Tech: Digital wallets a growing threat to traditional banks
DURING recent trips across the US and the UK, I conducted a small experiment. Though I still carried some cash and credit cards, I decided that I would not reach out for my wallet unless I absolutely had to. Only digital payments. I am a long-time user of Apple Pay, which is connected to all my credit cards as well as my bank accounts. I also regularly use PayPal’s Venmo and Square’s Cash App.
From getting an Uber in Detroit to get downtown to catching the Heathrow Express to Paddington station in London to paying for accommodations in the US and breakfast at Starbucks outlets in several cities, I successfully avoided whipping out a physical credit card or cash and paid for everything digitally. Across North America, over the past several weeks, I have had trouble getting into museums and galleries that are not digital-payment-friendly. At a flea market in Detroit where Apple Pay did not work and after I had finally resigned myself to paying cash, suddenly access to Square’s Cash App came in handy.
To be sure, governments around the world are increasingly focused on digitising payments to create greater efficiency in the domestic economies, reduce crime and boost tax revenues. Mobile payments and digital wallets are not only convenient but helping enhance the payment experience as well as offer financial inclusion. The digital payment boom has been spurred by the growth of e-commerce and by low-cost acceptance. Contactless, mobile, QR, or quick response, code-based payments are powerful catalysts for digitising payments globally. The key enablers for digital payments in Asia include the growing penetration of smartphones as well as the widespread availability of mobile internet, near field communication (NFC) enabled handsets and biometrics — such as facial or fingerprint recognition — technology. Regulations in China and other emerging markets, particularly in India, Japan and South Korea, have also helped boost the adoption of digital payments.
China leads the world in QR code payments, with Tencent Holdings’ WeChat Pay and Alibaba Group Holding-affiliated Ant Financial’s Alipay being the dominant players. QR codes contain simple information such as website URLs, payment credentials and product identity that can be read by an image-processing device such as a smartphone. Indeed, QR codes have helped turn smartphones into low-cost payment acceptance devices. Created in the late 1980s, square-shaped QR codes were initially used by Japanese carmakers to track auto parts in the manufacturing supply chain. QR code payments are done through a code presented by a merchant that a consumer can scan with his smartphone to complete the transaction.
Alipay and WeChat Pay are helping propel China in the race to become the world’s first truly cashless society. Mobile payments totalled roughly US$15 trillion last year, or more than 120% of China’s US$11.9 trillion gross domestic product. AliPay and WeChat Pay processed a combined US$4 trillion worth of transactions (online and QR code-based) last year, or more than 10 times that of PayPal’s and almost as much as Mastercard processes globally every year. Alipay now has 870 million active users and 110 million partners in more than 15 countries, including Singapore and Malaysia. WeChat Pay has more than 800 million active users. With annual growth of around 40%, Chinese digital payment platforms could be a global financial services force to be reckoned with.
Digital wallets have been gaining momentum in the developed world as well, propelled by the growth of Cash App, Apple Pay and Paypal’s Venmo, notes Bhavana Yarasuri, analyst at ARK Invest in New York. Cash App, which like Venmo is used for payments between friends, had seven million customers on its platform at end-2017, and Venmo, 18 million.
Yarasuri argues that digital wallets are becoming the new automated teller machines. ATMs first emerged in the 1960s as an alternative to bank branches, offering customers easy access to financial services and helping banks lower infrastructure costs. Their role in retail banking has evolved over the years to include enabling customers to make deposits of both cheques and cash, and even pay taxes or gain access to initial public offerings. After years of heady growth, ATM growth around the world has begun to flatline, averaging 47 per 100,000 adults globally, with the US at roughly 225 and China now stabilising at just under 100.
Bypassing traditional banks
Digital wallets are increasingly empowering consumers to bypass traditional bank branch networks and ATMs, particularly in emerging markets such as China. Alipay and WeChat Pay allow access to services that span payments, investments, lending and insurance. “Digital wallets are taking share today and, eventually, could dominate customer-facing banking ecosystems globally,” says Yarasuri. M-Pesa, a mobile phone-based money transfer, financing and microfinancing service popular in Africa, and Alipay are already providing access to a wide range of financial services to customers who are difficult to reach, she notes. Even in the US, which has a well-established infrastructure, digital wallets are taking off, making ATMs obsolete.
