Will wallets soon be obsolete? The Chinese fintech company Ant Financial is banking on it. In a promotional video for its mobile payment app Alipay, a young professional in Hangzhou goes about her day with only her smartphone. She splits the check with friends at a restaurant, shops at the mall, pays for a taxi in a split second, and interviews her friend who explains that she uses it to pay rent, utility bills, and her mobile phone bill.
“All I need is my phone,” she says, explaining that, thanks to sound-wave technology, she didn’t even need to be connected to the internet to use the app. After 12 hours without cash or cards, she declares, “big wallets like mine are going to be a thing of the past.”
The video is a window into how Alipay – Ant Financial’s flagship product – has transformed Chinese consumer culture from a largely cash system to a predominantly digital one. Over the past five years, Ant Financial has grown into a financial technology behemoth, with more than half a billion Alipay users scanning QR codes at millions of checkout counters – from luxury malls to street food carts – with their smartphones every day. The company is an affiliate of the Chinese conglomerate Alibaba and is recognized as the most valuable fintech company in the world. Through Alibaba stores such as Tmall.com and Taobao.com, users can buy virtually anything with their phones online, as well as ordering and rating services by pushing a (digital) button.
But it’s not just about shopping: Ant Financial also offers credit, investment, and wealth management services. Users who transfer money from their bank to spend on Alibaba platforms or receive money as a gift or a form of payment can put that cash in a special wealth management app called Yu’ebao, which Ant Financial launched in 2013 with a Chinese asset management company. In the Yu’ebao account, money accrues interest at a roughly 3% higher rate than a normal Chinese bank rate, which is set by the government. That offering won the company CNY1.14trn ($180.25bn) to manage by last April, making it the biggest money market fund in the world. Forget wallets; Ant Financial is giving banks a run for their money.
The company’s tentacles now reach into every corner of its users’ lives, from chatty texts to utility bills. And because of the way business in China is regulated by the state, it’s not hard for the government to obtain much of that information. In August, the People’s Bank of China even announced it would require mobile payments to run through a centralized clearing house, where transaction data could be collected. The justification for this aggressive move was to cut down on money laundering, and so far, users trust the system enough not to mind.
Alibaba’s bid for trust
In fact, Alipay’s entire business model was built on just that: trust. Founded by Alibaba Chairperson Jack Ma in 2004, Alipay initially served as a third-party escrow system similar to PayPal through which users buying items on Alibaba could securely pay the site’s massive network of sellers. In the early days of e-commerce, confidence was crucial to getting consumers to exchange goods and money with vendors from across the country. A neutral go-between went a long way in establishing that trust.
The platform met a real need; it also took off early enough that it had little real competition, and ended up with so many users that it began offering the service to other e-retailers. In 2011, it spun Ant Financial off into its own, independently managed firm that oversees the Alipay app and all related products and platforms.
Rather than stopping at payment processing, the company then leveraged its two biggest advantages – namely, its large number of existing customers and China’s already significant digital infrastructure – to create a veritable ecosystem of original and third-party services within Ant Financial’s umbrella. To serve its enormous clientele, it identified unmet needs like easier banking and investing, and, once users were already signed up, made it as easy as possible for them to sign up for them; a process aided by China’s digital IDs, which make verification less onerous than it would be in other countries. All of this adds up to the AliPay of today: a one-stop app for everything from rating the local pet store to getting a microloan.
Ant Financial is privately held, so it’s hard to say exactly where its revenues come from, but it earns interest on loans and deposits, and charges users and merchants transaction fees. It also sells services like insurance. Ant Financial has seen significant investments from venture capital firms, and has itself invested in other companies. According to a Bloomberg analysis of Alibaba filings, the company doubled its earnings in 2017.
A one-stop app for everything
Alipay’s success has moved in tandem with the digital evolution of Chinese consumer culture over the past decade. During the same period, Alipay’s main competitor, WeChat Pay – an add-on to the popular messaging system – gained ground quickly, too, to reach roughly the same number of active users. That app grew out of a popular texting platform, and caught up to AliPay with an ingenious gambit: offering digital versions of “red envelopes”, or cash packages, that families and friends traditionally exchange to celebrate the New Year.
In the financial press, Alipay and WeChat are frequently compared to Mastercard and Visa. The analogy speaks to the brand recognition and duopoly they enjoy: Together, they control the vast majority of the Chinese mobile payment market. But it also indicates the ubiquity of these kinds of payments in China today, which rival the use of plastic in North America. By 2015, $5.5trn was exchanged via mobile apps; in 2010, the number was next to zero. These companies have effectively changed the culture of buying and selling, and allowed China to skip over cards altogether. Digital payments now constitute two-thirds of non-cash payments.
