How can Chinese technology innovation change the business model in Europe?

How can Chinese technology innovation change the business model in Europe?—using Alipay & Tencent WeChat Pay as examples

With the new round of technology revolution and industry transformation, e-commerce has gradually become the highlight and new growth all around the world. In China, the pace of development of e-commerce has speeded up much faster for nearly 20 years from the establishment of e-commerce enterprise Alibaba in 1998. In 2016, the transaction volume of e-commerce in China was equivalent to 35% of the GNP and reached as high as 26.1 trillion RMB, while the electronic payment industry, which supports the service industry, has reached as much as 5.5 trillion US dollars. By contrast, the amount in the U.S.A was only 112 billion US dollars, a 50 times difference between the two countries.  In the Netherlands, the e-commerce was worth 20.16 billion euros in 2016.

In China, there are two e-commerce juggernauts taking up at least 90% of the internet payment market: Alipay and Tencent WeChat Pay. Alipay, as a third party payment platform, was founded in 2004. As of the second quarter of 2014, it has become the biggest mobile payment service provider in the world. Alipay’s payment services include online secured transaction, payment, transfer, credit card repayment and mobile phone recharge, as well as providing services for a number of industries such as retail department stores, movie theaters, supermarket chains and taxis. It also provides wealth management services such as Yu’E Bao which is a new money market fund  of Alibaba. Users can save their money in this fund and make some profits.

How could Alipay achieve such a success? The main three reasons are as follows: operation model, profit model and safety model. As a credit guarantee platform, the essence of its operation is based on Alipay being a credit intermediary. Before buyers confirm the receipt of qualified goods online, Alipay is responsible for keeping the payment for both buyers and sellers. In other words, it is a kind of escrow service. This payment model effectively solves the payment and credit bottlenecks in the current development of e-commerce. In the meantime, benefiting from this mechanism, there are deposits of enormous sums of money in the accounts of Alipay. Due to the fact that payment for goods is normally settled in weeks, or even in months, huge interest income is stacked up in Alipay. In addition, as a third-party payment platform, Alipay charges service fees to customers according to the commission rate paid to banks . Also, Alipay earns on-line advertising revenues and charges for value-added financial services, all of which form the source of revenue for Alipay. To ensure security of electronic users and payment, Alipay uses mobile phone dynamic passwords, digital certificates, treasure orders, payment shields, third-party certificates, and even smile-technology with facial recognition of identity authentication.

The second giant is WeChat Pay. Its strategy is using offline payments combining with online payments to seize the mobile payment market. WeChat Pay invented its own special technology to secure account safety: Users only need to tether a bank card with the WeChat app to complete the certification. Once the keywords are entered into the phone, the payment is done. Besides, WeChat Pay also uses QR code technology to provide scan payment meaning users can pay just through scanning the QR Code using their own mobile phone. Moreover, there are other kinds of payment channels including the WeChat public number and WeChat App to make users more convenient to pay. People can also enjoy services like WeChat red envelope, voucher, e-coupon etc.

At the same time, the e-pay industry in Europe seems stagnated. Traditional e-pay dominates the whole market. When people in Europe are doing e-transactions like shopping online, they still need to pay through complicated and tedious steps. Users cannot scan QR codes to complete the payment, which has become part of Chinese people’s daily life. In Europe, people cannot go out without bringing either bank debit and/or credit card or cash, let alone borrowing money, managing money, purchasing movie tickets and even choosing seating, all through one single App. In this respect, the e-pay market in Europe has a huge opportunity for improvement.

In 2015, the European Parliament passed the second Payment Services Directive (EU) 2015/2366 (“PSD II”) which aims at completing the payment system of Europe and providing better experience and protection for consumers. A leading research analyst firm in this industry, Juniper Research has defined that PSD II will be the next beacon in the field of Fintech. This Directive is bound to be revolutionary for the future of payment systems for consumers and change financial business models in Europe.

Furthermore in the Netherlands, there is a payment platform called Adyen which plans to list on the Euronext stock market listing in June 2018. This platform was founded in 2006 and surpassed €100 billion in processed volume in 2017. It has the similar system as Alipay to some extent where it enables merchants to accept payments in a single system, enables revenue growth online, on mobile devices and at the point of sale.[1] Also Adyen has expanded its partnership with Alipay in 2017 in order to make global retailers more easily accept non-cash payments from Chinese customers in stores.[2]

Facing this context of economic transformation and technology revolution, Europe could learn from the evolution China has gone through in e-payment and will continue to refine in the near future.

By Hanren Xiao

Hanren Xiao is an associate with the Wintertaling China Desk.

 

[1] see the official website of Adyen <https://www.adyen.com/about>

[2] more details see the link <https://www.mobilepaymentstoday.com/news/adyen-expands-partnership-with-alipay-for-mobile-payments/>