5 ways the U.S. must catch up to China in digital payments

March 4, 2019 10:10 AM

China dwarfs the U.S. market in e-commerce adoption and is likely to be soon giving lessons to internet executive from U.S. and Western countries.

According to the U.S. Department of Commerce, e-commerce represented 9.8 percent of total retail sales in the third quarter of 2018. China’s e-commerce represented 16 percent of total retail in 2016, according to the Goldman Sachs’ China E-Commerce Shopping Re-Imagined Report – a rate the U.S. is unlikely to beat anytime soon given China’s digital commerce growth.

In its 10th year promoting an unofficial Chinese holiday celebrating singlehood, Alibaba’s online sales hit a record 213.5 billion Yuan (about US$30.8 billion). In comparison, Americans spent US$ 11.62 billion across ALL online merchants on 2017’s Black Friday (US$ 5.03 billion) and Cyber Monday (US$ 6.59 billion) combined, according to Adobe.

On the mobile payment front, China's Alipay exceeded 1 billion users with more than 700 million users in China alone, according to a report from the China Daily in January 2019. Additionally, more than 40 million small shops and sellers accept Alipay in China. The WeChat messaging app has more than 1 billion active users and Forbes reported that iResearch Group estimates 80 percent of WeChat users have used the WeChat Pay payment service. In contrast, U.S.-based PayPal reported just having 267 million active accounts across the globe at the end of the fourth quarter of 2018.

The e-commerce share of total Chinese retail sales is expected to grow by more than 50 percent between 2016 and 2020, reaching 25 percent of the total market. Based on the Goldman Sachs’ China E-Commerce Shopping Re-Imagined Report forecast, there are several factors driving this growth: More people shopping online, fulfillment centers are shortening delivery times, higher online spend and increased coverage of underpenetrated segments.

In 2016 China had 467 million online shoppers of whom three quarters were millennials. By 2020, Goldman Sachs predicts that 200 million additional consumers will grow the ranks of online shoppers. Seventy one percent of these new shoppers will come from lower tier cities.

Alibaba, via the Cainiao Alliance, has expanded the number of its same/next delivery cities with the build-out of new fulfillment centers. Meanwhile the government has set a 90 percent express delivery network coverage target for rural markets by 2020. All of these developments make ordering goods online more attractive since delivery is much quicker.

Given that the vast majority (75 percent) of Chinese online shoppers are millennials who tend to be digital natives, it should be no surprise that the mobile phone is the preferred channel for e-commerce. Over half (52 percent) of Chinese online shoppers use their mobile phone on a weekly basis to make purchases, compared to just 14 percent of global online shoppers, according to PwC’s Total Retail 2017 survey of global consumers. Over a third (38 percent) of global users have never used a mobile phone to make an online purchase compared to just 7 percent of Chinese online shoppers.

According to the 2018 Global Mobile Market Report from Newzoo, a global provider of games and e-sports analytics, China had over 782 million smartphone users, which represented over 55 percent population penetration. As a comparative reference, India had almost 375 million smartphone users and a penetration level of 27.7 percent, and the U.S. had over 251 million smartphone users with a 77 percent penetration rate. The U.K. has the highest rate of smartphone penetration, according to the study, at 82.2 percent, followed by the Netherlands at 79.3 percent.

E-wallets are the dominant payment form for e-commerce in China, with a market share of more than twice that of payment cards.

According PPRO Group’s 2018 Asia Pacific Payments and E-Commerce Report, the share of transactions conducted by payment cards for online purchases was 23 percent compared to e-wallets such as Alipay, which was 49 percent. In addition, when examining the card scheme market share, PPRO’s research found that 97 percent of volume was covered by local network schemes while Visa made up 2 percent and Mastercard had 1 percent of the volume. This is an important issue for foreign merchants when considering selling to Chinese consumers since, unlike Visa and Mastercard, not all local schemes allow cross-border commerce.

“Selling in China or in other global regions requires attention to detail in the types of payments merchants offer. Local payment methods vary significantly from one country to the next," said Steve Villegas, vice president of partner management at PPRO Group. "Often, these are very different even to the payment preferences of close neighbors. In the Philippines, for instance, 42 percent of consumers pay for online purchases with bank-transfers. In nearby South Korea, it’s just 11 percent. U.S.-based online merchants must be diligent in offering payment methods that are preferred to the masses in that region; in China, this means offering Alipay, Union Pay or WeChat Pay."

More than four in ten online Chinese shoppers made a cross-border e-commerce purchase last year with merchants based in the U.S., Australia and Japan being the most preferred. According PPRO Group’s 2018 Asia Pacific Payments and E-Commerce Report 42 percent of Chinese online shoppers purchased goods and services from a merchant based in another country. In comparison, online shoppers in city-states such as Hong Kong and Singapore had higher cross-border shopping rates at 75 percent and 73 percent, respectively. Meanwhile, Australia also had a high cross-border shopping rate at 61 percent of online shoppers. However, Japan recorded a very low rate of only 6 percent.

One key factor that often influences whether or not online shoppers will make e-commerce purchases at a foreign merchant is whether or not they can use a preferred local payment method (LPM). In the case of Chinese consumers this would likely be an e-wallet such as Alipay.

The ability to use an LPM becomes an even more critical issue for consumers who don’t have a credit or debit card that can be used in cross-border commerce as it stops any e-commerce from taking place. It’s also where partnering with a firm that can enable local payments for a foreign merchant can be a potential game changer in driving foreign sales.

Third party mobile payment providers such as Alibaba’s Alipay and Tencent Holding’s WeChat Pay have significantly expanded beyond their original e-commerce and digital P2P payment roots to include a growing share portion of in-store physical sales and bill payments.

“As the middle class of the country grows and spending power rises, consumers will be looking for the fastest and most convenient way to make purchases. Mobile payments offer this ease, evidenced by the fact that WeChat Pay had 980 million users in China and in 2017 was used by Chinese consumers at a rate of one million transactions per minute,” commented Villegas.

Over 120 trillion Yuan (about US$ 18 trillion) in third-party mobile payment volume was transacted in 2017, up from 58.8 trillion Yuan (about US$ 8.8 trillion) in 2016. The data is from the iResearch Global Group Third Party Mobile payment report using government data.

Both Alipay and WeChat Pay have aggressively added brick-and-mortar merchants to accept their e-wallets in both China and overseas. Earlier this month Alipay expanded its global acceptance to include 7,000 Walgreens stores in the U.S.