Gavekal Fathom China is launching a new special syndicated report series on China’s financial technology industry, with a focus on Ant Group. The series, China Fintech, provides deep-dive research for a small number of participants. To ensure that our project is on the mark, participants themselves pose the questions. This is the first report in the series.
In this issue
- Alipay dominates big transactions. Alipay dominates in larger-sum online payments, and that will likely remain the case.
- Surveillance cooperation. No evidence suggests that Ant Group assists the state in extra-legal surveillance.
- Digital currency challenge. The central bank’s planned digital currency will challenge Alipay and WeChat Pay.
- JD’s fintech IPO. China’s number-two e-commerce company plans to list its very small payment platform.
- Financial holding regulations. The central bank will force Ant Group and Tencent to form financial holding companies.
- Credit scores. The central bank is pushing ahead with plans to sell credit scores, with Ant Group and Tencent still declining to cooperate.
Note on name change
In June 2020, Zhejiang Ant Financial Services Group (“Ant Financial”) changed its name to Ant Technology Group (“Ant Group”). To avoid confusion, this report uses “Ant Group” throughout, even when referencing a time before the name change.
Big vs small transactions
Consumers seem to prefer WeChat Pay for small transactions and Alipay for big ones. Will that change?
We don’t think that will change. Roughly 65% of mobile phone users have registered both the Alipay and WeChat Pay apps. They are always thinking, “Which one should I use?” The answer is situational. When buying things on the dominant e-commerce sites run by Alibaba Group Holdings (“Alibaba”), users will almost certainly use Alipay. Retail investors prefer to invest their money through Alipay over WeChat Pay because Alipay’s financial offerings are more extensive and mature. The same goes for Alipay’s lending business, and its payroll business. All those transactions tend to be bigger than transactions on WeChat Pay, which grew out of the WeChat social media platform and is more likely to be used to transfer money between friends, or to make small offline purchases.
Solid data is hard to come by. Data tends to differentiate between two types of payments, “mobile payments” and “e-commerce payments,” yet how those categories are distinguished is unclear. If someone uses a phone to buy something on one of Alibaba’s e-commerce platforms, is that an e-commerce transaction or a mobile transaction? According to firm Analysys, which measured the value of total transactions, Alipay in 2018 had 53% market share and WeChat Pay had 39%. And Alipay had only 197bn transactions that year, compared with WeChat Pay’s 460bn, so the average value of Alipay’s transactions was much larger. Yet those figures have doubtless increased over the past two years, and we do not see evidence that WeChat Pay has closed the gap in transaction values.
The preferences of Chinese people for one payment app over the other traces to when the apps launched. Alibaba released Alipay in 2004 because Alibaba wanted to sell things online, and Chinese rarely used credit and debit cards. From the start, Alipay was for sums of money greater than the cost of lunch. Tencent launched WeChat Pay in 2013, nearly a decade later. Its first big moment came in 2014 with a brilliant marketing campaign tied to the Lunar New Year, when Chinese traditionally give friends and relatives red envelopes containing small (and sometimes not so small) sums of money. WeChat enabled people transfer virtual red envelopes through WeChat Pay, and the idea went viral: people sent more than 40mn virtual envelopes of real money. WeChat Pay made the scene by enabling the transfers of very small amounts.
The point is that Alipay started with comparatively large transactions, and WeChat Pay started with small ones. Both have been path dependent ever since. Of course, each offers a lot more, and their offerings are almost interchangeable. Yet from its start in e-commerce, Alipay has done better at hooking people into larger transactions through its more advanced offerings of financial products, including credit and investment options; WeChat Pay, from its start in person-to-person transactions, has done better at convincing people to pay for small-change items with its app. This general balance of power seems likely to remain.
Data in the table above comes from research company Ipsos, and is based on interviews. Gavekal Fathom China cannot verify the data’s accuracy but they look like what we would expect. They show that in “personal transactions,” which means payments between people, WeChat Pay is used more often and transfers more money. For offline consumption, which means buying things offline, people spend about the same value with Alipay and WeChat Pay, yet the average transaction value is bigger for Alipay. And for buying things online, Alipay is the runaway winner in everything. Financial transactions are undisclosed but Alipay doubtless has a big lead.
