BRIEF China’s Alipay and WeChat Pay: Reaching Rural Users Chinese information technology conglomerates Alibaba1 and Tencent own or operate dozens of competing online businesses, and yet, their affiliate mobile wallets stand out for how they have fundamentally influenced everyday living in China’s cities. Alibaba through its dominance in e-commerce and Tencent through its mobile social media and messaging platforms (WeChat and QQ) connect mass-market audiences with their respective wallet products: Alipay and WeChat Pay. Although these services are the product of unique market conditions, they offer many learning opportunities. Perhaps most extraordinary has been the companies’ ability to build trust with users. Tencent and Ant Financial, Alibaba’s financial affiliate, are redefining the relationship users have with finance. Finance is becoming simpler; it is also remarkably more social in nature. This holds great promise for advancing rural financial inclusion in China. However, challenges in serving last-mile clients remain. Today, the Alipay and WeChat Pay mobile wallets, which technical experience, a massive user base, and extensive link users’ bank cards to a smartphone application, each bank networks, but transactions were predominantly still has hundreds of millions of active users; combined they done on desktop devices for e-commerce. By the time hold 92 percent of market share (most users have both Tencent rolled out its own wallet in 2013 as a part of wallets). China Internet Network Information Center its mobile-only WeChat application—a messaging and (CNNIC), a government agency, reports that China now social media platform (Shrader 2014)—online activity has 502 million unique mobile payment users—almost as was quickly shifting to mobile. WeChat’s dominance in many as the 556 million mobile money accounts found in messaging paved the way for a rise in person-to-person the rest of the world (CNNIC 2017, GSMA 2016).2 This (P2P) transfers. Users can exchange money directly in the widespread use of mobile payments has shown China, and same chat panes they use to talk with family, make plans in turn the world, a glimpse of a cashless future. with friends, and collaborate with co-workers. Despite these large numbers, defining Alipay and WeChat Linking bank cards to mobile wallets works exactly as it Pay’s impact on the “average” Chinese household is does for the desktop versions. High bank account ownership less straightforward. The dynamic ecosystem of services levels in the country (79 percent) made this a practical model, built into these smartphone-enabled mobile wallets has but it was surging smartphone ownership, which rose from driven unprecedented use for banked Chinese who have 39 percent in 2013 to 71 percent in 2016, that catalyzed the disposable income and who are technologically savvy. In growth of these products (Findex 2014, BTCA 2017). fact, mobile payment apps are so pervasive in urban areas The accumulated experience of Tencent and Ant Financial that they have become symbols of the country’s newfound in mobile payments comes from years of chasing after urban modernity. However, 44 percent of the country’s population users with convenient and needs-based services. They have still live in the less developed rural areas (World Bank 2015). created a seemingly endless list of use cases by linking mobile A lack of young workers in the countryside (a product of wallets to various consumption or bill payment services— urbanization), a general lack of trust and awareness of from taxi hailing and grocery delivery, to utilities and credit digital services there, and an urban-rural infrastructure card payments, to booking wedding venues and investing gap all impede the ability of mobile payment solutions to in financial products. Each has fought for market share by progress in these regions. This makes one wonder whether aggressively marketing wallets and providing consumers the sweeping change Alipay and WeChat Pay brought to with a greater variety of linked services. Competition has cities might also transform China’s rural landscape. given rise to an abundance of features found in each app, a Replicating the experience of urban users in rural areas reflection of an evolving urban lifestyle in China. can help bring these solutions into the hands and minds For the rural countryside, many of these services or features of an older, more rural population. However, it may take simply do not relate to daily life in the same way. Even if a different approach and new design considerations to requisite conditions are met (i.e., owning a bank account achieve this. Additionally, creating