Mobile Payment System in China

People use Alipay or WeChat Pay to purchase goods, order coffee and food delivery, pay electricity bills, book taxis, buy air tickets, make donations, transfer money, and even invest in financial products. Almost all commercial outlets in China, including streetside stores, widely utilize mobile payment services’ Quick Response (QR) codes to conduct business.

The New Payment System 

While America spent the past decade upgrading its bank-based magnetic striped cards with chips, China experienced a retail payment revolution. Leapfrogging the card-based system, two new payment systems dominate person-to-person, retail, and many business transactions. China’s new system is built on digital wallets and QR codes (two-dimensional bar codes). It runs through their big tech firms: Alipay running through Alibaba (China’s version of Amazon) and WeChat Pay running through Tencent (China’s version of Facebook). China’s system largely disintermediates banks from payment transactions, robbing banks of an essential and long-standing source of revenue. It creates an alternative payment ecosystem with different incentives between merchants, consumers, and payment system providers. It challenges the long-standing placement of payments on the side of banking as opposed to commerce. This system creates new incentives to realign existing business models and relationships between merchants, banks, and technology providers. China’s new payment system exploded in under a decade, growing from inception to dominance. With over a billion users on each platform, the power of network incentives has been unleashed. The new payment system has replaced cards and cash at registers, how families give gifts, and even how beggars ask for money, with QR codes returning tin cups.

In retrospect, 2005 might be the first year of China’s mobile payment industry, with Alipay coming online at the end of 2004. Since then, mobile payments have grown at a truly astonishing pace. Several events played essential roles in this development. First, the release of Apple’s first iPhone in January 2007 marked the beginning of the new era of smartphones, making it possible to use mobile payment services anywhere, at any time. Second, the success of Ant Financial’s money market fund Yu’E Bao significantly boosted awareness of and enthusiasm for the financial technology (fintech) industry, including mobile payment. Third, the distribution of red (cash) envelopes on WeChat Pay during the Chinese New Year holiday in 2014 became almost viral and attracted hundreds of millions of new users. And finally, the adoption of the QR code for mobile payment made it possible for any formal and informal business to use mobile payment services by simply printing out the code on a piece of paper. In recent years, China’s mobile payment business has rapidly expanded in terms of active users, the number of transactions, and transaction values. The number of active users of Alipay increased from a little over 100 million in 2013 to 900 million in 2018, and that of WeChat Pay grew from about 350 million to 1.1 billion.

The success of China’s mobile payment business could be attributed to three factors: a supply shortage of payment services, a friendly regulatory environment, and recent technological developments. With broad access, low cost, and reliable transactions, people’s daily lives, and commercial business models have changed significantly. The empirical investigation also provides convincing evidence that mobile payment promotes household entrepreneurship in China and enhances households’ ability to smooth risks when experiencing adverse idiosyncratic income growth shocks. Nevertheless, although revolutionary financial inclusion has been created, China’s new mobile payment business needs to evolve further to address outstanding issues, including consumer protection, data inequality, and regulatory arbitrage.

How Does It Work?

The providers do NOT charge users for mobile transactions except for large sums.

Chinese digital payment systems use Quick Response (QR) codes to enable transactions from one party to another. Depending on the merchant or business, QR codes can work in two ways:

1. The person making the payment has to scan the merchant’s QR code. It is often printed and placed on the cash register. First, the payment app recognizes the vendor using the app and the smartphone’s camera capability. Then, the buyer can input the amount and confirm the transaction to complete the payment. This method is popular with smaller businesses.
2. In the second scenario, the roles are switched. The merchant scans the buyer’s QR code which will be displayed on the smartphone. A unique QR code is generated for each user once they sign up for the mobile payment platform. When the QR scanner/reader recognizes the buyer, the merchant enters the amount to be deducted from the buyer’s account. This account links to the app via their bank card. The second method is more prevalent among larger businesses that can afford to invest in a QR scanner.

The best thing about QR code-enabled payments is that they can work on ANY smartphone. This is the opposite of Near Field Communication (NFC). This requires NFC technology-enabled phones. For example, Apple Pay uses this technology. On the other hand, QR payments require an internet connection.

Photo: Kachka/Shutterstock

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