WeChat Pay built its lead in personal transactions with its red-envelope trick in 2014, then extended its lead through sheer convenience. Most Chinese people use their do-everything WeChat apps all day long for messaging and social-media. When they unlock their phones, chances are high that they left their WeChat apps open and waiting. When the time comes to transfer money or pay for something, doing so could involve touching the screen as few as two times. That’s pretty convenient. Using the Alipay app would require first closing something else, then opening Alipay. That would take about a second, maybe two. And yet those moments generate an annoyance that is hard to measure. WeChat Pay is simply faster and easier, and those easy clicks become habit.
In the e-commerce world, Alibaba’s dominance is easy to explain. Alibaba’s e-commerce sites rule, and Alipay is the only payment option other than bank cards. Market-share breakdowns can be tricky depending on what is being measured, but when you pour together the alphabet soup of e-commerce—B2B, B2C, C2C—then in 2019, 56% of all e-commerce spending went to Alibaba, another 17% went to JD.com, with the rest going to others. Because online sales tend to have higher values than the often small offline things people pay for with WeChat Pay, Alibaba enjoys a big advantage in big transactions. That is why people spend more money on Alipay than on WeChat Pay.
Alipay enjoys another advantage in that e-commerce is a great jumping-off point for credit. Consumers who need to borrow money to buy online items, or who want to pay in installments, can use Alibaba’s virtual credit card, Huabei. They can also use Huabei offline when they pay for things through their Alipay app. WeChat Pay does not have a similar function. Alibaba uses e-commerce payments as a gateway to its credit offerings and financial services. We will write more about that in future reports.
How much does Ant Group assist the government with surveillance?
The simple answer is that nobody knows. Unlike big American firms like Google and Apple, Chinese tech firms do not disclose requests from the government regarding access to data on individuals. Chinese people who think about these things simply assume the Chinese government has real-time access to whatever Alipay data it wants, just as they assume it has real-time access to WeChat messages. Yet evidence in the public domain suggests that Beijing uses access to Alipay data less than you might think.
Beijing’s most important effort to monitor what people do on Alipay and other payment platforms came with the creation of a single state-run payments clearinghouse. That gave the government transparency into who paid whom, when and where. Before that, Ant Group had built relationships with banks across the country. If someone in Beijing used Alipay to transfer money to someone in Qinghai, the funds would pass through banks in many jurisdictions. Those banks store data in different ways in different places, hindering government retrieval. So even though the People’s Bank of China surely had access to the bank information of individuals, piecing together where money was moving was still an ad-hoc effort, much more complex than tapping a few keystrokes into a searchable database.
The government now has a much easier time tracking money that moves through payment platforms. In 2017, it placed a new state-owned entity, NetsUnion, between online payment platforms and banks. Whereas Ant Group used to maintain relationships with many different banks, now it has one. That gives the government a single entry point into transactions involving payment platforms. The stated reason is not surveillance, but risk mitigation. People’s Bank of China governor Yi Gang in 2018 emphasized that NetsUnion “was developed on the principle of maintaining both fair competition and the security of payment systems.” Were Yi to issue the same speech today, he might note that NetsUnion would have prevented the WireCard fraud that shocked Germany: if WireCard had been required to use something like NetsUnion, then it would not have been able to claim it had earned fees from phantom transactions, and that it had deposited imaginary revenue into non-existent third-party escrow accounts.
NetsUnion’s 45 shareholders do not include law enforcement. Institutions associated with the PBOC and the State Administration of Foreign Exchange own 37% of NetsUnion. Wholly-owned subsidiaries of Ant Group and Tencent each own 9.6% of NetsUnion, and have board seats. The chairman of NetsUnion is Chen Bo, a PBOC official who also runs the Payment and Clearing Association of China, a quasi-official chamber of commerce for payment companies. Other top NetsUnion managers come from state-owned banks. All these positions create convenient points of contact between government officials and the owners of data on individuals. How the government might access that data is unclear.