those same conditions and having a smartphone with internet connection), for success in rural areas will take time, especially when a compelling reason for use is still needed. This calls for considering that the rapid growth of Alipay and WeChat Pay renewed exploration for how solutions can be designed to in cities has been many years in the making. Their foray into complement rural users’ unique problems and needs. digital payments began as early as 2004 when the companies developed online, escrow-based payment solutions to service their e-commerce and online gaming platforms, The State of Rural Mobile respectively.3 Online shoppers, who were concerned about Payment Adoption in China scams and fraudulent dealings, suddenly had a mechanism This is not to suggest that mobile payments cannot reach for transacting with greater confidence. Users only had to rural users yet. Recent data from government sources show link their bank cards to online accounts to get started. that rural mobile wallet adoption is already happening. When Alipay finally launched its first mobile version of the Alibaba and Tencent’s services have made steady progress wallet in 2008, Alibaba was entering the market with strong in reaching part of the rural population. Using CNNIC 1 Alipay was officially spun out of Alibaba in 2011 and then reorganized under the entity now known as Ant Financial. While legally separated, Alibaba and Ant Financial are both managed by founder Jack Ma and often are treated as part of the Alibaba Group. For simplicity, Alibaba is used to refer to the affiliates’ combined activities. 2 Mobile payment users and mobile money accounts are not a one-to-one comparison. 3 Early digital consumers did not trust online sellers out of fear of scams. The Alipay system is designed to hold paid amounts in escrow and release them to shop owners on Taobao, Alibaba’s flagship e-commerce platform, only after delivery confirmation that a satisfactory product was December 2017 received. This built trust in both online payments and the Taobao/Alipay brands. 2 figures from 2016, about 104 million rural users (about Providers Lead the Charge for 17 percent of the rural population) were using mobile payments. It is an impressive number compared against Rural Mobile Wallet Adoption the 398 million urban users. Today the total number is While connectivity and bank account access are somewhat surely higher, but more important is the fact that rural beyond the control of current providers, Ant Financial and residents are using these services. In fact, almost half of Tencent have signaled a willingness to take rural mobile all rural internet users are already using mobile payments. payment adoption head on in other ways. Jack Ma, founder This suggests that the adoption rate among rural people of Alibaba, has been outspoken on how Ant Financial, the who own smartphones is actually quite high. financial services-focused parent company of Alipay, is championing financial inclusion for China’s development, The dramatic increase in rural bank account ownership levels especially for rural users. Alipay and WeChat Pay both link in China has been another key enabler (Duflos and Klapper users’ wallets directly to in-app platforms that offer low- 2015) of rural mobile payments adoption. From 2011 to barrier-to-entry investment and insurance products. More 2014, bank account ownership among rural residents shot indirectly, a combination of online and proximity payment up from 53.7 percent to 74.3 percent, close to the national transactions provides data on users that ultimately enable average. Government campaigns mandated state-owned Ant Financial and Tencent to offer users a host of credit banks to proactively open accounts for rural households. products across their businesses. This facilitated delivery of government-to-person (G2P) subsidy transfers for healthcare and agriculture productivity The appeal of reaching more rural users is multifold. (Shrader and Duflos 2014). It has also allowed a bank-card Once in the mobile wallet universe, a new user is linked model for mobile payments to work efficiently. Sitting immediately more likely to purchase services or goods in between users and their bank accounts allows the wallets from Tencent and Alibaba or on one of their platforms. to provide users with improved customer experience and This multiplies the commercial benefit to the companies comply with know-your-customer procedures of banking. and generates valuable data on individuals who have no Alipay and WeChat Pay’s Chinese label of “third party credit score. payment company” is a nod to their products’ reliance on