As I flew back from China earlier this week, Apple pulled the trigger and launched Apple Pay in China, initially partnering with China UnionPay (中国银联) and the Industrial and Commercial Bank of China, ICBC (中国工商银行). Other banks are sure to follow soon.
“Apple Pay launching in China today. Can’t wait for you to try it and see how incredibly easy it is to use! Apple Pay 于今日正式登陆中国。欢迎大家踊跃尝试，体验它卓越的便捷性！”
– Tim Cook, Apple CEO, via Sina Weibo
Much has been made of the launch in the technology press with many treating Apple’s chances of success with a healthy dose of scepticism. None of the mainstream technology press brought home the scale of the challenge presented by the incumbents WeChat Pay and Alipay. Not only are they on home turf, but they have also had several years to establish a position of strength in the market. Apple is clearly the outsider. As if this wasn’t enough, Xiaomi (小米科技) and Huawei (华为) are both rumoured to be readying payment platforms of their own.
During my recent trip to China, it became evident just how real the challenge ahead of Apple is. And, whilst many in the press have cast doubt on Apple’s chances of success, I wanted to present my take on what they need to do if Apple Pay is to stand any chance of being successful.
Apple Pay in the UK
I have yet to personally experience Apple Pay in the US and so have based my comparisons with China on my experience of the service here in the UK.
When Apple Pay launched in the UK back in July 2015 Apple were able to take advantage of the proliferation of contactless payment terminals in the majority of retailers. Whilst Apple launched with a number of prominent retail partners, the reality was that Apple Pay was more widely available than people initially realised. Many of the contactless payment terminals supported Apple Pay with no action required on behalf of retailers. In many cases, retailers didn’t even appear to know that they supported Apple Pay. Simply asking to pay by card and holding your phone to the terminal was all that was required to use the service. It wasn’t long before I found myself able to get through a typical week without using cash or even a bank card.
We must remember that prior to the launch, card payments were commonplace even for relatively small transactions. Some smaller retailers insisted on a minimum transaction value to ensure they recovered the card processing costs but you could generally expect to be able to pay for most common transactions by card. I mention this, because this isn’t true of many countries and it is often easy to forget that our norms don’t necessarily apply elsewhere. Apple was able to take advantage of this infrastructure, and both customer and retailer expectation to launch a new service and whilst I don’t wish to trivialise their achievements, it is important to remember their starting position.
The Landscape in China
When I first visited China back in 2006, I went to buy a pair of shoes in a mall in Beijing. With the Visa logo on prominent display next to the cashier’s desk, I handed over my Barclaycard expecting to be asked to type in a pin or to sign a payment authorisation slip. What I did not expect was for the clerk to pick up the phone and make a telephone call to Visa to process the payment. Card payments, at least those not with Union Pay were clearly not common place. Even with Union Pay, it was clear that cash was still the payment method of choice for many retailers.
Now, some ten years later, I’m blown away by the prevalance of the mobile payments platforms, with many retailers actively pushing them over card payments, and in some cases even cash. Following a meal with a friend, we offered to pick up the bill. Our friend had taken a couple of days away from family to show us around the city of Guangzhou (广州) so we thought it only fair to treat her to a meal. But there was a challenge, neither of us had WeChat Pay and the restaurant was offering a significant discount to those who paid using WeChat. Our friend would receive even more of a discount as she had booked the table using Dianping (大众点评), an App in which Tencent, WeChat’s parent company, has an investment. Not only that, the waitress preferred to receive a WeChat payment over cash as it made things easier as she didn’t have to hand over precious small change. I was so surprised by this that before you know it, the waitress had written down the authorisation code and our meal was paid for. We never did get to treat our friend to that meal.
I was curious so probed a little further. Our friend pays for utility bills, travel, meals, groceries, visa renewals and even doctors appointments through WeChat. To her, this was convenient, often cheaper but above all, it was normal.
I asked around to see whether this was the norm and to my surprise I found that not only is it the norm, but it doesn’t seem confined to the younger generations. My in-laws also use WeChat Wallet. And, whilst I don’t want to generalise based on my short time in China and the limited number of people I have spoken to, but the impression I was left with was that if people didn’t use WeChat Pay themselves, they at least knew what it was.
At this point I should highlight that WeChat Pay isn’t the only prominent mobile payments service in China. AliPay has been around longer and is accepted by a wide range of retailers. Whilst in China I didn’t experience of AliPay first hand and they require the use of a Chinese bank card for registration so I was unable to try myself. However, for an indication of how common it is, I refer you to this article by Steven Millward of Tech In Asia when he tried to survive an entire day using WeChat to pay for stuff. There are almost certainly other players in the market but WeChat Pay and AliPay are the two most dominant.
Whilst the individuals I spoke to cannot possibly be regarded as a representative sample of the Chinese population, I found it interesting that none were familiar with Apple Pay or how it worked. With the launch imminent, the Apple marketing machine would surely address this. But I could see something more than just a lack of knowledge, the people I spoke to just weren’t that interested. They could already pay for things on their phones, why would they want to use a service provided by Apple? Just what was it that Apple was offering them?
If you think Apple Pay breaks new ground, you have to see how WeChat payments dominate China. Household bills, food & transport. #fintech— Bill / 葛威 (@BillGlover) February 13, 2016
It would be easy to write Apple’s efforts off. Indeed, many in the industry already have. But here is what I think Apple needs to do in order to be successful with mobile payments in China.
