Strategies employed by Tencent and Alibaba to shape the Chinese digital payment ecosystem

Introduction

China is leading the rest of the world in building up a cashless society. Digital payments are not only accepted by the tech-savvy middle class from big cities; more than half the country has at least made one mobile transaction in 2020. This trend has been driven by two Chinese giants, Alibaba and Tencent, which pioneered digital payments and now account for over 90% of the $17 trillion mobile payment market. These companies see digital payments not as an end in itself but as an entry point to a vast ecosystem of offline and online goods and services and use the data generated to transform financial services and the physical retail industry. The rapid shift from a primarily cash-based society to cashless was enabled by the country’s widespread bank account and smartphone ownership. However, China’s existing financial infrastructure can’t explain this shift alone, and the strategies taken by Tencent and Alibaba hold clear lessons for digital wallet providers around the world. Funnily enough, it appears that it’s not China copying this time, but Occidentals and Westerners using Alibaba’s and Tencent’s strategy to grow.

Main digital wallet providers

Tencent was founded in 1998 and quickly became China’s leading player in online messaging. Think WhatsApp but in China. However, Tencent doesn’t use WeChat as an online messaging app only but grew it as the largest Chinese social media platform. WeChat is a super-app, with an extensive ecosystem in which its user, through WeChat Pay, can pay for a multitude of services, play games, shop, read the news, post pictures, book a doctor’s appointment, etc. Tencent is also one of the world’s largest gaming companies. To this day, WeChat has over 1.2 billion monthly active users.

Alibaba started in 1999 as a B2B e-commerce platform. It built the equivalent of the Chinese Amazon, called Taobao, in which Alipay, it’s mobile e-wallet, is the only online payment system. Other e-commerce platforms, such as Amazon, JD.com, and AirAsia, use Alipay as an e-commerce payment method. Currently, Alipay has over 900 million users. Alibaba also grew as a super-app that offers its user access to a vast ecosystem of in-app products and services, although more focused on business usage.

These two mobile payment companies shaped China’s payment infrastructure. With a penetration rate of mobile payment at 81.1%, 101.4 billion mobile payment transactions, and 802 million mobile payment users as of 2020, they created massively valuable mobile payment markets. Their ability to grow digital payments can be explained by their approach to creating an attractive ecosystem and limiting frictions while using digital payments as a means for an end, rather than the product itself.

Creating value for merchants and consumers

The initial strategy was to reduce both on-boarding and transaction friction, which they enabled by self-enrollment of both customers and merchants, and increasing the level of KYC only as it became necessary, allowing the merchants to get set up instantly through the QR code in the app. The easy on-boarding, in which sellers can start accepting digital payment by sharing their QR code even before registering as a merchant has helped many make the transition. Alibaba responded to early low trust in China’s online payment system by quickly introducing escrow: the buyer makes the payment before the product is shipped and is released when the product is received. This was a game-changer in solving the trust issue and expanding the market. Then, they’ve focused on fees. Not only are they particularly low (0.6- 1% of transaction value), but if a merchant’s monthly transaction volume is lower than a certain threshold, Alipay and WeChat Pay refund the commission, making the service virtually free to use. For customers, the P2P and merchant payments are free of charge. Their only fee is for withdrawals above a certain threshold from their digital wallet. This is to incentivize users to leave funds in their wallet and spend within the ecosystem. The low fees allowed participants to embrace digital wallets and their rich ecosystem, which then provided Alipay and WeChat many cross-selling opportunities and access to valuable data and insight on user behavior. These insights allowed both companies to up their game and create value for all parties.

Once they offered an attractive payment infrastructure to attract customers and merchants, they focused on driving customer and merchant excitement.

For customers, WeChat recognized the importance of cultural and societal features. Therefore, it created a digital version of the traditional Chinese “red envelop” gift exchange to drive acceptance of the payment mechanism. Alipay quickly followed suit with the strategy. WeChat also created functions like “Shake” which connected users who were randomly shaking their phone simultaneously, and “Message in a Bottle” which enabled messages to be sent to random users. They’ve also concentrated their attention on customer loyalty rewards and cashback incentives for purchases made through their platform by giving hundreds of millions.

