China's group payment platform a threat to traditional acquiring

Pinduoduo's controversial IPO was seemingly a world removed from western merchant acquirers, but it's yet another example of how social payments can upend conventional relationships between merchants, shopping and payment processing.

For merchant acquirers already facing tightening margins and fierce competition from fintechs, the threat is not as much from Chinese social e-commerce upstart Pinduoduo directly as it is about how Pinduoduo has grown its business—using pieces of social networking, discounts and digital payments that already exist in the U.S. and Europe.

The Shanghai-based Pinduoduo, which raised more than $1.6 billion in its IPO, undercuts rivals such as Alibaba through "group buying." Pinduoduo, which means "piece together more and more," invites users to form a team to reduce prices through social networks such as WeChat, and ties that to coupons and other marketing.

Qilai Shen/Bloomberg

The three-year-old Pinduoduo has become famous in a short time in China because of its gamified process, and the apparent success of its primary mission to cut prices—with discounts as high as 90%. It sells a huge range of products, such as electronic equipment, household items, groceries, clothing and consumer goods.

In the days following the company's July 26 IPO, there's been tendency to dismiss Pinduoduo, given the tendency of Alibaba challengers to burn out in China after a fast start. There's also been controversy over "fake" goods sold on Pinduoduo's platform.

But there's more to Pinduoduo's concept of team payments, which can be adopted by fast-moving fintechs in the U.S. as another way to take share from traditional merchant acquirers.

"This is like Walmart or Amazon promoting communal earned quantity discounts through Venmo or Facebook Messenger," said Richard Crone, a payments consultant. "It is a leading indicator for legacy payment platforms that don't support social request capabilities."

PayPal's Venmo first became popular as a social P2P app used by young people. Despite its balance sheet struggles, Venmo has since become a major part of PayPal's expansion strategy because of its power to serve as a communication tool among a group of buyers and sellers.

Retailers can use Venmo for marketing, and apps such as Uber can use Venmo as a valuable source of data about their customers—informing future sales, discounts and other services. While other P2P apps, most notably the bank-driven Zelle, have avoided combining their services with social networking, the use of social tools can provide an insight into shopping habits.

"The power of the platform is broadcasting purchase intent not only to friends but directly to the supplier, in this case Pinduoduo, the actual retailer," Crone said.

There are companies in the U.S. that include some elements of Pinduoduo's model. Grubhub recently acquired mobile payment company LevelUp, which adds LevelUp's incentive marketing and gamified rewards to Grubhub's restaurant aggregation. And PayPal has tied its customer service and P2P payments to Facebook Messenger, another combination of P2P, social media and a potential merchant network.

Team payments are also an option on Wish.com, a San Francisco-based e-commerce site that gamifies discounts. The concept's challenge in western markets is the existing access to discounts from other, more traditional sources, so team payments would require a change in consumer and merchant behavior that's not required in China.

"Harnessing the power of social media to create an aggregated purchase is a great way to drive efficiencies into the e-commerce market and their focus on lower cost, unbranded merchandise positions them in a less competitive niche when compared with TMall and Aliexpress," said Thad Peterson, a senior analyst at Aite Group. "As with Alipay and WeChat Pay, the open question is whether or not this is a business that can thrive in China but doesn’t necessarily translate into other markets."