Weakness in the banking sector
Having more or less sold Chinese citizens on its services, Alipay is now angling for market share in other countries. But it’s hard to imagine the application being used as a matter of course – both by consumers in wealthy nations and developing countries – in the same way they use Facebook, Google, or even Amazon. The conditions that allowed Alipay to flourish in China and ultimately play such a huge role in people’s lives can’t be easily replicated, says Bill Maurer, an anthropologist at the University of California – Irvine who studies how and why societies adopt mobile payments.
Maurer says the key to altering consumer behavior with new technology is connecting new practices to pre-existing habits and norms. “You see this again and again in areas where mobile payments are successful,” Maurer noted. “If there’s an existing cultural practice they can leverage, then they can take off.”
In China, smartphones were that link. “China skipped credit cards, and it also skipped the feature phone,” Maurer said. “Smartphones were the main way they got connected. And with smartphones, we don’t talk or text: We send pictures. The mode of using the screen-camera combination was the main interface that people understood.” WeChat’s “red envelopes” were a textbook example of combining traditional culture with new technology. “It gamified it, linked it to a cultural script, and connected to what people were already doing, but this time with money attached.”
Alipay, in particular, managed to meet other uniquely Chinese needs, too. Part of AliPay’s strength as a financial service provider hinges on China’s weakness in the banking sector. According to EY, while many people have bank accounts, there are only 8 physical bank branches per 100,000 people, compared to 28 in the United States and Europe. That makes it hard to get cash, statements, and loans. At the same time, more than half of the Chinese population is online, with exponential growth expected to come, and the state has a robust digital infrastructure for its citizens.
Digital IDs and behavioral credit scores
“China has a state-mandated government digital ID for everybody,” said Maurer. “There’s a card and a number and it’s all in a database. You enter the number and hey presto! China’s able to build on top of a digital ID layer, both from regulatory and compliance to a safety standpoint.”
The most controversial feature AliPay has introduced into its roster is Zhima (Sesame) Credit, an opt-in service run by a third party that gives citizens ‘scores’ based not just on whether they pay back loans, but on “purchase preferences, contractual fulfillment capacity, and user profile”, according to the company. The service is still being tested and only available to Chinese users; in early January, the company was revealed to have auto-enrolled a number of users in the credit services, but quickly apologized and removed the problematic feature.
That’s where the political context behind Alipay’s success comes in: Digital privacy isn’t as much of a concern in China as, say, Germany, because, as Maurer put it, “there’s already a degree of acceptance or resignation around the fact that the government already has your data.” Ant Financial says it does not share user scores or underlying data with any third party including the government without the user’s prior consent. And it won’t say whether or when credit scoring will be rolled out abroad.
Alipay, nevertheless, has global ambitions, though what it will import and what it will keep at home remains to be seen. “We are currently focusing on markets in developing countries, which is in line with our mission to service the unbanked and underbanked,” a spokesperson wrote. “That is where our fastest-growing geographies currently are. Eventually, we hope to have a presence in all major markets.”
Exporting the Alipay model
Alipay’s global expansion strategy has two prongs. The first is to “cultivate local partnerships to facilitate access to mobile-based financial services for local populations in South-east Asia, South Asia, Africa, and Latin America,” according to the company.
To that end, Ant Financial is investing in foreign fintech firms. It recently merged with a company called HelloPay Group to more easily access new markets. HelloPay is now available as Alipay Singapore, Alipay Malaysia, Alipay Indonesia, and Alipay Philippines, the company said. Ant also put $200m into South Korean counterpart Kakao Pay.
Other partners include Paytm in India, Ascend Money in Thailand, CK Hutchison in Hong Kong, Mynt in the Philippines, Touch ‘n Go in Malaysia, and EmTek in Indonesia. By forging these alliances, Ant Financial is essentially piggybacking on existing apps to export its brand and its technology in the developing world – without pushing a whole new product on an entire foreign population.
The Alibaba empire is also targeting a higher-end consumer market in foreign countries by accommodating the growing Chinese middle and upper-middle class who are increasingly likely to travel, study, and work in other countries. Alipay has teamed up with tourism organizations in Vietnam, Australia, and the Nordic states to introduce its QR code technology into more stores. In New York and Las Vegas, thousands of businesses – and an additional 16,000 taxis – accept Alipay as a platform for payment.