The creation of NetsUnion could enable two key developments. One is to facilitate the rise of new payment platforms. A barrier that new platforms faced was the sheer difficulty of establishing relationships with banks across China. Now, only one relationship is enough. Yet NetsUnion does not seem to have enabled the rise of new platforms. The other development is NetsUnion’s access to private data, and by extension, the PBOC’s access. At least one observer is critical of this new access. Zhu Zilin, a master’s degree student at the respected Peking University Financial Law Research Center, wrote her thesis in 2018 about NetsUnion’s invasion of privacy. In it, she writes that setting up NetsUnion is an example of state overreach:
The PBOC directly obtains firsthand payment information about its clients. This is a matter of a client’s privacy, and banks are obligated to protect this confidential information. Without special rules and regulations, no companies or individuals have the right to access that information. The PBOC has no legal basis for obtaining such information.
Zhu’s warnings that the PBOC has no legal authority to gather data on individuals has not led to changes in NetsUnion’s access to data. Zhu is not a senior academic, and her paper was published on a WeChat social media publication run by a group affiliated with Peking University. The decision to publish it was likely made by someone more senior, which suggests that more such carefully composed criticism is possible. Yet Zhu’s comments have not been echoed elsewhere. Since the formation of NetsUnion, neither Ant Group nor Tencent has commented on its relationship with the new state-run company.
Whether NetsUnion can remain neutral in its treatment of different payment platforms is somewhat open to question. In February 2020, NetsUnion and Mastercard received approval to set up a joint venture. The new company, 51% owned by Mastercard, will be the first foreign-controlled firm to clear payments in China. Beijing is signaling that it is opening its financial system to foreign competition even as it keeps a close eye on what foreign firms do. The impact on Ant Group seems minimal: Mastercard competes less with Ant Group and more with China’s state-run payments company, UnionPay, which clears debit- and credit-card transactions. Still, it seems odd for a state-run company with quasi-regulatory functions to form a joint venture.
Hand-in-hand with the creation of NetsUnion came one other regulation with a big impact on Ant Group’s operations. Ant Group had maintained control of money in its users’ online wallets. It invested that large “float,” which was estimated in 2018 at RMB490bn. Other fintech companies did the same, including Tencent and some less reputable characters. After much hand-wringing, the PBOC forced them all to turn their floats over to an account run by the PBOC. The justification was to prevent Ant Group and Tencent from misusing the lightly regulated funds, which seems prudent. The regulation passed in 2017, and Ant Group and others finished transferring their floats to the PBOC in January 2019. Whether the change helps the PBOC monitor money in individual online wallets is unknown. Probably, the PBOC could monitor accounts just fine without controlling the float, so the benefits for surveillance seem minimal.
Another way that Ant Group could contribute to state surveillance of individuals is through Beijing’s widely misunderstood effort to implement “social credit.” Many observers mistakenly believe that Beijing’s powerful algorithms sift through all available data on private individuals, assign a score to each person, and then rewards people with high scores and punishes those with low ones. Beijing may aspire to such power but so far it is not even close. Instead, local governments are running a series of very different experiments and trials.
Beijing announced its intention to create a social credit system in 2014. One year later, in 2015, Ant Group’s credit-rating subsidiary, Sesame Credit, began calculating credit scores for Chinese individuals, including by assessing their social contacts and the types of things they bought on Alibaba’s platforms. Also in 2015, the government authorized Ant Group and seven other companies to help develop pilots for the social credit system. Yet by 2017 those social-credit pilots had been canceled. Sesame Credit still gathers information on users to generate credit scores; high-score customers enjoy perks like higher loan limits and renting cars without deposits. If the government requests that data, then Sesame Credit doubtless shares it. The government may even enjoy a backdoor to that data. Yet if Sesame Credit’s user data is contributing to a government-generated social credit score, there is no publicly available evidence of that collaboration.
That is not to say Alibaba and its subsidiaries do not participate in Beijing’s social-credit schemes. They participate by complying with requests to punish or reward people. If some government authority flags individuals based on their social-credit scores, and a Chinese court tells Ant Group to block that person from using Alipay to buy train tickets or some other item, then Ant Group does so. Chinese rules say only a court is supposed to issue such orders, and courts are under direct Communist Party control. One of the most cogent writers on China’s social-credit efforts is Shazeda Ahmed, a PhD candidate at the University of California, Berkeley. She says Alipay does follow court orders to punish people who fall afoul of social-credit systems. Yet she says that so far, no evidence shows the wholesale transfer of data from Ant Group to government analysts:
According to available government and state media reports, one type of agreement, called “information sharing,” involves companies receiving government-issued blacklists, which they then match to their user base in order to prevent blacklisted people from performing certain activities like buying airplane tickets. Another kind of agreement, called “joint rewards and punishments,” restricts the behavior of blacklisted individuals even further: blacklisted users of Alipay, for instance, are unable to buy so-called “luxury items”—although it is unclear whether it is Alipay or the government that determines which items fall into this category.
