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Chen Hongmin: Apple Not A Key Player in China's Mobile Payment Market, Seriously?

Alumni and Public Relations Office 2017-05-27

Flashing a mobile phone to buy everything from financial products to steamed hot buns has become a common sight in present-day China. It has also created a competitive market.

Apple is expected to unveil a peer-to-peer money transfer feature in its latest iOS11 operating system during the Worldwide Developers Conference this June, and is also gearing up to enable payment for public transport fare on China's buses and metro.

Meanwhile, Alipay has recently struck a deal with payment processor First Data Corp to establish a foothold in the US payment market.

Nevertheless, in reality Apple is not one of the key players in China's online payment service, which might seem strange considering the fact that roughly 131 million Chinese own an iPhone in 2015, according to a report by China Internet Network Information Centre, a branch of the country's Ministry of Industry and Information Technology.


Started last February with much fanfare - more than 30 million bankcards were added during the first day of its official launch, Apple Pay has failed to attract enough active users, in third-party analyst reports, it sits in the marginal 'Others' category, posing little threat to the two dominant local giants: Alipay and Tenpay.

One of the reasons may be limited coverage. There are not enough places in which Apple Pay can be used, and in some of the retail outlets where it can be used, there isn't enough signage or displays to tell people that.

In addition, Apply Pay is a relative late comer in China. And when the majority of the population has already formed a habit of using Alipay or Tenpay for almost a decade, it's always going to be a challenge persuading them to switch. No wonder Starbucks China, where once only Apple Pay could be used, has also added WeChat's Tenpay last December.

Professor Chen Hongmin from Antai College of Economics and Management contends that in essence, Apple is not a payment processor, and adding the payment feature is just a way to boost its competitiveness and enhance consumer experience, in the same vein that Huawei produced HUAWEI Pay and Xiaomi the Xiaome Pay.


But is Apple is not a key player, then who is?

Or rather, who are? Apart from the obvious two: Alipay and Tenpay, there is another important party, China UnionPay.

Before mobile payment is made available, people pay for their purchases either by cash or by cards. These two payment methods follow a four-party model - banks issuing cards to consumers, consumers swiping their cards in businesses and acquiring agencies processing the payments and linking businesses back to banks.

Initially banks themselves also act as acquirers, later, China UnionPay was established to break the barrier of inter-bank transaction and open up the market. It connects acquirers on one end and banks on the other and handles all the clearing.

The profits are shared in a 7:2:1 ratio between banks, acquirers and UnionPay respectively and processing fees are paid by the merchants. This is also a widely adopted model throughout the world, thinking VISA and Mastercard.


Alipay started as an acquirer, but soon began opening its own accounts in commercial banks and using bank and account transfers as an indirect way of clearing, creating the third-party payment model.

This model not only bypasses UnionPay - a key reason for its partnership with Apple Pay, but affects commercial banks as well.

By using Alipay and its counterparts, consumers are increasingly transferring their money out of their bank accounts, and the all important transaction data, once used by banks to analysing consumer habits and conducting precision marketing, is now in the hands of Alipay and the likes.


But with mobile payment companies amassing ever larger amounts of data, there is growing concerns with privacy and security.

Professor Chen Hongmin notes that the third-party model is obviously more efficient than the previous four-party one, but it does have weaknesses in terms of safeguarding assets and information. The four-party structure is more transparent and better regulated, while the third-party pattern is more of a blur, it's hard to define whether it is an acquirer, an issuer or a clearer.

'Lack of proper regulation means high risk, should something happen to its cash flow, the impact on the entire society would be catastrophic,' said Professor Chen. 

Moreover, they may also create convenient loopholes which might be exploited by criminals.

More scrutiny for the online payment market is looming, however. A trial run of a new clearinghouse for online payments administered by the People's Bank of China (PBoC), China's central bank, has started on Mar 31.

The new platform will cut direct links between third-party payment providers and commercial banks, and let PBoC become the intermediary for all transaction clearance, so as to maintain unified standards and control risks.

Current pPayment giants Alipay and Tenpay, as well as the four state-owned banks are all set to join, according to industry sources.

In the future, a third-party payment provider will be able to choose to join either the new online clearinghouse or the UnionPay, but 'will not be allowed to directly facilitate transactions with banks,' according to a PBoC official.


The platform will also manage the provisions of its members to reduce risks and enhance security. In the past, payment providers such as Alipay and Tenpay can use provisions and account balance as they wish, with issuing red envelopes, or Hongbao being the most common way, earning interest from banks while paying nothing to users.

Under new regulation, such companies will have to set up a dedicated account for users' provisions, separating them with their own equity funds. Money stored in the provisions account cannot be transferred out and earns no interest. 


But ordinary consumers will hardly feel the changes, rather, the experience of paying would only become ever more smooth. 'In the four-party payment system, a POS terminal must be present no matter you chose to swipe cards or use UnionPay's Quick Pass,' said Professor Chen.

Today's third-party system replaces POS terminal with a QR code, which greatly enhanced the whole experience. 'And competition between UnionPay and the new clearinghouse will only faciliate a better payment service in the future.' 



This article (in Chinese) was originally published on May 25, 2017 by Shanghai Observer, an online daily founded by Shanghai Media Group