In less than a decade China transitioned from a pay-in-cash nation into a mobile-first payment nation. An unparalleled achievement.
At the turn of the century, the Chinese financial system was considered underdeveloped by Western standards. Less than two decades later, China has become a global leader in Fintech innovation according to KMPG’s 2019 Fintech100. Asian Fintechs, in particular Chinese ones, dominate its rankings.
This is the first in a series of upcoming articles where we explore Fintech in China. We’ll start off the series with the story that revolutionized China’s financial system. A process that continues up to this day.
A unique challenge
Fueled by the central government’s ambitions to become a global superpower China has been in hyper-development since the early 1990s. But for each region of China that benefited, there were many more that remained underdeveloped. Providing all regions equal access to modern conveniences proved to be a colossal undertaking.
One challenge that proved to be especially problematic was how to enable every Chinese citizen to participate in the nation’s rapidly digitizing financial system. Particularly people of old age, and those living in rural areas experienced many difficulties. The majority of them struggled with accessing modern technology and financial services (such as debit cards, online bank accounts, or even physical banks). As a result, hundreds of millions of Chinese citizens were limited to using cash only at the turn of the century.
This presented the People’s Bank of China (‘PBoC’, the nation’s central bank) with a unique challenge: ‘how to grant the greatest number of its country’s citizens, regardless of their age, living conditions, financial situation or level of education, access to the nation’s modern [digitized] financial services?’.
Enter the Tech Juggernauts
Instead of spending many years building everything up from scratch themselves, the PBoC decided to go for an alternative strategy. They kept bank regulations to a minimum and invited tech juggernauts such as ‘Alibaba’ and ‘Tencent’ to enter the regulatory vacuum and solve the problem for them.
By the time Alibaba and Tencent entered the playing field they were already established tech companies. Their platforms fulfilled the needs & desires of millions of users through webshops and communication services. More importantly, both tech companies were fiercely competing for market dominance. The PBoC realized this would serve as a catalyst for innovation.
“China liberalised the banking rules and gave both Alibaba and Tencent — the rough equivalent of Facebook and Amazon, banking licenses”
Richard Turrin, author of ‘China’s Digital Currency Revolution’.
Soon Alibaba and Tencent launched their online financial services known as ‘Alipay’ (nowadays known as ‘Ant Group’) in 2003 and ‘Tenpay’ (a.k.a. ‘WeChat Pay’, part of WeChat) in 2005. These services were at that time very similar to Paypal in the West.
As more regions of China developed an increasing number of Chinese citizens gained access to modern conveniences. Yet it were predominantly third-party providers such as Alibaba and Tencent that gave them access to modern financial services. However, by the early 2010s, the majority of the rural and elderly populations were still lacking behind. The internet connection remained slow and unreliable in rural areas. And both populations had limited financial means. Many of them could not afford the latest high-end hardware (e.g. smartphones and tablets) that most financial services required.
In a bid to make their financial services more accessible, Alibaba and Tencent started looking into technologies that only required the bare minimum in hardware and internet connectivity. Soon they found a solution that offered them everything they were looking for: the QR code.
QR codes: oldschool but very cool
The QR code-technology was originally developed in 1994 by Masahiro Hara for Denso Wave, a barcode-scanner manufacturer in Japan. Its purpose was to track vehicles during the assembly process. Soon its fast readability and storage capacity was picked up by other industries. A few years later, the whole world was using QR code-technology.
By the time Alibaba and Tencent started experimenting with the QR codes, its capabilities were already well understood and documented. Several smaller Chinese tech companies had already been running local experiments in QR transactions with various degrees of success. However, these tech companies lacked the userbase (by then consisting of hundreds of millions of Chinese citizens) that Alibaba and Tencent managed to build over the course of many years.
All Alibaba and Tencent needed to do was integrate the QR code technology into their financial services, and buy up a couple of small tech companies to ensure no other competitors would emerge over time.
The ultimate UX design
Unlike their Western counterparts ‘Google Pay’ and ‘Apple Pay’, Alibaba and Tencent designed their apps with maximum accessibility for all layers of the Chinese population in mind. It did not matter whether someone was rich or poor, young or old, educated or unschooled, living in a metropolitan area next to the East China Sea, or in an underdeveloped rural village in Western China.
By using QR code technology, all someone needs is a cheap old smartphone with a simple camera and a few bytes worth of internet connection. Additionally, the fees Alibaba and Tencent charge for using their financial services are negligible, even for someone with extremely limited finances.