With a clear incentive to penetrate rural areas, the an underlying bank account. question is then how. For rural residents with both a The increase in smartphone ownership, too, has enabled bank account and a smartphone, two use cases seem many millions to use these solutions, but it is clear that positioned to win over new, rural users: e-commerce and connectivity is still a major barrier to serving more remote proximity payments. areas. Seventy-one percent of the rural population do not use internet compared to only 33 percent of urban E-commerce residents who do not use the internet. In cases where Relying on e-commerce adoption might be a gradual the rural population is estimated to be closer to half means of incentivizing digital payment adoption for rural of the total population, the gap in internet use is even users, but it has worked before in China, as it was the wider (CNNIC 2017). Information on broadband coverage starting point for Alipay adoption in cities. Furthermore, is scarce, but CNNIC studies imply that rural residents e-commerce creates a powerful incentive for users to without an internet connection fail to gain access to the purchase a smartphone. To illustrate this, CNNIC statistics internet most often because of either a lack of awareness show just how important online shopping is to getting or a suitable device (CNNIC 2016). people to use digital payments in China. The percentage of internet users who use digital payments compared Action is being taken to address the problem. In January with the percentage of those who shop online is almost 2017, the government’s National Development and Reform identical—65.5 percent compared to 65.1 percent for users Commission and Ministry of Industry and Information in urban areas and 47.7 percent compared to 47.3 percent Technology announced 1.2 trillion yuan (about US$170 in rural areas, respectively (CNNIC 2016). billion) worth of investments in core infrastructure over the next three years that will target broadband and Rural e-commerce is not such a farfetched idea either. mobile network improvement. This investment and falling Households in villages are learning from one another smartphone costs may help close some of this digital divide. about how to create small businesses that sell traditional Figure 1. Rural-Urban Internet and Mobile Payments Penetration (2016) Rural Population (608 mn) Urban Population (774 mn) China’s Population 104 97 407 224 152 398 (millions) 2016 Total pop: 1.382 bn Use mobile payments (rural) Do not use Use mobile payments (urban) internet Use internet, do not use Use internet, do not use mobile payments (rural) mobile payments (urban) Note: estimates of mobile payments users comes from 2016 year-end estimate of total mobile payment users and 2015 year-end percentages of online payment users in rural areas Source: CNNIC 3 knick-knacks or fresh produce online. In other cases, merchant mobile payment adoption happened only after people in rural counties are setting up small-scale factories a critical mass of consumers were already on the platform. to manufacture practical goods, which are later sold on Merchants initially acted to seize generous promotional Taobao, Alibaba’s small business e-commerce platform. incentives offered by Ant Financial and Tencent, but many Alternatively, WeChat users promote their products or companies followed suit in reaction to rapidly changing services directly through social media posts on WeChat or customer preferences. through one of WeChat’s business accounts. For buyers and Formally, merchants can open merchant accounts that sellers on either end of the transaction, using the mobile charge much lower payment fees than what China wallet associated with the e-commerce channel is essential. UnionPay has traditionally offered (0.6 percent for Plans from October 2014 has Alibaba investing 10 billion Alipay and 0.1–2.0 percent for WeChat Pay). A point- yuan (about US$1.6 billion) through 2019 to build 1,000 of-sale (POS) terminal is not required; users simply scan county-level and 100,000 village-level rural service centers a QR-code provided by the shopkeeper and an in-app throughout China that help rural residents set-up their own message confirms the transaction to both parties. When online shops and offer access to digital devices (Alibaba a smart POS terminal is used, typically at bigger retailers, n.d.). As of 2015, 70,000 “village marketers” had been merchants scan the QR-codes that customers generate deployed to promote the sale of rural products and services. from their phones to complete the transaction. In July 2017, 30,000 villages had rural service