier this month but it only lasted a week despite expectations of running through to December. The state-owned financial institute seems to be a little rough in its promotional abilities compared with other emerging Internet companies.
Tackling formed consumer habits is difficult
As a pioneer in the field, Alipay launched a QR code scanning feature in 2010 for its e-commerce properties first but soon expanded to offline transactions. According to market research company Analysys, Alipay has already seized 71.51% of the mobile payment market as of the third quarter of 2015.
Not only has Alipay accumulated over 800 million registered users in the past 10 years, it also knows how to maximize its influence through partnerships with other businesses. In sharp contrast with Apple Pay’s tough battle with the supermarket chain alliance in the U.S. Alipay formed partnerships with all the top five supermarket brands in China as of August.
Meanwhile, with years of experience in e-commerce, Alibaba is tactical in market conversion and penetration. This has been proved again most recently with its offline-focused Double 12 promotional campaign this year. According to Alipay data over 300,000 offline stores and 28 million people participated in the Double 12 promotion campaign, including 3.29% of consumers over 50 years old.
The participation of older consumers shows Alibaba’s advanced capacity to convert new users and develop user habits.
Alipay’s primary rival WeChat Payment also has had a history of victories with market penetration. With its successful promotional campaign on the Spring Festival Gala last year, it boosted users to 200 million within two years.
Both these two Chinese leading mobile payment tools have teams who have deep insight into Chinese consumers preferences. Apple, in contrast, is a mega international company which stands at a disadvantage when it comes to local insight.
“Now Alipay and WeChat payment are the mainstream payment methods and they give users and businesses a lot of subsidies, which is something Apple will be unlikely to do,” said Ma Tao, an analyst at Analysys.
The previous promotion wars have turned the competition in the Chinese mobile payment market into a cash-burning battle. As Chinese users have been spoiled by all the subsidies distributed by Internet companies, will Apple find its own way to change the market or will it change its past marketing style to adapt? It’ll be another tricky issue Apple has to handle.
To know your users is to win the game
Apple Pay’s advantages compared to other existing payment methods are clear: it’s fast, simple, does not require the Internet, and it protects user privacy with no preservation of user information during usage.
However, according to MasterCards’ global mobile payment survey released in September, primary considerations for users are convenience and habit.
Distinguished from Apple Pay’s product positioning as a payment tool, its Chinese competitors are regarded as platforms aggregating connections to other services. Both Alipay and WeChat Wallet are not only payment applications, but also act as entrances to Alibaba and Tencent’s entire product galaxy: e-commerce portals, financial services, ride-hailing businesses, and even social networking as Alipay is attempting to do.
Also, with the heating-up of competition between WeChat Payment and Alipay, both companies have offered enormous discounts and coupons over the past two years. The cash-burning war has developed new payment habits among Chinese users especially for new scenarios, for example WeChat’s strong growth along with the development of its ride-hailing business.
The first growth peak for WeChat Payment was when Tencent invested USD 100 million in Didi Chuxing and had WeChat Payment as the primary payment method in-app. Through the RMB-two-billion cash burning war between Didi and Kuaidi in 2014, WeChat Payment gained its first batch of users along with Didi Chuxing’s aggressive expansion.
Meanwhile, at the business end, online payment tools are giving a better deal to businesses. Alipay reduces its transaction fee to 0.6% to small and micro businesses. WeChat’s charge varies from 0.6% to 2%. Baidu Wallet gives a discounted 0.6% for mobile end users.
Though Apple Pay only charges 0.15% of credit-card transactions and 0.5 cent for each debit transaction in the U.S. according to the Wall Street Journal, because of an additional charge paid to UnionPay, which is normally 1- 1.2% of the transaction, the Apple Pay – UnionPay alliance will be far less attractive to small business owners.
Considering the needs of both users and businesses, Apple Pay may have to adapt accordingly to break into the market.
And one last thing…
Based on the points above, Apple Pay’s venture in China won’t be that easy even after it solves all the regulatory hurdles. But then why does Apple Pay even bother with entering China?
Because the market is too big to miss.
Comparing with the U.S. market, the current Chinese market is more friendly to mobile payments. According to Business Insider, only 13.1% of Apple users were reported to have used Apple Pay in the U.S. Among them, 32% of iPhone 6 and 6 Plus users said they didn’t use Apple Pay because they were satisfied with their current payment methods.
In contrast, in China, after Alipay and WeChat Payment’s years of promotions, Chinese people are more used to mobile payments compared with their American counterparts. According to China’s Central Bank, People’s Bank of China, for the first three quarters of this year, China saw 4.5 billion mobile transactions for a total amount of RMB 18.17 trillion (USD 2.83 trillion).
For Apple Pay, this is a market they’re more likely to have breakthroughs in.
Meanwhile, in spite of Apple’s strong performance in China this year, iPhone 6S sales have slowed and are not as impressive as sales of the iPhone 6. It might imply the Apple market in China is now reaching a tipping point.
As for Apple, it needs a new drive to continue performing in its biggest market. Apple Pay may be the trick to push users owning older models to upgrade to the latest versions and possibly a contributor to sales of its new iPhone 7 next year.
Though it will be a harsh battle for Apple Pay in China, it’s a battle it has to fight.