Apple Pay's One Year In China: High Threshold & Low Subsidy

(Chinese Version)

When Apple Pay officially entered mainland China on February 18th, 2016, some media pinned great hopes on it, believing that Apple Pay could rise into one of the three dominant mobile payment tools in China, together with Alipay and WeChat Wallet. However, things didn’t seem to go as expected when we look back a year later.

Apple Pay, the undisputed dominant mobile payment service provider in Europe and US

Two and a half years ago, Tim Cook officially introduced Apple Pay during the Autumn Press Conference held on September 10th, 2014. On October 20th, the service was available in the US.

However, Apple is, to any degree, a late entrant in the mobile payment market and has to face huge competition from PayPal, Android Pay and Samsung Pay. Based on marketing research company Investment Technology Group’s statistics, volume of mobile payment transactions conducted through PayPal reached $46 billion as of November 2014, making PayPal accounting for 78 per cent share of American digital payment market.

However, Apple was well prepared before entering this market. After all, it sold smartphones, the very terminal of mobile payment. Therefore, it came as no surprise that Apple soon caught up and even surpassed PayPal two years later. Today, Apple Pay has already become the most popular mobile payment tool in the US.

Based on Boston Retailing Partner (BRP)’s statistics, as of February 2017, over 36 per cent of American business owners have adopted Apple Pay, while its biggest rival PayPal’s market support rate only reached 34 per cent. In other words, Apple has grown to become the dominant player in the American mobile payment market.

Besides, according to an analysis of American consumers’ credit card bill record by the third-party research organization TXN in January, Apple Pay’s transaction volume jumped by over 50 per cent in 2016. Imagine its popularity. In a recent conference call, Apple also revealed that its global transaction volume in Q4 2016 rose by 500 per cent compared with the same period a year ago.

Up till now, Apple Pay has already entered over ten countries and regions, including the UK, France, Australia, etc. It is recently reported that Apple Pay is to enter South Korea, the headquarter of Samsung.

Apple Pay might have met with a cold welcome in the Chinese mobile payment market

Therefore, it’s natural Apple Pay would eye on China, the biggest mobile payment market in the world. When Apple teamed up with Apple Pay and launched Apple Pay in mainland China, the market was thrilled. It is reported that 30 million iPhone users add their debit card to their Apple Pay accounts the day the service was launched and the transaction volume grew by 150 per cent for the first few days.

When Apple’s senior vice president of Worldwide Marketing Phil Schiller was asked of Apple Pay’s ambition in China during his visit to China at the beginning of 2016, he pointed out that the entry into China was a milestone for Apple Pay. Besides, he admitted that he was well aware of the competition in the Chinese mobile payment market, stressing that:

“Apple Pay would focus on our own services. Apple believes that digital payment will be the future, and nobody will bother to bring a wallet on street. Apple’s goal is to provide a mobile payment tool that’s ‘convenient, handy, safe and reliable’.”

However, when Apple’s senior executives were so optimistic about Apple Pay’s popularity in major first-tier cities, they also found that people’s enthusiasm into Apple Pay faded as quickly as it rose and competition from Alipay and TenPay (WeChat Wallet) went far beyond their imagination. After all, the Chinese mobile payment market has already become very mature even before Apple Pay entered, with major players including Alipay, WeChat Wallet as well as QQ Wallet and JD Wallet. More importantly, most Chinese smartphone users have already been accustomed to paying bills by scanning QR codes with their smartphones.

According to Analysys International’s report last October, the overall transaction volume of the Chinese third-party mobile payment market in the first half of 2016 has reached 13.474 trillion RMB (over $1.959 trillion). More specifically, the overall transaction volume in Q2 reached 7.5037 trillion RMB (over $1.091 trillion), an increase of 25.68 year-on-year. Besides, Alipay ranked 1st in the Chinese mobile payment market, accounting for 55.4 per cent of the overall market, while TenPay ranked 2nd with 32.1 per cent share of the market. In comparison, Apple Pay’s market share, however, is negligible.

Low market penetration rate and utilization rate coupled to make Apple Pay’s development caught in a very awkward situation. Many Chinese consumers would ask shop assistants if they could pay the bill via Apple Pay but be asked back: “What are you saying, exactly?” Since it’s very convenient for consumers to pay bills by scanning QR codes, many business owners would stick their QR codes in stores. However, since few consumers would use Apple Pay, few business owners would bother to upgrade their machines, which would also backfire and annoy many Apple Pay users, since most business owners know what’s Apple Pay.