By forging partnerships with Chinese technology companies, the state ensures that blacklisted people can’t avoid punishment. These partnerships make it harder for individuals to evade restrictions in the non-state economy, which is otherwise farther outside of the government’s sphere of control. But they also open the door to the possibility of a much more expansive social credit system, since technology companies have a wealth of information about Chinese citizens. Still, it remains unclear when and how companies might share their data with the state—although it would be difficult for them to avoid doing so if asked.
One company that seems more exposed than Ant Group to accusations of contributing to a surveillance state is Alibaba. It is front and center in the government’s effort to build “smart cities.” Smart cities use omnipresent cameras and AI to direct traffic flows, optimize electrical grids and prevent flooding. They could also use facial or gait recognition to capture, store and analyze data on every movement citizens make, who they meet and what crimes (thought crimes or the regular kind) they might commit in the future. Something similar is reportedly already in use in China’s heavily Muslim province of Xinjiang, although the role of algorithms is unclear. Alibaba operates City Brain, a series of smart-city data centers that the company hopes will run the smart part of China’s future cities. If “smart city” becomes synonymous with “surveillance city,” then Alibaba will be providing the watchdogs with their power, and Ant Group’s contributions, if any, would likely be a sideshow.
New government-issued digital currency
Do plans by the People’s Bank of China to launch a digital currency threaten Alipay’s leading position in online payments?
Yes, the PBOC’s plan to issue a digital currency threatens Alipay’s leading position. The PBOC has been planning its digital currency, known as “digital currency electronic payment,” or DCEP, since 2014. Trials began in August 2020 in several cities, and the new currency should be operational by the Beijing Olympic Winter Games in 2022. The PBOC and officials elsewhere have never commented on DCEP’s impact on Ant Group, or suggested that the goal of DCEP is to create more opportunities for state-owned banks at the expense of existing online payment platforms. The government instead says it is launching the currency to track money laundering, establish a sovereign digital currency before other countries do, and to satisfy consumer demands for the anonymity of cash in a digital currency. If DCEP is successful, it will take business away from Alipay, WeChat Pay and others.
DCEP will be a different form of China’s yuan, the same as coins or scrip. Users will have an online wallet that they access through their devices, and they can transfer the money to other people, spend it on things, or move it to bank accounts. All of that sounds almost the same as Alipay and WeChat Pay, and how DCEP will compare remains unclear. DCEP will somehow enable anonymous transactions, but can still be tracked by the government to stop criminal activity. How it can be both anonymous and traceable is also unclear: an official leading the project, the head of the PBOC Digital Currency Research Center, Mu Changchun, says the currency will have “controllable anonymity,” whatever that is.
Other characteristics of DCEP compare favorably to existing platforms. Users can transfer money from their wallets to their bank accounts for free, whereas Alipay and WeChat Pay charge users 0.1% for such transfers. DCEP also will not require users to link their wallets to a bank account. And DCEP will be usable offline, either through Bluetooth or near-field communications that enable tapping the phone on a receptor. The government says offline operations make DCEP useful in emergencies that could knock out internet access, such as after an earthquake, whereas Alipay and WeChat Pay require internet connections.
DCEP has an advantage in that it is legal tender. Merchants must accept it as they would accept cash. That is why the new form of currency seems like it will inevitably replace Alipay and WeChat Pay in some transactions. Dong Ximiao, the chief researcher at the Zhongguancun Internet Finance Institute, which advices the Beijing city government on fintech issues, writes that DCEP will almost certainly cut into the business of payment platforms:
You really cannot compare the effectiveness of DCEP to Alipay and WeChat Pay. Everybody must use DCEP after it is released, but WeChat Pay and Alipay are optional. So it is possible that more people will use the PBOC’s digital currency instead of using Alipay and WeChat Pay. Users don’t care about the logic of payments. They decide based on which one is more convenient and secure.