For merchants, Alipay focused on eliminating pain points to entice them to use their services. Alipay supports a full-service delivery cycle, including payment, anti-fraud, fund management, smart marketing, customer insight, acquisition, retention, and engagement. Digital payments data, which Alipay gives to merchants for free, created new efficiencies and capabilities in logistics, marketing, and product developments that merchants didn’t have access to before. Alipay’s service providers can tap into traffic within the app, while an AI-driven incentive program will encourage them to consistently improve the customer experience, which ultimately enhances distribution efficiency. For example, Alipay launched Ling Shou Tong, a completely free digital inventory management platform for merchants. This service allows shop owners to restock directly from Alibaba through digital payments and one-day delivery. It also offers a host of other value-added services, such as data-driven insights on sales trends and inventory recommendations, supplier credit to finance inventory, and much more. This service was essential to small-medium shop owners. Merchant ultimately served their

customer better, improved their inventory management, and reduced operational costs. Ling Shou Tong, albeit more focused on accommodating merchants, also created convenience for customers by blending physical and online commerce such as last-mile delivery and drop-off points for e-commerce purchases and returns.

With the data it collects on customers, Alipay was able to enter the financial services industry. In 2017, it launched Caifuhao, a corporate account service powered by AI, on its wealth management platform. It gives financial institutions access to a suite of AI capabilities and digital solutions, including better user connectivity, operational optimization, and smart marketing. Now, fund managers can provide users with tailored investor education as well as wealth management products. This service allowed fund management companies to increase their operating efficiency, reduce costs, and yield a good reinvestment rate. WeChat and Alipay also provide credit scores and customer information to financial services companies that want to offer tailored services.

Finally, both platforms constantly improve their offering and adapt to changes and circumstances to better serve their users and merchants. Alibaba’s response to help both consumers and merchants amid the coronavirus has been impressive. It introduced an incentive program that encourages developers to create mini-programs (which I’ll explain later) that can help users cope with the impact, including fulfilling various lifestyle needs of those living and working from home. Within a week, 180 mini-program were launched by more than 1200 developers. AliHealth, a mini-program providing free medical consultation, received 700,000 daily visits on average. Meicai, a grocery start-up, found a mini-program to make its delivery service available to Alipay users, attracting 800,000 new users and orders from 80 cities in China.

The focus on serving customers and merchants, with easy on-boarding, a light approach to transaction fees, and a robust customer value proposition has enabled Alipay and WeChat to create a vast ecosystem that they could monetize.

Monetize the ecosystem, not the product

Alibaba and WeChat quickly understand that expanding their ecosystem was key to their development. Thus, through investments and partnerships, they are endlessly increasing the number of value-added services on top of their app to make their offering more appealing and useful to users. They’ve reached such a large scale that they’ve coined the term “Super App.”

WeChat launched “Mini Programs” (MP) to enhance its ecosystem, which are sub-applications within the WeChat App. MP’s are lighter than apps and easier for developers to program. Users can access them directly through WeChat, without needing to download an App. Customers can enjoy advanced features such as e-commerce, task management, play games, etc. Notably, MP became widely popular in e-commerce and gaming. For example, companies such as Dior China created a mini-program for Chinese Valentine’s Day, focusing on gift sharing. Tesla started a mini-program enabling users to locate charging stations, schedule a test-drive, and share their experiences driving a Tesla car. The MP ecosystem within WeChat

registered over 1,200 billion RMB of gross merchandise value in 2019. In 2020, there are 3.2 million MP and a user base of over 840 million.
In gaming, engagement within MP exploded, with most mini-program users being “heavy users,” meaning 67% of users use MP more than four times a day, with the average Chinese person being online 30.8 hours a week in 2020. Currently, there are over 2,000 mini-games, with over 310 million monthly active users. This is consequential for WeChat’s future as the gaming industry is growingly becoming an important place in people’s lives, even being considered a third place by ARK Invest.

The same developments went through Alibaba, which developed a vibrant ecosystem offering users a gateway into a comprehensive digital lifestyle.
Here is a non-exhaustive list of Alibaba’s partnership and services:

• E-commerce — Taobao
• Food delivery system — ele.me
• Bike-sharing service — ofo
• Operator of China’s KFC brand — Yum China
• Micro-lending — Qudian
• Hong King Entrepreneur Fund lending company — WeLab
• Credit rating service that uses user’s data such as social media and e-commerce data for loan approvals — Sesame Credit
• A money market fund ( the largest in the world) — Yu’e Bao.

