Millions of Chinese tourists flocked overseas for this year’s Labour Day public holiday and their mobile phone data shows a surprising number of them love American fast food. This is a mere nugget of the kind of information that mobile payments app Alipay routinely collects.
The Chinese firm, which is controlled by e-commerce billionaire Jack Ma, also reported that most of its app users on their holidays abroad between April 29 and May 1 went to either Hong Kong or Thailand. In addition, two-thirds of them were female and 85% were either born in the 1980s or 1990s.
Such an invasion of privacy is becoming more commonplace as Alipay, and its arch rival Tencent’s WeChat Pay, roll out super-slick payment services and location-based technology in transport hubs and high streets across Asia.
These mobile cashless apps are gateways into people’s lives, through which merchants with access to users’ shopping histories can push carefully crafted adverts to try and persuade them to spend more.
Alipay and WeChat Pay’s overseas push comes at a time when largely cash-based, developing economies in Asia are rapidly digitising and their burgeoning middle classes are becoming increasingly affluent.
As first-movers, or in partnership with innovative local startups, they are in pole position to condition users to adopt their convenient payment systems, spend time in their e-commerce ecosystems, and create extensive credit-scoring databases on individuals across the region. They are also well placed to capture mindshare – sexy marketing speak for consumer awareness – and potentially use that as a platform to sell different products, brands, and services.
ECOSYSTEMS AT WORK
The way Alipay and WeChat operate in China offers a glimpse into how these e-commerce ecosystems might work across the rest of Asia and beyond.
In China, WeChat’s instant messaging service is already a mainstream way to hail a taxi and settle the fare, buy cinema tickets, or make a restaurant reservation and pay for dinner, as well as talk with friends or redeem coupons. WeChat’s monthly active users hit 1 billion during the Chinese New Year holiday in February and half of its users used WeChat for 90 minutes a day.
“The appearance of WeChat Pay and WeChat totally changed Chinese people’s lives,” said Grace Yin, a director of WeChat Pay in its global operations.
Tencent’s integrated communication and social platforms reinforce the cohesiveness of its user community and create a high barrier to entry for competitors.
“In the old days a payment action means the end of the transaction because the consumer will leave like the water floating away,” Yin said, noting WeChat’s huge power these days. But with WeChat Pay’s social network, merchants can set up new customer relationships and “drive” consumers to sticky, repeat business, especially if they combine user WeChat IDs with their customer relationship management systems.
Merchants can study user shopping patterns and tailor precise marketing messages without having to pay for expensive TV advertising campaigns.
E-commerce executives say payments act as a "funnel" to bring users into ecosystems.
"QR code payments are a good way to acquire customers/users for your digital ecosystem," said Ray Ferguson, chairman of Singapore-headquartered payments firm, Youtap. Internet companies can then use the power of their ecosystem to prioritise generating demand for one of their borrowers, he added. Potentially, that could mean boosting promotions of a borrower's merchandise to the broader user base.
More and more activities can be performed within one ecosystem, unlike in the past where customers went to separate providers for everything from the shopping to loans.
The ability to hoover up data within ecosystems as large as those of Alibaba and Tencent for the purpose of selling even more merchandise holds a powerful allure for investors.
WeChat is the jewel in the crown of Shenzhen-headquartered Tencent, which became Asia’s most valuable company in 2016 and is run by tech tycoon, Ma Huateng, also known as Pony Ma. As Tencent said in its March earnings release, WeChat Pay is helping it to upsell more financial products, including wealth management services, consumer loans, and insurance.
So when one of Tencent’s earliest shareholders, South Africa’s Naspers, sold $9.8 billion worth of stock on March 22, institutional investors lapped up the offering within hours.
It’s a similar story at Ant Financial, which owns Alipay and is in the process of raising another $8 billion to $10 billion through a share sale that would value the company at around $150 billion.
That is double what it was estimated to be worth just two years ago, when it raised $4.5 billion of capital. What’s more, it would make Ant Financial the world’s most valuable unlisted company, according to a person familiar with the privately handled stock offering.
Unsurprisingly, Chinese sovereign-wealth funds and leading private-equity firms are likely to take part, head of corporate trading, Oliver Kovac at Evans Chamberlain Asset Management said in a report.
Investors are clamouring so loudly to participate that many of China’s largest, privately owned tech companies are able to include clauses in their fundraising contracts that bar their investors from also backing rivals.
“This is abusing your monopoly position to cut off your competitors’ capital supply,” said a veteran fundraiser for Chinese companies.
Anti-trust regulation is lagging behind changes in the market.
“You can no longer look for monopolies purely from a point of view of market position and revenue; you should also include data as a resource,” the fundraiser added.
No business operates in a total political and social vacuum. So investors in Hangzhou-based Ant Financial and Tencent should carefully weigh the risk of a public and regulatory backlash due to the way these ecosystems intrude into people’s lives and how that could yet cost them.