Similar comments that DCEP will erode the leading positions of Alipay and WeChat Pay are commonplace in China. For example, the head of the Fudan University Fintech Research Center, Song Siqi, says DCEP will “improve competition, provide more choices, and will be more reliable.” The most detailed account of why Beijing wants to create a digital currency comes from Mu, the head of the PBOC Digital Currency Research Center. Speaking in September 2019 to an online audience during a talk modeled on Ted Talks, he said Beijing wants to protect the “sovereignty” of its currency, indicating a concern that another country like the US could issue a digital currency that Chinese might want to use, or would have to be blocked from using:
Why did the PBOC decide to release a digital currency when electronic payments are already so advanced? The biggest reason is to protect the sovereignty and legal status of our currency. For that, we need to plan ahead.
Furthermore, the cost of issuing, printing, recycling and storing banknotes and coins is very high. More costs are required for anti-counterfeiting technology. Cash is inconvenient, circulates at too many levels, and nobody wants to carry it anymore.
It is not only criminals who want to hide activity. You may also buy things and you don’t want others to know, so you use cash. Yet nowadays, people need cash less and less. So as long as you are not a criminal, and you want to buy things without people knowing, then we need to protect that kind of privacy.
The public wants anonymous payments. Yet the current payment tools, such as internet payments and bank card payments, are all tightly bound to the traditional banking system, and it cannot meet demands for anonymity. That’s why people can’t completely abandon cash payments.
The PBOC’s DCEP can solve these problems. It will not only maintain the main attributes and characteristics of cash, it will also meet the requirements of portability and anonymity.
DCEP will likely hit WeChat Pay harder than Alipay. While speaking at a forum in August 2019, Mu said DCEP will be especially popular for small amounts of money, which he called a “high-frequency, small-amount retailing scenario.” That sounds like WeChat Pay’s market.
The main question is whether the public will welcome DCEP. Alipay and WeChat Pay have spent many years fine-tuning their products, with Ant Group approaching from the e-commerce field and WeChat from the social-media field. The PBOC comes from the regulatory field. It has never issued consumer-facing financial products, and releasing a digital currency that people want to use will be much more complicated than embossing Chairman Mao’s image on pink RMB100 notes. The PBOC has chosen four cities for trials: Shenzhen, Chengdu, Suzhou and the Xiong’an New Area. China Construction Bank is adding a DCEP wallet to its app, and many private companies have said they will cooperate with the PBOC to test the currency, including Didi Chuxing, Meituan, JD, Bilibili and ByteDance. We will follow the progress.
- JD plans fintech IPO. China’s number-two e-commerce company, JD.com, applied in July to list its subsidiary, Jingdong Digits Technology Holding, on the Shanghai exchange. It released a prospectus on September 11 that says the firm “manages the company’s fintech business, including operating the mobile-payments and lending businesses on the JD platform, and offers payment solutions to other insurance and fund companies.” JD founder Richard Liu holds 50.35%. JD’s fintech business has a 0.67% share of the mobile payments market, according to Analysys. It recorded RMB18.2bn of revenue in 2019, and a small net profit of RMB772.5mn.
- The PBOC issues financial holding regulation. The PBOC has long planned to require fintech companies to structure themselves as financial holding companies. It launched those reforms on September 11 on a trial basis by issuing a new regulation, “Financial Holding Company Supervision Management Trial Regulation.” It takes effect November 1, and requires companies like Ant Group and Tencent to form financial holding companies. Ant Group disclosed in its prospectus that it plans to apply for the license through a subsidiary, Zhejiang Rongxin Internet Technology. Tencent may need to do a more thorough restructuring.
- The PBOC Credit Reference Center cooperates with Baihang. The PBOC center collects financial data on individuals from state-owned banks, and Baihang Credit collects similar data from private companies. They are the only two institutions in China allowed to sell individual credit scores. They will cooperate on “credit reference strategy, businessand technology.” Baihang says it has collected data from 600 companies. Ant Group and Tencent have in the past refused to turn over data, and that refusal still appears to be the case.