Banking operations around the world have been under extreme pressure over the past few years, but few functions have evolved as quickly and drastically as the payments sector. Internet payments, mobile payments, new market entrants, expanded regulation, real-time clearance and settlement and the impact of data analytics have all combined to create massive and irreversible change in the sector.
Amid all of this disruptive change, one development in particular – while somewhat slower to play out – will change the very dynamics of the sector: the shift East. The facts are undeniable. In 2010 alone, Asia's share of global payment transaction volumes on general purchasing cards increased from 26 percent to 31 percent. By 2015, Asia's purchasing volume is expected to be double that of the US.
From emerging to leading
This massive shift is largely driven by changes underway in China. Population growth, while moderated, continues; more people equates to more transactions. China is also experiencing increasing levels of affluence and a growing middle class, which are leading to higher levels of consumerism and greater household liquidity. Rapid urbanization is also acting as a catalyst for transaction volumes as more people move into cities and start paying for everything from rent to transportation.
Mobile technology is having a particular impact on China's payments ecosystem. Its widespread adoption has led to increasing numbers of transactions taking place on the platform, from the purchase of air tickets to more modest micro-payment activities. As more citizens start to use mobile apps to consume services and products in 'bite-sized' pieces (one renminbi, for example, can buy a farmer access to local weather forecasts or a thermometer from online auction house Alibaba.com), pressure is placed on transaction processors to maintain the level of service over these volumes while also trying to run at a profit.
Indeed, the Chinese public has proven to be remarkably open to innovation, driven not only by the adoption of mobile technologies, but also by a desire for more convenience and accessibility. This has led forward-thinking companies such as TenPay and China Rewards to explore opportunities to monetize this market through the integration of online shopping channels and loyalty programs. Early evidence shows that this combination of technology, value proposition and market is proving to be a recipe for success in China.
Policy drives change
China's government has also played a key role in driving the growth of payment transactions in Asia. For example, China's leadership has prioritized payments, outsourcing and cloud computing in the recent 12th Five-Year Plan, thereby encouraging the development of the payments ecosystem. China's leadership recognizes that a functional, efficient and secure payments system is key to maintaining growth. Indeed, as the Governor of the People's Bank of China, Zhou Xiaochuan, noted, "The extensive development of China's payment system in recent years, and its safe and efficient operation, has effectively supported and promoted economic and social development for the country."
The Chinese government has recently granted almost 200 licenses to domestic non- bank third-party payment service providers to expand the payments ecosystem effectively and promote the healthy development of the online payments industry. The government has also taken steps to ensure that license holders are robust enough to survive: all new license holders are required to have registered capital of at least US$25 million in order to receive a nationwide business license, and need to have been making profits for two successive years. It is predicted that this approach will bring greater choice and competition to the domestic payments market and, simultaneously, protect the general public.
There has also been heavy investment in developing the underlying infrastructure for the industry. More than US$154 billion is now being spent to improve processing capabilities (particularly in areas such as cloud-based data centers), and telecom companies are rapidly improving their capabilities in mobile payments and other areas.
Turning innovation into value
China's payments market is still largely dominated by four key players, AliPay, TenPay, UnionPay and 99Bill, which collectively hold an estimated 80 percent of the domestic payments market. But while these big players effectively control the 'volume market' by offering convenient and innovative consumer- focused solutions, there is still tremendous opportunity for new market entrants.
Many of these new entrants have focused on establishing unique market niches in which they can develop an end-to-end value proposition. SmartPay, for example, is focused on city- wide bill payments and lottery; QQ is rapidly establishing itself in the gaming sector; and China PayPal is competing with Alipay in the consumer online auction and virtual market segments.
Other small third-party players seem to be struggling to articulate their business value proposition. In many cases, these parties not only hold licenses in the Chinese market, but valuable technology innovations and applications as well. However, many of them are somewhat less focused on dominating the market, since they recognize that even small levels of market share of a population of more than 1.3 billion can bring significant revenue. For these players, great opportunities still exist in delivering leading-edge solutions to demanding consumers. Handpay, for example, is partnering with banks to strengthen mobile commerce platforms by delivering enhanced payment security through smartcard overlays.
The opportunity for foreign players
The real question today is not whether China will modernize its payments environment, but rather how local and global players can take advantage of the opportunities that are now emerging. True, licenses are currently restricted to domestic service providers, but there is still significant opportunity for foreign organizations seeking to gain a foothold in the Asian marketplace. By partnering with either existing or new domestic players, for example, foreign companies can bring their ideas and best practices into the China market and help to stimulate continued innovation while simultaneously developing their brand, capabilities and experience within the new market.
And while China's payments market will transform itself with or without the participation of foreign players, it does provide an environment where the best operators in the world can deliver leading-edge services to the largest market on Earth, while simultaneously helping the rest of the industry outside China to develop their own business propositions.
The bottom line is that the agenda of the global payments industry is now largely being driven by the East in general and China in particular. If foreign players do not react quickly to this tectonic shift, they may find themselves struggling to compete in this bold new world.
- Egidio Zarrella, Clients and innovation Partner, KPMG China
- David Sayer, Global Head of Banking, KPMG in the UK