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What WeChat Pay and Alipay Means for the U.S.

Monday, September 10, 2018

To Chuck Huang, getting U.S. merchants to accept Alipay and WeChat Pay is just the beginning. He's founder and chief executive officer of Citcon, a Silicon Valley-based startup merchant acquirer specializing in cross-border payments for Chinese consumers. And he sees the niche as a stepping stone to a much broader market of mobile payments, which still lies in relative dormancy here in the United States.

"The opportunity is to leverage the mobile phone and the mobile wallet rather than plastic cards," Huang says. "That is the dream and the vision."

While mobile payments have been slow to pick up steam here, limited mostly to early adopters of Apple Pay, Huang might be onto something. Alipay and WeChat Pay have come to dominate Chinese payments in recent years, so much that they have transformed China into a virtually cashless society. Their entrance as wallets for Chinese consumers in the United States could bring more competition in the mobile wallets race, and bring on disruption for issuers, acquirers and the card networks themselves. If anything, their presence should push providers to 'think mobile.'

It's not that payment experts think Chinese wallets will take over the American payments system. It's too balkanized, with too many entrenched competitors for China's innovators to grab significant market share, says a Mercator report authored by Sarah Grotta and Raymond Pucci.

But still, these players are likely to disrupt the market and spur innovation. "A key lesson to learn from Asian mobile networks is that integration of features and functionality attracts a wider audience," Pucci notes.

An aging market

The potential for disruption in part has to do with the age of the American payments system. Magnetic stripe technology and even EMV are not spring chickens, to put it mildly.

"We're a society that runs on 70-year old technology with a magnetic stripe," says Ralph Dangelmaier, chief executive officer of BlueSnap, a global payments company. "Your phone is a much better device for security, encryption and tokenization to make payments."

In fact, the entrance of Alipay, which grew out of e-commerce provider Alibaba, and WeChat Pay, an offshoot of the ubiquitous multi-purpose messaging and social media app WeChat, is the most significant competitive development in payments in the last 35 years, says Steve Mott, principal of Better Buy Design, a payments consultancy. "For the first time, you have got some real healthy competition from an economic standpoint coming up in the card business."

In part, the competition is on price. Citcon, for example, charges bricks-and-mortar merchants 2.7 percent plus 15 cents per transaction as of this writing. That's in the ballpark with general domestic offerings by acquirers, but in this case, Citcon's rate is about 40 percent lower than what merchants would have to pay to accept Chinese-based traditional credit cards, the company notes.

The other differentiator is Alipay and WeChat Pay's use of QR codes as an interface, which helped quickly expand their merchant bases in China. Increasingly, the QR code has gained momentum worldwide when it comes to mobile wallets. U.S. purveyors such as ChasePay, LevelUp and Walmart Pay have all elected to go with QR codes.

Simplicity is key

One advantage of the technology is its simplicity: it requires no investment in hardware or software by merchants in order to accept payments. In China, it also helped to have a large and growing consumer base and rapidly expanding internet access, notes the Mercator report. This allowed mobile payments to boom in China, reaching annual volume of about $5.5 trillion, about 50 times as much as in the United States, while its population is four times as big.

Meanwhile, China's rapidly growing middle class has fueled tourism worldwide. This cohort of travelers will spend $453 billion overseas over the next five years, estimates Citcon.

About 93 percent of the Chinese travelers prefer mobile payments when overseas, Citcon says. The travelers also like American and European brands, and Citcon fits the bill, processing for luxury retailers in the United States such as Kering, Bottega Veneta and Oscar de la Renta.

China's rapidly-growing middle class has fueled tourism worldwide.  Travelers will spend $453 billion overseas over the next 5 years. 93% of Chinese travelers prefer mobile payments when overseas.

China UnionPay, an association for China's bank card industry, is rolling out its own app in March, completing the 'must-have' Chinese payments trifecta, Dangelmaier says. "If you are really going to address the Chinese market, you have got to accept China UnionPay, and offer WeChat pay or Alipay," he says. "It's just the way it is."

As things speed up, Citcon, BlueSnap and other early adopters will be ready to grab a lot of the business.