In the last fortnight of 2015, Apple Pay and Samsung Pay both announced their entries into China via partnerships with China’s UnionPay, China’s Visa and Mastercard-like card processing association. Both indicate they will likely start their businesses in China in early 2016.
The entry will be just the start of a rocky journey for Apple Pay and Samsung Pay in China. In our previous analysis, we discussed how the announced partnerships with UnionPay may not really contribute much to the smartphone makers’ payment businesses in China, primarily because the market is already occupied by established competitors in the field: Alibaba-backed Alipay and Tencent’s WeChat Payment.
Looking into 2016, AllChinaTech assesses that Apple Pay and Samsung Pay will still bring new changes to the mobile payments sector in China. But instead of being a threat to existing payment tools, their participation will bring about further adoption of Near Field Communication (NFC) technology among Chinese smartphone brands, rather than posing a substantial threat to existing players. The primary competitors in the field will still be just Baidu, Alibaba and Tencent.
1. Chinese smartphone giants will revive NFC technology for mobile payments
NFC is nothing new. Prior to Apple’s launch of Apple Pay, digital wallets had supported NFC with some smartphone manufacturers having already adopted the tech in China. Oppo, one of China’s major smartphone makers, partnered up with China Merchant Bank — one of China’s top four commercial banks — and launched its NFC-supported smartphone ‘the N1’ with mobile payments back in 2013.
Due to the relatively high expense of equipment upgrading and limited acceptance in the market, neither digital wallets on smartphones nor NFC became prevalent for smartphone makers in China. The launch of Apple Pay in September 2014 brought NFC back to the spotlight in spite of its stagnant adoption in the Chinese market.
At the same time, traditional financial institutions like China UnionPay are attempting to embrace NFC-enabled mobile payments to compete against tech companies, which are extending their business from online shopping to offline transactions. The support from financial institutions encourages smartphone makers — who happen to be in shortage of ground-breaking new innovations— to add NFC to their smartphones as a new selling point.
Some already have. Huawei launched their mobile payments tool together with China’s CITIC Bank on its ‘Mate 7’ back in September 2015. Another smartphone brand ZTE, introduced ZTE Pay in partnership with China UnionPay, which can be used as a public transport card as well as an online payment tool for utilities.
And the trend indicates that more will soon follow suit. Xiaomi, which provoked controversy for removing NFC from its earlier flagship model the ‘Mi 4’, is reported to have reinstated the technology for its next flagship phone the ‘Mi 5’.
On top of that, Xiaomi launched its own financial service in September 2015. Facing the embarrassment of falling short of expected performance targets for 2015, it’s even possible that this smart device manufacturer will extend deeper into the financial sector with mobile payment tools as a start.
In 2016, we may see NFC become a new criterion for bleeding edge smartphone models, just as fingerprint recognition and uni-metal bodies have in the past two years. With a wilder imagination, we may see more smartphone manufacturers venture into the financial sector starting from mobile payments.
2. Still a game for the BAT, but Xiaomi & Huawei may become contenders
Even after NFC becomes universal among Chinese smartphone brands, the competition for mobile payment dominance, at the moment, will still be a match between Chinese internet giants Baidu, Alibaba and Tencent, which use QR code scanning rather than NFC technology.
After years of promotion, consumers are now used to QR code scanning and won’t easily switch to another method without strong incentives. Meanwhile, QR code scanning doesn’t require an upgraded device. A low cost smartphone is compatible with most payments functions needed for daily use without any specific need for a particular brand or model.
The only thing that companies who adopt QR code scanning need be concerned with is government policy and regulation. QR code scanning was shortly suspended when it was first initiated in 2014, out of payment security concerns. The suspension was then lifted after 280 days but with a request that payment companies take full responsibility for any possible damages incurred by users during usage. With no significant improvement to this problem, suspension out of security concerns is still a future possibility for QR code scanning.
Among those internet companies which rely on QR code scanning methods, Alibaba, Tencent and Baidu account for the first-tier players. Alibaba currently has 71.2% of the mobile payments market while Tencent is chasing behind with 15.9%, according to Chinese market research agency Analysys.
Baidu is the latecomer to the sector but is spending a whopping amount of money on promotions. Over New Years Eve alone, Baidu gave out coupons equivalent to RMB one billion (USD 153 billion).
Mobile payments are a strategic business for all these three companies, which means this is doomed to be a brutal competition.
As for Baidu, its Baidu Wallet is now an integrated entrance to all of its online-to-offline services. Robin Li, Baidu’s CEO, regards the O2O business as Baidu’s key business now, and announced Baidu would invest RMB 20 billion (USD three billion) into the sector. As the integration of all of Baidu’s O2O services, Baidu has to achieve a large increase in market share for its Baidu Wallet.
For the other two companies the logic is similar: all these primarily digital-based giants are trying to expand their businesses into the offline world. Mobile payments are the gateway to the real world.
One noteworthy mention is Ant Financial, the Alibaba-backed parent company of Alipay, who plans to see an IPO carried out in 2016. This means that the company must keep its leading position in the market otherwise it might not realize a satisfactory issue price for its current investors.
Products of the three companies don’t vary much, but each have advantages in related sectors: Alibaba has a vibrant e-commerce business, Tencent’s WeChat is now the leading social networking tool, Baidu still owns the most used maps application and China’s biggest search engine.
Though the market at the moment still has significant gaps, with the laggards desperately trying to catch up, a cash war is inevitable.
For the Spring Festival this year, Alipay bid for the partnership with the most viewed television program during the festival with millions of dollars, while WeChat Payment announced a massive reimbursement for its users over the holidays. Baidu has jumped the gun with its RMB one billion promotion over New Years Eve last Friday.
“Based on our statistics, we realized that 91% of our first-time users are using WeChat Red Envelope to get red envelopes, while only 9% of first timers are using it to send out red envelopes. So we decided to give more people a chance to receive red envelopes, which is an effective method to achieve user growth,” said Wang Pengfei, WeChat Payment’s Senior Product Manager on the team’s strategy of giving out all of their income during the holiday to boost users, according to 21th Century Business Herald.
Compared with these established parties, the newcomers aren’t as concerned with access to users. Smartphones with pre-loaded mobile payment tools are natural channels to reach users. Huawei’s smartphone shipments in 2015 alone, surpassed 100 million, according to company figures. Xiaomi, in spite of sliding performance, still holds 3.5% of the global market in terms of shipments for the third quarter 2015, based on a report by market research company Digitimes Research. Relying upon their massive smartphone volumes, these smartphone manufacturers can easily pose a threat to existing players.