Not only are business owners not familiar with Apple Pay, but also Union Pay, Apple Pay’s key partner in China, is also worried about Apple Pay’s market outlook. That’s why it couldn’t wait and turn to QR codes. During Double Twelve shopping festival in 2016, Union Pay announced its official QR code payment standards, marking Union Pay and China’s commercial banks’ entry in the QR code scanning payment battle. However, Union Pay’s method was different from that of third-party mobile payment tools such as Alipay, but similar to Apple Pay, since it adhered to the existing four-party payment model, involving debit card issuing organization, issuing bank branch, bill acceptance bank and business owners.

Union Pay and major commercial banks are not only key partners of Apple Pay, but also major promoters of the service. However, Union Pay and major commercial banks that supported Apple Pay, including ICBC, China Construction Bank, China Minsheng Bank, CITIC Bank, China Merchants Bank, etc., have all launched QR code scanning payment products. Although they would still support NFC payment, it seemed inevitable that Apple Pay has meet with a cold welcome here in China.

Two fundamental problems holding Apple Pay's development in China

“To use Apple Pay, you have to use and iPhone and find a store that supports Apple Pay. At the same time, you would find that MeiTuan Wallet, Nuomi Wallet, Alipay, WeChat Wallet and QQ Wallet have all kinds of discounts and vouchers,” a Chinese internet user said jokingly. However, he hit the nail on the head and pointed out the exact problem Apple Pay had in the past year.。

At present, Union Pay’s service rate for Apple Pay ranges from 0.38 to 1.25 per cent, while that of WeChat Wallet and Alipay ranges from 0.6 to 2.0 per cent. In addition, since WeChat Wallet and Alipay often carried out subsidy and discount both for consumers and business owners, many business owners would prefer to use WeChat Wallet and Alipay than Apple Pay.

Moreover, both consumers and business owners have to consider the cost to use Apple Pay. For users, they have to buy iPhone6 and above versions and add credit cards to their Apple Pay accounts; for business owners, they have to upgrade their POS machines that support NFC payment. Only when can users successfully use Apple Pay. According to Tencent’s in-depth report of the Chinese smartphone market in 2016, iPhone only accounted for 25 per cent. Therefore, 75 per cent of Chinese smartphone users can’t use Apple Pay at the very beginning.

What’s more, not all 25 per cent of Chinese iPhone users have iPhone6 and above versions. Therefore, there are even less Apple Pay’s potential users. For business owners, when they can receive bills through Alipay and WeChat Wallet’s QR code, why do they bother to spend money upgrading their POS machines?

To some degree, WeChat Wallet and Alipay have already almost dominated all the potential markets of Apple Pay. These Chinese mobile payment giants have spent a huge sum of of money and subsidy in nurturing both consumers and business owners’ habit. Indeed, they have taken up almost the entire Chinese mobile payment market, from supermarkets to roadside stands

In a word, high entry and low subsidy have become two of the most urgent problems of Apple Pay.

A brighter future for NFC payment?

To some degree, NFC payment is safer than QR code scanning payment. However, POS machines that support NFC payment aren’t widespread here in China. Moreover, some vested interest parties are also blocking the upgrading of POS machines. When we take a close look at the entire Chinese NFC industry chain, we can’t find any mature of successful example. Even Apple Pay and Union Pay together failed to accelerate the development of this market. It is safe to say they interests aren’t well-coordinated along the industry chain. From this aspect, there is still a long way before NFC payment can replace QR code scanning payment.

Although Apple Pay have to face lots of challenges right not, some analysts are still optimistic about its development. Compared to QR code scanning payment, NFC-based Apple Pay is still safer and more convenient. While users have to unlock their smartphone, open the APP and find the QR code to pay the bill, Apple Pay users only need to bring their iPhone/Apple Watch close to a POS machine. In addition, NFC payment has already been bringing more convenience to Chinese. For example, Xiaomi Pay and Huawei Pay have already supported users to pay their transportation fee at the subway and on buses simply by bringing their smartphones near the billing machine.

When we see this issue from a larger picture, we may conclude that Alibaba and Tencent have already chosen the right direction in the Chinese mobile payment market and took the lead, at least temporarily, compared with NFC payment’s representative, Apple Pay. In the future, the competition between QR code scanning payment and NFC payment will only become fiercer. While NFC payment players will catch up, Alipay and TenPay won't await their doom. For consumers, however, we should be aware and protect well our own wallets.

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[The article is published and edited with authorization from the author @Dongdongbiji, please note source and hyperlink when reproduce.]

Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost.

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