In 2014 Alibaba and Tencent introduced the QR code payment system to Alipay and Tenpay. Its simplicity and convenience in usage resulted in an almost overnight adoption by all layers of the Chinese population, including the rural and elderly ones. Likewise, companies, public services, family businesses, and street vendors immediately recognized the benefits of the QR-code. All they had to do was print out their QR code, and sticker it somewhere on their (web)shop to enjoy the benefits of this new payment technology.
No longer is there a need to carry around large quantities of cash or log into complex online banking systems. Whether you want to buy a dress, pass a subway gate, book a train ticket, order flowers from a webshop, or renew your driver’s license, all you need to do make a payment is scan a QR code and complete the payment. It really is that easy.
QR code payments are instant, safe, and reliable. It revolutionized the way Chinese citizens pay for their things. The technology proved to be especially useful and convenient for small day-to-day transactions. For large investments (e.g. buying a new car or a kitchen) credit cards remain more popular.
“The two Chinese internet giants are only one of the two forces that pushed QR codes in China. The second force, are the thousands of merchants that started taking advantage of this technology in order to advertise their activity, connect to the consumers and use the payment services of these giants for their transactions.”
Stefania Zocco, author of ‘QR codes in contemporary China: digital money and people’s perception’.
The COVID-19 outbreak and the consequent social distancing restrictions have only further accelerated the widespread adoption rate of no-contact mobile-first payment methods across China.
It’s not just a third-party financial service provider
Here in the West, we like to keep our service providers separate from one another. We value our privacy and do not want to give a single company too much power (i.e. information). Hence, we have a separate app for everything: one app for our bank, another one for public transport, a third one for dating, etc. Every service fits neatly into its own individual box.
In China and other parts of Asia, things are different. To illustrate this let us take a closer look at the most radical of the two financial service providers: Tencent’s ‘Tenpay’. This service was integrated in 2013 with the WeChat platform (its financial service became henceforward known as ‘WeChat Pay’).
In the West, we oftentimes assume WeChat is merely a plagiarized copy of Whatsapp. But this assumption could not be further from the truth. Originally WeChat launched in 2011 as a messaging platform. It quickly gained popularity because of its feature to send voice-clippings, something that no other chat software was doing at the time. However, WeChat’s development didn’t stop there. On the contrary, its rising popularity only resulted in more services being added (and connected) to it. Soon WeChat had become an ecosystem of services, unlike anything we have in the West.
A small selection of WeChat’s innumerable services include:
- Live Messaging (text, call, video, voicemail). Keep in touch with friends and loved ones via text, calls, video, and voice messaging. Users can also directly contact companies and public services for an immediate response.
- WeChat Pay (a.k.a. Tenpay). The collective name for all of WeChat’s financial services. Once you deposit money into it all of WeChat’s financial services will open up to you.
- Moments. A feature somewhat similar to the Facebook wall. Users can upload posts (i.e. moments) and leave likes and comments. Whenever a user creates a new post they can mark who gets to see it.
- Red envelope. Introduced in 2014 this feature dramatically increased WeChat’s popularity amongst Chinese. It enables users to send a digital red envelop (containing money, according to Chinese tradition) as a gift to someone in the contact list. Users can also hand out a single red envelope in a group chat. The money will then be unequally distributed amongst the recipients at random.
- Savings account. Want to set aside some money for later? No problem. WeChat has you covered. A couple of years ago the annual interest rate was up to 5.0%.
- Chat roulette. By “shaking” your phone your make it known to WeChat users all over the world (who are at that same moment also “shaking” their phone) that you’re looking to have a chat with someone. You never know who will answer your call into the abyss, but that’s what makes it exciting.
- QQ Coin. WeChat’s cryptocurrency launched in 2005. Originally intended to be used exclusively as a commodity in WeChat’s virtual ecosystem. However, it’s also used as a black market (i.e. illegal) currency and exchanged for real-world goods.
- Healthcare. Users can connect their WeChat account to their healthcare accounts. Amongst a great many things it enables the user to see how much budget they still have left in their healthcare plan. It also offers many practical functionalities, such as the option to take a snapshot of any suspicious mole, for a quick digital diagnosis.
- Public transport card. There’s no need to carry a public transport card in many of China’s biggest cities. Instead, at the gate you present your wallet’s QR code, the scanner deducts a few RMB, and off you go.