centers, more than double than that of the year before (CGTN 2017). Informally, shop owners who are not willing to register or have only just begun using mobile payment apps can Private investment in modern logistics firms—parcel facilitate a simple P2P transfer between buyer and seller delivery businesses, characterized by electric carts and by printing out and displaying their personal account local drop-off centers—combined with public investment wallet QR-code. This serves as a stepping-stone to in roads and physical infrastructure have built the onboarding new merchants and effectively displaces connections needed to make this happen. Alibaba’s cash-based transactions at little-to-no downside for strategic investment in Cainiao, one of China’s largest merchants. logistics companies, is but one example. Today, Alipay and WeChat Pay have built 600,000- and WeChat has also evolved to take on many e-commerce 300,000-strong merchant networks, respectively. Already, characteristics. Formally, businesses can set up official convenience purchases have surpassed e-commerce WeChat business accounts to market and sell products shopping as the most common use case for WeChat Pay and services in-app. Informally, social users have learned (China Tech Insights 2017). to share products and services with groups of friends and those within extended friend circles. Pictures, a description, This could be an opportunity in rural areas as well. and a QR-code image linked to a WeChat account are all Although it is unclear how many of the current merchants that is needed to get started.4 Users can then share these reside in the countryside, offline payments offer a good images, thus enabling broader viewership. This has created mechanism to bring in users who may be less inclined localized e-commerce opportunities that require less to shop online or who cannot receive parcels. As some technology savvy. This trend suggests that e-commerce merchants begin accepting mobile payments, these might be one of the core reasons rural users will adopt outlets may also help rural residents gain broader in- mobile wallets in greater numbers. person exposure to the technology, in turn raising awareness. Migrant workers who return home for Chinese Merchant Payments New Year or to start their own businesses may also help In cities, Alipay and WeChat Pay have also become educate rural families on the services and act as a catalyst ubiquitous tools for merchant payments. However, for merchant adoption. Figure 2. Alipay and WeChat Pay: Built on E-commerce and Social Platforms Alibaba E-Commerce WeChat • Alibaba E-commerce Shoppers (mobile): 493 million • Daily Users: 902 million (2017) • Single Day Sales: $25.3 billion (2017) • “Official Accounts” — i.e., Merchants: 3.5 million • Share of Single Day Sales on Mobile: 90% (Tencent 2017) • 2016 E-commerce Sales Volume: US$485 billion • 46 billion “Red Packets” sent during Chinese New • Village Rural Service Centers: 30,000 (2017) Year (Tencent 2017) Alipay WeChat Pay • Alipay Accounts (desktop & mobile): 520 million • WeChat & QQ accounts with Linked Cards combined: • Alipay Merchant Fee: 0.55%; free for P2P transfers 600+ million • Offline Merchants Accepting Alipay: >600K (2016) • WeChat Payment Merchant Fee: 0.1 – 2.0%; free for • Fee for Transferring Wallet Balance to Bank: 0.1% P2P transfers • 2016 Avg. Daily Transactions (desktop & mobile): • Fee for Transferring Wallet Balance to Bank: 0.1% 175 million • Offline Merchants Accepting WeChat Pay: >300K (2016) • 2016 Avg. Monthly Transaction Amount: US$83.9 4 Equivalent to an account number, QR-codes are two-dimensional barcodes that are linked to a wallet (and chat or service account, in the case of WeChat). Customers may use the phone’s built-in camera, launched via an in-app selection, to scan the code. This pulls up the option to pay a merchant directly. 4 December 2017 All CGAP publications Figure 3. The Rise of WeChat Pay are available on the CGAP Web site at 2014 2016 ¥6 Trillion RMB ¥58.8 Trillion RMB www.cgap.org. 7.4% 8.0% CGAP 10.0% 1818 H Street, NW MSN IS7-700 Washington, DC 37.0% 20433 USA 55.0% 82.6% Tel: 202-473-9594 Fax: 202-522-3744 Alipay WeChat Pay Other Email: cgap@worldbank.org Note: 2014 Market share is from Q3, when Alipay had the highest market share; WeChat Pay here also include some “Ten Pay” transactions which occur online or on QQ mobile. Source: iResearch © CGAP, 2017 Concluding Thoughts GSMA. 2017. “State of the Industry Report on Mobile Money.” London: GSMA. https://www.gsma.com/mobilefordevelopment/ The incredible success of Alipay and WeChat Pay proves wp-content/uploads/2017/03/GSMA_State-of-the-Industry- Report-on-Mobile-Money_2016-1.pdf that social payments in a digital environment may not only iResearch. 