- Identify a clear value proposition
- Incentivise retailers
- Allow peer to peer payments
- Play nice with the regulatory bodies
Whether or not Apple Pay is successful will depend on how well Apple can address these four essential objectives.
Identify a clear value proposition
When Apple Pay launched in the US, the proposition was clear; convenience and security. By the time they launched in the UK, the value proposition was less clear. We already had the convenience of contactless payments, so perhaps it was just simply security. We don’t yet know how successful these launches have been, but the promise is there. It isn’t yet clear to me that these values alone are enough to entice Chinese consumers away from established offerings. Concerns around data privacy, security, etc. all seem secondary to price and convenience. Apple has to compete on price in order to be successful, even if it means forgoing its usual transaction fees and persuading the banks to do the same. Whilst I don’t see Apple being able to offering the discounts that the other major players are offer, there are signs that Apple and its partners are already starting to offer users some incentives. Bank of China offering everything from loyalty points, discounts, and cash back to customers who use Apple Pay. Being able to compete on price is going to be key to success in China.
But price alone may not be enough. Apple needs to offer the consumer convenience and, in China, that may be at odds with Apple’s desire to control the full end to end user experience. Apple needs to accept that consumers demand services and functionality that exist outside the controlled Apple ecosystem and open up the wallet to its partners.
Concerns around security and privacy may be secondary to price, but this is one area where Apple is able to offer a unique proposition. It may be an American company, and there will undoubtedly be concerns around using an American company to handle payments, but Apple’s brand reputation is strong and their recent decision to fight a court order to assist the FBI in gaining access to an iPhone has gone down well with the Chinese.
Whatever Apple settles on as their value proposition, they need to get the message out to consumers and to do so quickly. With WeChat and AliPay are installed on the vast majority of phones in China (not just those made by Apple), both players have a significant head start.
Apple’s main competitors offer retailers prominent placement within their Apps, enabling retailers to offer additional services right alongside the interface customers use to make payment. Apple’s desire to control the complete experience around Apple Pay has limited what others can do inside the wallet. Whilst loyalty cards are offered, they are limited in functionality and in reality have retailers have been slow to adopt them even in Apple’s more established geographies. Being able to enhance the wallet experience will be key to encouraging retailers to invest in the platform.
When it comes to infrastructure, Apple needs to incentivise the roll-out of the contactless terminals required to make a payment. Contactless payment terminals are not cheap and unless there is a clear incentive for retailers the Apple Pay platform will be held back by the inability for consumers to use it. If it becomes known as the payment platform that no retailers accept, consumers will quickly lose interest and Apple will struggle to regain the initiative. In some ways, Apple risks falling into the same trap as American Express who missed the boat on the contactless roll-out in the UK and, with their higher transaction fees, provide little incentive for retailers to upgrade their payment terminals to support AMEX contactless payments.
By partnering with Union Pay (Apple didn’t have a choice here), there is hope that Union Pay will support the roll out of the required terminals to retailers. However, both WeChat and Alipay are rumoured to be working on their own point of sale (POS) systems and both have demonstrated a cut-throat ability to muscle their way into a new market.
Allow peer to peer payments
Apple has yet to enable customers in any geography to use Apple Pay to transfer money between consumers. I suspect one of the key limitations behind this is the existing arrangement that Apple has with their partner banks. However the success of competitor peer to peer payment offerings will present a challenge.
During the recent New Year celebrations in China, WeChat users sent 32.1 billion Red Packets (红包) to each other, 8 billion of these on New Year’s Eve alone. These are monetary gifts of anywhere up to RMB200 (GBP20). When sent to groups of friends, the amount received by individuals in the group was randomised to add a sense of luck or chance to the event. These numbers are staggering and Apple Pay offers no alternative. If Apple is going to establish itself as a serious player in the mobile payments market in China, it is going to have to enable the low value, high volume consumer to consumer transactions that drove adoption of both AliPay and WeChat Pay over the last couple of years.
Play nice with the regulator and the party
Apple is a foreign company and it must remember that. The experience of foreign companies in China has shown that Apple is unlikely to be allowed to dominate the industry. If local competitors don’t get there first, you can be sure the relevant organs will help them out. I suspect that along the journey Apple will be required to make difficult decisions that may not endear it to it’s consumers back home. Striking a balance between keeping the Party and the various regulatory factions happy whilst not compromising on its core values will be key to the success of Apple Pay in China.
Foreign technology companies don’t have a great track record when it comes to China. But despite the bearish attitude in the technology press to the recent Apple Pay launch, I suspect Apple is uniquely placed among Western technology companies to give it a go. Brand familiarity is high and that is not something that can be said for many of Apple’s Western competitors. But, investors would do well not to get carried away.
“We think China could be our largest Apple Pay market,”
– Jennifer Bailey, vice president of Apple Pay, via Reuters
Apple have been deliberate in their choice of words. And, whilst they are unlikely to be the largest player in China, even small market penetration in China could easily make China the poster child for Apple Pay success. Whatever the outcome, the future of mobile payments in China will be interesting to watch.
I’d like to offer my thanks to both @alicialiu, and @the3rocks for help in research and proofreading for this post. I’d also like to extend my thanks to Cassie for the meal in Guangzhou that inspired me to write.