After all, Hong Kong-listed Tencent lost $114 billion of its market value from its January peak to the end of April in the wake of Facebook’s Cambridge Analytica data-mining scandal which broke on March 16, before its share price rebounded slightly.
Public awareness of the privacy controversies issues being stirred up in the information age is undoubtedly growing. As Li Shufu, founder and chairman of carmaker Zhejiang Geely Holding Group, put it earlier this year, according to media group Sina.com, Tencent chairman Pony Ma “is watching us through WeChat every day because he can see whatever he wants.”
Academia is working at reengineering products to reveal what today’s largest tech behemoths know about us and influence the information we read. Researchers at the University of Toronto’s Citizen Lab published a report in 2016 that revealed how WeChat censors content and blocks users from accessing websites.
Regulators are beginning to react too. The People’s Bank of China publically admonished and fined Alipay in April for inadequate customer rights protection, misleading advertising and improper data protection.
“There is more to come here as China’s tech giants have had what could be called a ‘liberal approach’ to data privacy and usage,” said payments consultancy Kapron Asia in a report.
Disruption of incumbent banks, who find their ability to lend as retail deposits flow away into e-wallets, could make economic growth more volatile. One China banker likened the money flows to a “modern-day bank run”. It is an area regulators are sure to increasingly look at to protect financial stability.
To make them more competitive and reach more citizens, financial watchdogs are also looking at ways to upgrade incumbent banks.
Sopnendu Mohanty, chief fintech officer at the Monetary Authority of Singapore, said the regulator is seeking to answer the question: “How do we transform the existing infrastructure, small banks, micro banks sitting in small villages – how do we digitally transform them to create growth capital for inclusion for everyone?”
Ant Financial and Tencent are expanding abroad partly because they are reaching saturation point in China.
To eke out growth they are resorting to taking customers off each other. For example, WalMart said on March 27 it was switching to WeChat Pay from Alipay in its stores across western China.
Ant Financial’s market share has also fallen to about 54% in the fourth quarter of 2017, from 70% in 2014 amid the rise of WeChat Pay, according to consultancy Analysys.
Alipay’s rivalry with WeChat is weighing on the earnings of Alibaba, which currently receives royalties from Alipay’s parent company Ant Financial and is set to own a third of the firm under a restructuring plan awaiting regulatory sign off.
Given growing US resistance to Chinese acquisitions – encapsulated by US foreign investment watchdog Cfius’s rejection of Ant Financial’s $1.2 billion bid for Moneygram in January – the under-banked and lightly regulated economies of emerging Asia look increasingly attractive to China’s dynamic duo.
To date, the simplest way for Tencent and Ant Financial to expand in this direction has been via the mobile phones carried by the swelling ranks of Chinese holidaying in Southeast Asia.
Tourists draw money into their e-wallets in chunks before travelling overseas. Chinese international tourism spending hit $261 billion in 2016, more than triple the $73 billion recorded in 2011, and their spending overseas will reach $429 billion in 2021, according to a July 2017 report by equity analysts at Hong Kong broker CLSA.
As a result, local retailers who are looking to capture this Sino spending power are signing up to the Ant Financial and WeChat platforms.
One of Asia’s busiest transport hubs, Changi airport in Singapore, signed a deal to hook up its restaurants and shops with Alipay so that Chinese tourists waiting for their flights can more easily be enticed into outlets offering daily deals and payment options in renminbi.
Alipay said it saw five times as many in-store transactions overseas during the May Labour Day mini-break than at the same time last year. Average total spending per user also increased 59% to Rmb1,508 ($237) from last year’s Rmb946 ($149).
“Their strategy to increase adoption in Southeast Asia is similar to that in China, namely focusing on high-frequency use cases to gain consumers’ mind share,” Morgan Stanley in a blue paper lead-written by equity strategist Jonathan Garner.
WeChat cross-border payment, where users can pay in renminbi and merchants can settle in their local currency, as of February is available in 25 countries and regions including Hong Kong and Macau, 13 currencies and 250,000 merchants have joined the platform.
“WeChat users like to use WeChat Pay in retailers, restaurants and travelling, and Hong Kong is the perfect overseas shopping destination, closely followed by Thailand and Japan,” WeChat Pay’s Yin said during the Money20/20 fintech conference in Singapore earlier this year.
As their payment model spreads across different parts of Asia, Ant Financial and Tencent are embedding themselves in the lives of more people, as they already have in China.
In 2017 Ant Financial invested in a joint venture with a unit of Malaysian bank CIMB called Touch ‘n Go, which calls itself the de-facto standard for contactless smartcards in Malaysia.
“I am the king of five ringgit, because 97% of all e-wallet transactions below 5 ringgit happens with the Touch ‘n Go platform,” said Syahrunizam Samsudin, the chief executive officer of Touch ‘n Go.
