Chinese web giants Alibaba and Tencent have been locked in a bruising race to dominate the country’s trillion-dollar mobile payment market — a contest that has now reached a tipping point with signs one side is starting to edge ahead.
Tencent, which is several years behind Alibaba in terms of market entry, has been steadily chipping away at its rival’s lead. While its payment service is behind Alipay in terms of market share, analysts say the company has more potential to capture China’s rapid e-payment growth, as electronic wallets continue to take over bank cards as a favorite payment method for tech-savvy smartphone users.
Tencent owes much of this payment success to WeChat, its popular instant-messaging app with one billion monthly users. By incorporating functions such as online shopping and e-payment into the app, where an average user already spends more than an hour inside the WeChat platform texting and reading news on a daily basis, the company gave people few reasons to leave the platform for other services. Zhang Yu, an analyst at Beijing-based consultancy iResearch, estimates that 80% of WeChat’s users have tried its payment service, Ten Pay. And Ten Pay now has more active users than Alipay’s 520 million, company executives said in last week’s fourth-quarter earnings releases.
“The challenge for Alipay has always been the connection to consumers,” said Zennon Kapron, founder of Shanghai-based consultancy KapronAsia. “Typically as a Chinese consumer, you are going to use WeChat on a regular basis, and the payment function within the app is much more common and normal for people.”
This has led to Tencent’s rapid increase in market share. In the third quarter of 2017, China’s mobile payment market grew 28% from a year ago to $4.7 trillion, with Alibaba having a 53% share. Ten Pay followed closely with its 40% market share, according to Beijing-based consultancy Analysys International. It is a dramatic retreat for Alipay because as early as 2014, it had 70% of this market, Analysys International data shows.
Alibaba, however, isn’t without advantages of its own. Together with affiliate Ant Financial, the company has been inking partnerships with restaurants and retail chains such as Intime and Suning, where Alipay has become the primary payment choice. This helps to make up for the shortfall in user numbers by boosting transaction volume, as shoppers pay for bigger-ticket items like clothes, meals and electronic gadgets there. Ten Pay, meanwhile, is widely used by smaller shops such as convenience stores because its merchant registration process is often faster, according to iResearch’s Zhang.The company, however, is also racing for partnerships with big-name retailers, with Walmart recently dropping Alipay in China for the WeChat system.
Alibaba and Ant Financial are spending heavily to claw back lost ground. Starting from December, Alipay has set aside as much as 1 billion yuan ($160 million) in fresh market promotions. Consumers can collect up to a couple dollars in cash-back incentives for each purchase made with the service, which potentially tempts shoppers to use Alipay more frequently.
But it may only get Alipay so far. With digital payment platforms are now near ubiquitous in big cities like Beijing and Shanghai, growth will come from remoter areas. But it’s Tencent that is managing to draw out new users there, analysts say.
This is primarily because people outside Chinese metropolises have even less incentive to leave WeChat and download Alipay. Unlike residents in more developed areas, they don’t use Alibaba’s online malls as often, which control 80% of China’s $370-billion e-commerce market and use Alipay as the default payment method (WeChat has been excluded from these sites since 2013 as Alibaba wants to better promote Alipay). With online shopping not as prevalent, residents can just use WeChat as an one-stop platform for chatting as well as daily purchases, according to Steven Zhu, senior analyst at consultancy Pacific Epoch.
“They [Tencent] will have stronger growth potential as compared to Alipay, which is literally just expanding alongside e-commerce,” Zhu said. “Talking about the future in china, the advantage is leaning towards WeChat.”
For example, Chen Aiyun, a 30-year-old woman living in the town of Liaocheng in Shandong province, said she finds Alipay unnecessary. Chen uses WeChat for social and buying daily goods in convenience stores. When she does shop online, it is a Tencent-backed budget shopping service called Pinduoduo that is her primary choice.
“I just don’t want to download another payment app,” Chen told Forbes. “It is troublesome and it takes up space in my phone.”
But it isn’t all good news for Tencent. To grab users’ attention, the company has no choice but to match Alipay’s marketing spending. This, coupled with other investments in content and technology, will weigh on Tencent’s margins, executives said in last week’s earnings call. The warning sent Tencent shares down as much as 4.8%.
Returns, however, are also lucrative. By attracting users to their respective payment services, Alibaba and Tencent can capture more financial data and assess credit worthiness accordingly. Such moves pave the way for introducing more services like online loans and insurance, with the companies’ algorithms mining data and credit histories to offer tailored financial products.
Growth in this area is fast. Last year, Tencent’s nascent lending service Weilidai already had more than 100 billion yuan ($16 billion) of outstanding loans, according to the company. Ant Financial’s money-market fund Yu’e Bao, which users can access directly inside Alipay and invest up to $3,000 for an annual return of about 4%, now has $160 billion under management — making it the largest money-market fund worldwide.
“There are a lot of opportunities coming from data captured from the platforms,” KapronAsia’s Kapron said. “A lot of focus will be around that in the next couple of years.”