Mobile payments have become the latest battleground in the ongoing struggle for market share between America’s retail and tech heavyweights. Check out the latest headlines:
There’s a reason why so many major players want a piece of the same pie. Though exact estimates vary, a large majority of Americans now own smartphones, with the percentages even higher among young people. Studies show that most smartphone owners have their phones with them practically all the time. These statistics are increasingly typical in developed and emerging economies – and developing countries aren’t far behind. With advances in broadband access and plummeting prices making smartphones accessible worldwide, it seems likely that mobile devices will be the constant companions of the majority of the world’s population in the not-too-distant future.
Combine something everyone has with something everyone does (like spending money), and it’s clear that mobile payments could be one of the key industries of the next decade – one predicted to top $720 billion a year by 2017. With more and more of the world’s $15 trillion in retail transactions happening on smartphones, there is now a fortune in transaction fees, consumer data and targeted advertising opportunities at stake. And mobile payments promise to open up a promising, underexploited global market: the financially underserved. These facts are not lost on companies around the world, who are now vying to gain a foothold in an arena filled with stiff competition. However, the task of creating an effective mobile payments solution is not an easy problem to solve.
To appreciate the complexity involved, let’s take a look at the evolving landscapes in the world’s top two smartphone markets: China and the U.S.
In America, the mobile payments space languished for years, with prominent efforts like Google Wallet and SoftCard both failing to take off. Apple made a big splash last fall by launching Apple Pay – only to meet quick resistance from a consortium of major retailers refusing to enable the product in their stores as they instead prepare a competing payment app called CurrentC.
While the jury’s still out on whether any of these products will succeed, they’re all facing similar challenges. America, like other developed economies, already has a digital payments infrastructure in place, in which credit card providers facilitate transactions between retailers and banks. U.S. companies interested in the mobile payments market have had to decide whether to compete with these players or partner with them. Both Apple Pay and Google Wallet have seen their prospects boosted and weakened, respectively, by their divergent success in negotiating these partnerships, while the CurrentC retailers hope to sidestep credit card companies (and their fees) altogether.
And though online payments are less problematic, the challenge of making retail point-of-sale transactions both simple and secure has presented some technical dilemmas. Mobile wallets generally either require users to scan QR codes – a rather unwieldy process – or wave their phones at near-field communication (NFC) equipment installed by retailers. Meanwhile, they’re competing with an existing payments option (credit cards) that’s both ubiquitous and convenient. With their success not only dependent upon changing consumer behavior, but also on convincing a vast network of self-interested partners to build a new physical and technological infrastructure, it’s easy to see why mobile payments haven’t yet taken off.
In contrast, China’s mobile payments ecosystem has had fewer struggles. As a newly emerged market, it is much more dependent on cash than the U.S., with only about a quarter of the population having credit cards. Mobile payments consequently represent a clearer value proposition to customers who lack other digital options. And practically all of China’s credit cards are from UnionPay (the nation’s government-backed card issuer), which has a virtual monopoly in the country, thereby eliminating the complexity of dealing with multiple stakeholders. What’s more, UnionPay has established a system that will allow cardholders to pay retailers by scanning QR codes on their mobile device. If this system gains widespread acceptance, it could speed up adoption among retailers by eliminating the need for them to invest in NFC equipment.
Though China’s economic infrastructure does have other challenges, including the government’s current prohibition of QR codes among third-party digital wallet providers, other Chinese companies are competing actively for the market. E-commerce giant Alibaba offers a mobile wallet called Alipay, which has become a popular tool for online shopping, bill payments and even P2P payments, including a “split the bill” function that links users’ smartphones to facilitate payments between them. Increasingly, the mobile wallet is also being used for point-of-sale transactions at Chinese retailers, which the company encourages by offering to integrate Alipay into merchants’ payment systems for free. And though it typically works by linking to users’ bankcards, Alipay also lets customers deposit their money in an Alibaba-owned money market fund called Yu’ebao, where it’s available for m-payments while earning around 6 percent interest.
Alibaba’s main competitor, Tencent, is offering a similar deal. The company operates WeChat, China’s most popular text messaging service, and its TenPay mobile wallet allows users to link a bankcard to their WeChat accounts. Besides allowing payment for goods ranging from taxi fare and movie tickets to bill-sharing and in-app purchases on WeChat, TenPay lets users store their money in an interest-bearing monetary fund. The two companies have been a big part of the explosion in mobile transactions in China, which grew 707% from 2012 to 2013 to $197 billion – numbers that are expected to nearly triple this year (and that doesn’t include payments made through UnionPay).
As America’s tech giants continue trying to unlock the potential of mobile payments, and its social media innovators make cautious moves into the market, it’s interesting to consider how markets like China often hold advantages over more established economies. It’s no surprise that American tech companies from Apple to Stripe are forging partnerships with China’s mobile payments innovators, and it will be fascinating to see how these collaborations shape the ecosystems in both countries in the coming years.