Touch ‘n Go is using the data it gathers at retail outlets, parking metres, and on public transport systems to provide credit to riders on public transport.
“We know their transaction records, we understand what kind of user they are, we know how to get them into the habit of changing their lifestyle,” Samsudin said.
Alipay and WeChat’s expansion is taking place at a pivotal time in people’s use of e-commerce and is likely to shape the payments architecture of the future.
That infrastructure is building up. Internet connectivity is improving, as are the logistics with new roads, while the last mile to the customer is being bridged by ride-hailing startups, which are sometimes also affiliated with China’s fintech leaders, such as Tencent-backed Go-Jek in Indonesia.
At the same time, Asians are increasingly embracing the change.
The percentage of digitally active consumers in emerging Asia doubled in the three years to 2017, a 15-country study by management consultancy McKinsey shows, based on a sample of 17,000 city dwellers holding bank accounts.
But smartphone banking penetration is growing at an even faster pace than overall digital banking, jumping two- to four-fold in many emerging Asian markets over the same period. And that is opening the door to even more convenient forms of payment for a wider range of people and altogether bigger market.
“We have the ability to leapfrog to QR-based payments,” said Anthony Thomas, chief executive officer at Philippine fintech firm Mynt, which is 45% owned by Ant Financial, Alipay’s parent entity.
Thomas was referring to the generation of Quick Response codes (scannable barcodes that resemble square mazes) on a mobile phone app to make payments. This is a big technological breakthrough in a country where only 31.3% of adults have a transaction bank account, according to the data from the World Bank.
“The adoption of QR-based payments is something of course we’ve seen proliferate in countries like China – but we’re just at the beginning of that,” Thomas said.
If regulators can set the right balance between protecting the privacy rights of citizens and enabling continued financial innovation, then greater financial inclusion should boost economic growth.
Regulators need to carefully vet Alipay’s and Tencent’s acquisitions for anti-competitive behaviour such as absorbing nascent competitors, suppressing alternative payment technologies, or building unassailable market positions.
Since it first invested $1 billion in the Southeast Asian e-commercial firm, Alibaba has been integrating Lazada Group into its wider operations. In June 2017 it increased its stake to 83% and in March this year Alibaba invested another $2 billion in Lazada. Lazada’s payments platform hellopay started operating under the Alipay brand as of April 19.
“The acquisition has been extremely beneficial for us, because Alibaba has been running an e-commerce platform since 1999,” Inanc Balci, co-founder and chief executive of Lazada Philippines, said. “It will probably take many years for a competitor to catch up with us.”
And once ahead, consumer inertia could keep them ahead; once people have downloaded one app, spent time learning how to use it and uploading personal data, they are less likely to switch to another.
There are different ways to complete payments, such as biometric data and tap-and-go near field communications (NFC), as used by Apple Pay, and the Mondrain-esque QR code – but it’s not clear which will dominate global payments as yet.
Alipay and We Chat Pay are big advocates of QR codes in payments and it seems they are creating evangelists for the technology around Asia.
Mynt and Ant Financial launched a QR code payments option in April across the Philippines so Chinese tourists can pay local merchants using Alipay.
Vince Iswara, chief executive officer of Indonesian payments firm Dana, said Indonesia’s financial regulator is hungry for overseas case studies and greater knowledge of payment systems. Dana is a joint venture between Ant Financial and Indonesian media firm Emtek founded in 2017.
Iswara said he already shares information with the regulator on areas such as QR code payments and so believes that “they will come up with the right regulations.”
Regulators should bear in mind that NFC technology is superior to QR codes in terms of speed of the transaction and security. NFC chips, however, tend to be installed in more expensive phones and the technology costs more for the merchant to support. Whereas all a merchant needs to interact with a customers’ QR code generated on their mobile app is a smartphone and an internet connection.
The use of QR codes across Asia is undoubtedly growing.
In May last year, Malaysia established a national database of its citizens’ phone numbers and national identity numbers designed to help make the authorisation of payments using QR codes easier. In March, the country’s central bank also put borrowers’ repayment history online for lenders to peruse in order to speed the shift to a cashless society.
The proliferation of such personal data online amplifies the power of internet companies such as Alipay and WeChat, but with such power has to come responsibility for policing their platforms to make sure merchants use people’s data ethically.
After all, both Jack Ma and Pony Ma will have seen just how Mark Zuckerburg was pilloried over the way political consultancy Cambridge Analytica wrongly obtained Facebook users' data. It’s the kind of publicity nobody needs, with ramifications that continue to reveberate for the company and wider industry. A quarter of Facebook's US users are using the site less or have deleted their account in the wake of the scandal, an Ipsos/Reuters poll conducted in late April showed.
"Users are realising that their data/privacy is being undermined and we could see them look for alternative solutions from outside providers," said Youtap's Ferguson.
A warning for all tech titans.
This article has been updated to include comments from a veteran fundraiser for Chinese companies