- Gaming. WeChat has a wide selection of fun and addictive minigames. Great for whenever a user is commuting to and from the office. My personal favorite is ‘跳一跳’ (pronounced as ‘Tiào yī tiào’, which roughly translates into ‘Jump around’).
- Maps / GPS. WeChat has an excellent GPS system that has all the functionalities of Google Maps. Plus it can live-stream its user’s location to his or her contacts. Very handy next time you have a BBQ in a remote part of the park.
- Dating. It’s a weird mix between Tinder, Happn, and Chat Roulette. Basically the user activates the option to “look for nearby WeChat users”. In doing so he or she becomes visible to other WeChat users in the neighborhood. Oftentimes, it’s used to find a date or potential love interest.
- Marketplace. Want to book a hotel? Buy a new dress? Give to charity? Have groceries delivered at home? Get some second-hand products? Order a taxi? WeChat has a service for every single need or desire.
- Whatever else you can think of. Do you have a service or functionality in mind that is not listed here? Probably WeChat already has it pre-installed. If not just browse through their Mini-Programs (i.e. WeChat’s “app store”) and you’ll find the specific service or functionality you need in there somewhere.
WeChat offers a wide variety of social, financial, fun, and overall practical services to its userbase. Its ecosystem of services provides convenience to its users, especially in their day-to-day lives. This has resulted in WeChat becoming fully intertwined with all aspects of its users’ lives.
Hence WeChat’s reputation as the “app for everything” is well deserved. A Chinese citizen who installs the WeChat on his or her phone will (if they choose to) never have to download another app again. Any service imaginable can be provided by WeChat.
“It’s going to be hard for banks to tip the scales back to the old days when they controlled payments, because these tech platforms are so useful that people are addicted to them — they really like to use them because they’re great technology.”
Richard Turrin, author of ‘China’s Digital Currency Revolution’.
Where does this leave the People’s Bank of China (PBoC)?
By keeping regulations to a minimum and inviting third-party tech companies to innovate the Chinese payment system, the PBoC seemingly gave away a lot of power. In the short term, this is arguably true. However, the PBoC’s strategy has never been a short term one. Much like China’s central government, its strategy covers many years, if not decades.
Let there be no doubt: Tencent and Alibaba were able to innovate and revolutionize China’s financial services because the PBoC allowed them to do so. One temporary consequence of the PBoC’s strategy is that money which is transferred into an Alipay or WeChat Pay wallet is for the time being out of their reach. But now the time has come for the PBoC to reel the powerful tech juggernauts back in.
How will the PBoC do so you might be wondering? By introducing the ‘DCEP’, China’s (and the world’s first) national cryptocurrency. Not only does it enable the PBoC to regain total control over financial services in China, but it also has the potential to change our global economy forever.
Read all about DCEP in my follow-up article.
Lessons to be learned
- Innovation does not require (the invention of) new technology. Instead, it requires a clear and unbiased understanding of the challenge one is facing.
- Don’t reinvent the wheel. Look around at what others are doing or have done in the past. Learn, take, or purchase from them whatever you need.
- Invite others to innovate for you. It’s somewhat of a bold and dangerous move. But in doing so you can sit back, and let others do the hard and difficult work for you. Just make sure to not let go of the reins.
- Accessibility is everything. Know your target audience, their challenges, and their needs. Embrace their limitations (i.e. lack of money, technology, education, etc), and design your software with compassion in mind.
- Convenience over privacy. Not all places in the world have the same privacy concerns as we have in the West. Giving up (some) privacy offers a lot of convenience in return. Not just at an individual level, but also at a societal one. Will the West come to recognize its potential? Only time will tell.
About the author
Max Senden is a Senior UX Designer in the Fintech industry. One of his professional goals is to introduce Western audiences to Fintech from China. By doing so he aims to bridge the gap between cultures and stimulate the exchange of ideas, concepts, and technologies between China and the West.
Remarks, questions, or feedback
Please leave a comment on this article, or connect with me on LinkedIn. Any feedback, including critique, is greatly appreciated.
Sources
- Mobile Payment Usage in China
- Payment methods in China: How China became a mobile-first nation
- Fintech in China: What Lies Ahead
- How Alipay and WeChat Pay Revolutionised Chinese Payments, Paved the Way for Central Bank Digital Currency
- QR codes in contemporary China: digital money and people’s perception
- Tencent created QQ coin long before Facebook’s Libra
