Cash Is No Longer King In China

by: Kevin Carter


Cash is becoming obsolete in China.

QR codes are becoming the new cash.

Alipay and WeChat dominate mobile payment market.

Mobile payments support bike sharing business.

I remember the stories in 2010 of couples in China having hordes of cash, enough to buy cars and apartments. The government had to create rules on the limits for sending cash offshore. But thanks to the smartphone, cash is pretty much already dead, as the country quickly adopts to a future with mobile pay. How in a country so immersed in the cash culture can cash no be almost dead, you may ask?

With the introduction of the smartphone and QR codes, the country is living in the future by rapidly adopting mobile pay. Mainland Chinese stores and services are increasingly centered around mobile pay apps like WeChat Pay and Alipay.

Chinese mobile payment volume more than doubled to $5 Trillion in 2016, according to Analysys data cited by Hillhouse Capital. Mobile pay is growing so rapidly in mainland China that as a foreigner, many U.S. tourists are finding it difficult to complete basic transactions without it. Oh, and guess what, the dominance of mobile transactions lends itself to greater data collection by the Chinese government. Not that we are immune to that in the U.S. either.

Mobile pay is taking China by storm and changing daily commerce. The transformation of a society limited to bills denominated in 100 yuan ($15) or less into one where QR payment codes abound was by far the biggest change in mainland China since my last visit five years ago.

When eating out or shopping with local friends, they paid by scanning a QR code on the restaurant table or by showing a similar code on their smartphones to the store clerk. I surely expected it at my favorite Starbucks in Beijing by the U.S. embassy. But not at a spices shop, museum souvenir store and a seller of traditional Chinese calligraphy brushes which all had signs saying they accepted mobile pay. A lack of red tape and a less developed financial system have apparently allowed mainland China to leapfrog the developed world into embracing mobile payments. Rather than, "Do you take credit cards?" the question was often "Do you take Alipay? WeChat Pay?"

In the first quarter of 2017, Alipay had 54 percent of that mobile payments market, and WeChat Pay accounted for 40 percent, the previously mentioned Hillhouse Capital study from May said.

The Chinese mobile pay habit is also affecting other countries. More than 6 million Chinese traveled abroad during the "Golden Week" national holiday in early October, according to state-backed media outlet Xinhua. That puts pressure on popular tourist destinations like Japan and Hong Kong to add mobile pay services.

Just over the border in Hong Kong, it is common to hear Mandarin Chinese customers asking a store clerk to scan their phones' QR codes while Cantonese-speaking locals pay in cash. In April 2017, Nikkei reported that the number of stores accepting Alipay in Japan will double to 45,000 this year, according to the regional head of Ant Financial Services.

The growth of mobile pay in China comes off a solid base of smartphone users. The ubiquitous WeChat messaging app from Chinese technology giant Tencent reached 963 million monthly active users in the second quarter of 2017. In professional settings, adding each other on WeChat sometimes replaces business card exchanges. In many ways, we in the U.S. are slow to adopt to a purely digital culture and we create interim steps with sites like Linkedin. We would rarely give a professional colleague one of our chat usernames or social media access.

Alipay, which is owned by Alibaba affiliate Ant Financial Services, has 520 million users, according to its international website. The app is linked to online money market fund Yu'e bao, encouraging users to invest and spend with Alipay. Attractive interest rates of nearly 4 percent or more have turned it into the largest money market fund in the world, with 1.43 trillion yuan ($217 billion) as of the end of June 2017, according to state media reports citing Yu'e bao's manager, Tianhong Asset Management. "We expect China ePayments to quadruple to Rmb300tn, while eWealthmanagement AUM and eFinancing could triple to Rmb 6.7tn and Rmb 3.5tn by 2021," Elinor Leung, head of Asia Telecom and Internet Research at CLSA, said in a September 5 2017 report. "High mobile internet and E-commerce penetration, and an underdeveloped traditional financial market will drive growth," Leung said.

Mobile pay is growing so rapidly in mainland China that as a foreigner I sometimes found it difficult to complete basic transactions without it. Of course, better planning travelers can set up an account with a Chinese bank in advance and set up online accounts for both Alipay and WeChat Pay.

Taxis were also nearly impossible to hail in Beijing due to the rise of Didi, a ride-hailing app that bought Uber's China operations in a deal worth $35 billion last summer. Because Didi was linked through WeChat, I couldn't use it without a Chinese bank account. When you finally get a taxi, beware of fake 50 and 100 yuan bills in change, another good reason for a cashless society.

The growth of mobile pay in China has supported another business: bike sharing. Led by a few start-ups, the number of bikes stacked along the side of the street or sometimes scattered even alongside highways in China has exploded. The number of monthly active users doubled from February to more than 20 million in March 2017, according to TrustData cited by Hillhouse Capital.

Two of the largest Chinese-based start-ups, Ofo and Mobike, say they have a combined 13 million plus bikes around the world and have each raised at least $1 billion. Incidentally, Mobike entered the U.S. on September 20, 2017 by deploying bikes in Washington, D.C., while Ofo made its first foray into the country by launching in Seattle in August 2017.

The dominance of mobile pay also means companies like Ant Financial and Tencent have access to hordes of personal data. Can an Equinox type hacking scandal happen in China? Not if the government can help it. Some regions in China have been testing a personal credit score system linked to mobile pay data. But unless privacy issues have immediate negative consequences, convenience will probably trump all.

A smartphone is increasingly the only thing someone in China needs to carry when going out and that convenience is priceless - sorry MasterCard for the play on your tagline.

Disclosure: I am/we are long BABA, TCEHY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.