And the list goes on…

The sheer amount of data and insights that Alibaba and Tencent can extract from the transactions in their digital ecosystems enabled them to enter new industries with compelling offerings such as financial services and fundamentally transform retail commerce. The more features users can take advantage of, the richer and more diverse the data. In the financial services industry, Alibaba offers micro-lending, social credit, and digital money market funds. For example, Alibaba provides credit cards and wealth management services for young and lower-class consumers. For small to medium-sized merchants, Alipay offers small, short-term loans. These products are not traditionally available to these segments and are hugely valuable. During Single’s Day in China, Alibaba recorded $25.3 billion, partly bankrolled by Ant’s consumer loans, only enabled by its data. Jack Ma, the founder of Alibaba, coined the term “New Retail” which goes through retail commerce evolution. This shift to New Retail relies on data to power better services to merchants, reinvent the logistics systems delivering goods to both merchants and end consumers, and create product development processes that are far faster, more interactive, and tailored to customer preferences.

With this multitude of services provided by WeChat and Alipay, they created a one-stop digital lifestyle platform that gives their users immense value. They can also extract much value from value-added services and the vast amount of data it collects.

Difference between China and the U.S.:

First and foremost, it’s important to set the context. China has developed differently in payment methods: China is jumping from cash to mobile payments while the U.S. is transitioning from credit cards to contactless payments, including mobile payments. The mobile internet also evolved much more rapidly in China than in the U.S. Furthermore, Tencent and Alibaba were able to ride upon high banking ownership and increasing smartphone penetration. One additional feature is how widespread QR codes are in China, where even street musicians have one to collect money. QR being virtually free, its introduction was faster than POS, which is much more expansive. However, those infrastructure factors alone don’t explain China’s advance over the rest of the world in digital payments.

One other difference with the U.S. is the cost of transactions that are higher compared to China. In the U.S., transaction cost at least 2%, while in Chine, it’s likely less than 1% and not more than 1.5%. This is paramount in attracting merchants to use digital payments rather than cash, especially for small transactions.

Furthermore, for a long time, third party payment systems such as PayPal were just acting as intermediaries between two banks and used that as their business model. On the contrary, WeChat and Alipay used their digital wallet as a commodity to monetize their entire ecosystem. Those are two completely different business models: one focuses on transaction fees and the others on monetizing value-added services.

Moreover, Chinese internet companies don’t rely on advertising for revenue. In the U.S., most internet companies offer their service for free, like Google, Facebook, and Snapchat, and depend heavily on ad revenue to sustain their company. Conversely, WeChat, cautious to avoid flooding users’ timelines with ads, only allows a maximum of two ads a day to appear on its social platform Moments. Something inconceivable in the U.S.

The tendency is to copy Chinese digital wallet providers

Many digital wallet providers have expressed their willingness to go the Chinese way to enhance their offering, although without necessarily stating it explicitly. PayPay wants to create “one of the most compelling and expansive digital wallets in the world,” a clear shift from its historical only third-party digital payment strategy. Notably, they stated their willingness to penetrate further the physical world, which we’ve seen Alipay and WeChat have considerably focused on. It recently launched QR code partnerships with major retailers. The same goes for Square doubling down on QR codes.

Other U.S. platforms have entered the race, such as Google Pay, an all-in-one money app, with tap-to-pay, P2P payment, personal finance aggregation, and other customized offerings. Google interestingly stated that it would not share transaction history for ad targeting, which goes away from its traditional business model. With Google Pay, Google Maps, and Assistant, Google could slowly become a super app.

Well known wallet providers such as Cash App, or even Satispay, which I learned about from ARK’s podcast, have followed suits on similar strategies. As stated by Alberto Damasso in ARK’s podcast, they’ve launched features such as small fees for merchants, which was a local issue in Italy, especially for small payments, clearly focusing on merchants, as did Alipay years ago. Alberto also expressed the desire for Satispay to become a Super App, within which users can pay for anything, such as taxes, public administration payment, e-commerce, etc. Satispay also aims to become a marketing platform for merchants. To drive customer excitement, they’ve launched Satis Friday, for pay cashback, similar to Cash App. Focusing on merchants as well, Square offers software services giving merchants business insights and enhancing their operations. The central idea is that digital wallets are a commodity, and the value comes from a rich ecosystem.

Conclusion

Alibaba and Tencent, counting on advantageous existing infrastructure for their businesses, have employed savvy strategies to build a valuable ecosystem powered by their digital wallets. To do that, they’ve focused on building value for their consumer and merchants and consistently adapting to changing environments and needs. The bigger they grew, the more data they could collect, which ultimately enabled them to widen and deepen their services. This represented a business model shift from the West, which is now waking up to the fact that commoditizing their digital wallet while building a vast ecosystem around it was a better way to attract value.