Taking stock of China’s COVID-19 payments processes

As China recovers from the COVID-19 epidemic, market analysts are beginning to take stock of its impact on the payment industry.

Lockdown measures put in place at the beginning of the outbreak forced a majority of the nation’s urban population to work from home, spurring a so-called “touch-free” economy enabled by innovations like real-time mobile payment.

Health warnings against paying with cash – a potential transmitter of viral pathogen – also drove higher the demand for mobile payment.

According to statistics released on 9 June by the People’s Bank of China, the country’s central bank, the equivalent of some $1.3 billion worth of goods and services were transacted via real-time mobile payment apps, up 4.84% year-on-year in the first quarter of this year.

If you think COVID-19 has largely been a boon to real-time payment in China, think again.

Meanwhile, the number of mobile payments made during this quarter also increased by 14.29% from the same period last year.

Much of this growth, some analysts observe, came from sectors including online retail, gaming, entertainment, telework, online education and takeaway, as people confined to their homes become more comfortable getting their daily necessities or watching soap opera online.

But if you think COVID-19 has largely been a boon to real-time payment in China, think again. The real picture is mixed, with offline payment taking a drubbing at the same time online payment appears to be flourishing.

As arguably the country that comes closest to a cashless society, China is where real-time payment has emerged as a ubiquitous part of life. Almost every citizen, old and young, can be seen taking out their smartphone at a convenience store and paying for purchases as small as a pouch of paper tissues by scanning a QR code.

Nonetheless, the epidemic, at its worst, has shuttered a large number of restaurants, cinemas and offline retail outlets. Even after the lockdown was lifted, many of these establishments have gone under or are teetering on the brink of bankruptcy, considerably shrinking the application scenarios of offline real-time payment.

A report by iiMedia.cn, a market intelligence and research firm, indicates that China is home to more than 70 million small and medium-sized enterprises, which form the bulk of the client base that the country’s roughly 200 third-party payment companies are keen to tap. But with these small and medium-sized enterprises (SMEs) sneezing, the payments industry could not but catch a cold.

Take the catering industry, one of the biggest employers in China. In 2019, official data show that the sector reported a revenue of CNY 4.67 trillion ($667 billion). Traditionally, third-party payment firms charge a standard 0.2% commission fee on each meal paid for with e-wallets. Sums from the industry alone thus amounted to a whopping CNY 9 billion that lined the pockets of payment service providers such as Alipay and WeChat.

Now that a big chunk of the restaurants are no longer in business, payment companies that supply their clients with point-of-sale devices, technical support and related services are inevitably suffering as well.

Market observers predict a quick rebound in offline real-time payment for the second quarter. But it’s uncertain whether a fair number of loss-making payment firms will be able to see the light at the end of the tunnel.

COVID-19 has also called into question innovations like “pay with your face.” With shoppers reluctant to take off facial masks at the supermarkets equipped with face-scanning gadgets, what was once hailed as a hallmark of how artificial intelligence can make shopping even more convenient has been rendered totally irrelevant during the epidemic.

China’s real-time payment market is characterised by a duopoly. Alipay, operated by Ant Financial, dominated with a market share of 55.1% as of 2019. Its arch rival, Tenpay, which is owned and run by Tencent, occupied 38.9%. The rest of the market is divided among UnionPay and scores of smaller players.

With 94% of the real-time payment market gobbled up by the tech titans, which also lead in the number of monthly active users (more than 1 billion for Alipay and 800 million for Tenpay), the some 200 payment companies in China have no choice but to diversify into a new sphere to avoid competition in a highly saturated market.

A possible realm is business-to-business (B2B) payment. B2B payments traditionally are conducted through wire transfer or telebanking service. But an unintended consequence of the epidemic is that enterprise-level real-time payment is gaining momentum as a potential alternative.

“In the long run, B2B payment could become an immense market,” says Huang Dazhi, a senior researcher with Suning Institute of Finance, a think-tank affiliated with e-commerce giant Suning.

As traditional brick-and-mortar businesses steadily digitize their operations and adopt software-as-a-service solutions, Huang points out that money being moved between companies’ bank accounts via third-party payment tools will be a “real possibility” in the post-coronavirus world.

Challenges are myriad, first and foremost being a dramatically different landscape. In B2B payment, service providers face an uphill battle to offer products tailored to the personalized needs of individual clients, whose varied and highly complex businesses defy a uniform format as is seen with business-to-customer (B2C) payment apps.

“For B2B firms to prosper, it entails a lot of efforts. Knowing your customers will be crucial,” says Huang. “Which means, the market could be vastly segmented as opposed to the B2C sector.”