A big draw to using the app over cash is saving on exchange rates. Rather than holding the consumer responsible for any fees associated with paying in a different currency, Alipay deducts the amount of a payment from the buyer’s Alipay account in real-time in yuan, and settles the payment to the merchant in the foreign currency later, “with Alipay shouldering the difference in payment amount”, according to the company.
Local partnerships play a big role in the tourism market, too. In Sweden, Denmark, and Norway, Alipay is working with a local intermediary called Apay Nordic to promote mobile payments. “Our job is to make sure that it’s a payment method accepted by the local merchants so Chinese tourists can have the same experience as they do in China,” said Jie Zhang, the company’s Chinese-born co-founder and chairperson who has lived in Europe since 2004. “We have a local team here, and we know almost exactly which merchants are relevant to Chinese tourists,” Zhang said of the company’s tailored approach.
Apay Nordic only launched recently, so it’s too soon to know whether it’s successful, but Zhang said consumers were happy with their new options. “The biggest challenge isn’t about Alibaba or Chinese tourists, but the concept of the mobile payment,” he said. “It’s not so well deployed here in Europe in general. It’s very far behind China.”
Fliggy, Alibaba’s travel platform, is also testing whether Sesame Credit can help expedite European visa applications. This serves two functions: the promotion of its travel booking site, which is integrated with Alipay functions, and a kind of soft diplomacy, too. Luc Decker, Luxembourg’s consul in Shanghai, said qualified visa applicants could save a trip to the Luxembourg consulate and submit their applications electronically using the app as a kind of secure drop-box.
“We accept a ‘Sesame report’ instead of bank statements for people with a high Sesame score because a high score is a good indicator that the report is meaningful,” Decker explained. The Luxembourg consulate still has to review all the documentation, take fingerprints, and stamp the visa into their passports, but applicants can avoid a trip to the bank and another to the consulate when planning their travels. “In China you have to physically go to the bank, queue, wait for hours. It makes life easier.”
Decker specified that Alibaba didn’t have access to the information shared via the app and that his office only processes about 2,000 visa applications a year, a drop in the bucket compared to neighboring France or Germany. But the partnership now allows Luxembourg to have a presence on the travel site. “We’ll have more visibility. Some Chinese people might think, why not go to Luxembourg?”
A cashless future?
Chinese tourists will undoubtedly feel more comfortable and at home using technologies that are such a big part of their lives in China. Accommodating big-spending travelers abroad isn’t a hard sell if the effort amounts to adding QR codes and opening a merchant account, either. But for Alipay to gain users in the developing world, Bill Maurer said, it’ll have to look at local, not global, needs and norms, and adjust its model accordingly.
“I think Alipay would have a hard time catching on in the ‘Global South’ unless it figures out something super clever like red envelope,” he explained, noting that’s why Mpesa – an SMS-based money exchange app – took off so quickly in Kenya. Instead of a bank account, which people don’t always have, users can transact via designated Mpesa agents who stand in for bankers.
What’s more, reports about a “cashless” future outside China are overblown. With Mpesa, the point wasn’t to avoid cash, but to get hold of it. “In Kenya, there was an existing internal remittance corridor. Bus drivers were carrying money for student school fees and payment associated with marriages and funerals. So Mpesa worked because those things were part of [the] culture,” Maurer said.
Consumer privacy in China vs the West
Finally, Chinese norms around privacy won’t necessarily fly in Europe, the US, or anywhere else in Asia or Africa, for that matter. If Alipay was first built to establish trust, and this trust has now compelled users to share data about their entire lives, it will have to come up with new ways to maintain it and to build it abroad.
“What you see in China, what’s developed in a dramatically quick way, is due to people being underbanked. You won’t see that in Luxembourg,” said Decker, who uses mobile payments in Shanghai but not back home. “In Europe, people are very concerned about privacy but here, as long as it makes your life easier or it’s convenient, people don’t really care so it’s … the sensibility is a bit different.”
“I wouldn’t like to have somebody use whatever I’m texting to my friends to assess my credit worthiness or social creditworthiness,” Decker added. “These are things that make me feel not that good, but for Chinese people, if it allows you to then have not to make a deposit at the hotel, get the micro loan right away, then they’re fine with it.”
Maurer sees potential for Alipay to capitalize not off new markets per se, but in the context of China’s massive Belt and Road Initiative. “If they tie it to [that] then stuff gets interesting fast,” he said. “That will be another expression of Chinese soft power combined with new arms of Chinese hard power forging relationships.”
Atossa Araxia Abrahamian is a freelance journalist and author of The Cosmopolites: The Coming of the Global Citizen, a book about the global passport trade. She tweets at @atossaaraxia