2016. “China’s Third Party Online Payment GMV address infrastructural and business model inadequacies, Soared 62.2% in 2016.” iResearch Global, 3 February. http:// but they may also lessen longstanding psychological and www.iresearchchina.com/content/details7_30408.html educational barriers that limit use of financial services. ———. 2017. “The GMV of China’s Third-Party Mobile Payment The gifting of e-red envelopes perfectly defines this Shot up 113.4% IN Q1 2017.” iResearch Global, 11 July http:// trend. China’s custom of giving cash in red envelopes for www.iresearchchina.com/content/details7_34723.html Chinese New Year, when done digitally in chat groups, Kapron, Zennon, and Michelle Meertens. 2017. “Social Networks, is both personal and fun. Its widespread appeal among e-Commerce Platforms, and the Growth of Digital Payment Ecosystems in China: What It Means for Other Countries.” New York: China’s urban and rural users alike, despite it being little Better Than Cash Alliance, April. https://btcaprod.s3.amazonaws. more than a stylized P2P transfer, suggests that socializing com/documents/283/english_attachments/Better_Than_Cash_ payments may be an integral step in building trust and Alliance_China_Report_April_2017_(1).pdf?1492605583 learning about digital services in the community setting. Ma, Si. 2016. “China Mobile Eyes 1.75b Connections by 2020.” China Daily, 21 December. http://i.chinadaily.com.cn/newsdata/ For this reason, WeChat Pay appears better positioned news/201612/21/431509/article.html than Alipay to develop quickly in rural areas. While many Mastercard. 2014. “Creating Higher Levels of Financial users remain wedded to Alipay for its e-commerce use Inclusion in China.” MasterCard Advisors, 20 May. http://www. case, urban users are already finding added convenience mastercardadvisors.com/_assets/pdf/Creating_Higher_Levels_ Financial_Inclusion.pdf in having their main social and messaging application Nian, Yao. 2017. “How E-Commerce Transformed double as their payments and financial services provider, Chinese Villages.” CGTN, 10 July. https://news.cgtn.com/ as is reflected in WeChat Pay’s growing market share (see news/3d45444d3559444e/share_p.html Figure 3). The trend will likely be even more pronounced PCAC (Payment and Clearing Association of China). 2017. in rural settings, where WeChat is widely popular among “2016 农村地区支付业务发展总体情况.” PCAC, March. http:// first-time smartphone owners. www.pcac.org.cn/index.php?optionid=713&auto_id=2456 Sina. 2015. “支付宝钱包活跃用户数 2.7 亿 移动支付份额超 80%.“ Only time will tell if last-mile rural users will adopt these Sina Weibo, 22 April. http://tech.sina.com.cn/i/2015-04-22/ services, but in a country known for its breakneck pace of doc-iawzuney4040969.shtml change, the wait may not be long. Shrader, Leesa, and Eric Duflos. 2014. “China: A New Paradigm in Branchless Banking.” Washington, D.C.: CGAP, March. https:// www.cgap.org/sites/default/files/Working-Paper-China-A-New- References Paradigm-in-Branchless-Banking-March-2014_0.pdf Alibaba. n.d. “Introduction to Taobao Rural Service Center.” Shrader, Leesa. 2014. “Killer Apps in China: Social Networks and Video. http://www.alibabagroup.com/en/news/video?clip=9 Financial Inclusion.” Washington, D.C.: CGAP, 19 May. http:// China Tech Insights. 2017. “WeChat User & Business Ecosystem www.cgap.org/blog/killer-apps-china-social-networks-and- Report 2017.” China Tech Insights, 24 April. https://www. financial-inclusion chinatechinsights.com/report/21370582.html Tencent. 2017. “Tencent Announces 2016 Fourth Quarter CNNIC (China Internet Network Information Center). 2017. “The Results.” Tencent Financial Releases, 22 March. https://www. 40th China Statistical Report on Internet Development.” CNNIC, tencent.com/en-us/articles/15000591490174029.pdf July. http://www.cnnic.net.cn/hlwfzyj/hlwxzbg/hlwtjbg/201708/ Wang, Pengbo. 2017. “2016 年第 4 季度中国第三方支付移动支付 P020170807351923262153.pdf 市场交易规模 128146 亿元人民币.” Analysys, 31 March. https:// ———. 2016. “2015 年农村互联网发展状况研究报告.” CNNIC, www.analysys.cn/analysis/22/detail/1000702/ August. http://www.cnnic.net.cn/hlwfzyj/hlwxzbg/ncbg/201608/ World Bank. 2014. Global Financial Inclusion (Global Findex) P020170907348967498375.pdf database. Washington, D.C.: World Bank. http://www.worldbank. Duflos, Eric, and Leora Klapper. 2015. “New Accounts in China org/en/programs/globalfindex Drive Financial Inclusion Figures.” CGAP blog post, 22 May. http://www.cgap.org/blog/new-accounts-china-drive-global- financial-inclusion-figures AUTHORS: Tyler Aveni and Joep Roest