ARK Invest believes digital wallets could become the consumer’s bank branch, providing cross-selling opportunities for both banks and retailers. PayPal’s peer-to-peer digital wallet Venmo had more users than those institutions had depositors, trailing only Bank of America, JPMorgan Chase and Wells Fargo. Venmo provides cash-like transaction functionality through a smartphone interface. By the same measure, another digital wallet, Square’s Cash App, is also in the top 10 relative to traditional US banks. Engaging customers through peer-to-peer transactions, digital wallets such as Venmo and Cash App are just the tip of the iceberg for mobile-first financial institutions that are likely to disintermediate traditional banks, Yarasuri notes. Cash App already offers direct deposit of pay cheques and credit-card-style loyalty points.
Alipay and WeChat Pay, long seen as just China-based payment giants, are slowly spreading their tentacles around the world, starting with Asia. China is now the 800-pound gorilla of outbound tourism. A total of 131 million Chinese tourists travelled overseas last year. Spending by Chinese tourists abroad totalled US$261 billion in 2016. Most of the trips were to Hong Kong, Macau, Thailand, Japan, Vietnam, Singapore, Malaysia, Australia and the US. Over 65% of Chinese tourists used mobile payments abroad. As they travel abroad, the Chinese would demand the same convenience of paying digitally. That means tourism markets that want to attract Chinese tourists must have the infrastructure to readily accept Alipay and WeChat Pay just as they have built the infrastructure to accept Visa, Mastercard or American Express or Japan’s JCB card.
One Asian market WeChat Pay and Alipay are unlikely to dominate anytime soon is South Korea, where indigenous third-party digital payment services such as KakaoPay, Payco, Samsung Pay as well as Toss (which has PayPal and Singapore’s GIC as investors) have the lion’s share and a huge head start.
Mobile payments increased to US$130 billion, or 9% of GDP, from just 1% of South Korea’s GDP in 2017. According to Starbucks Korea, less than 5% of the chain’s sales are paid in cash these days. Most people pay for their Latte or Frappuccino by using a smartphone app, though some still use physical credit cards.
The next logical step for South Korean digital payment providers is a full-fledged banking licence. On Oct 16, Seoul revised the ownership law for internet-only banks, paving the way for firms such as Kakao and Naver to own a full-fledged commercial bank from next January.
Japan has been a little slower than China or South Korea, though its top messaging app, Line, is making a big push into mobile payments in the world’s third largest economy with its own Line Pay. It is also expanding into wealth management, through a partnership with Nomura, and insurance, where it has an investment in start-up JustInCase and a partnership with Sompo, the country’s No 2 property insurer. In the wake of demonetisation in India, PaytM, which has Ant and Alibaba as shareholders, has grown to be a big player.
Regulating new players
In Southeast Asia, ride-hailing firms such as Grab and Go-Jek are starting to emerge as leading mobile payment players and WeChat-like “super-apps”, or the region’s equivalent of a platform that combines China ride-hailing giant Didi, online food delivery-to-ticketing services giant Meituan Dianping and Alipay, notes Linda Sun-Mattison, an analyst for Sanford C Bernstein in Hong Kong. Go-Jek acquired three fintech start-ups last year and more than 60% of transactions in Go-Jek’s ecosystem are now processed through Go-Pay. Last month, Go-Jek partnered with three peer-to-peer lending start-ups to expand into credit. Grab has also announced several partnerships through its Grab financial arm to offer financial services. But analysts believe Grab’s and Go-Jek’s payment services might end up as affiliates of Alipay and WeChat Pay. SoftBank is the largest shareholder of Grab as well as Alibaba. WeChat’s parent Tencent is an investor in Go-Jek. Alipay and GrabPay are on the same technology stack. SoftBank is likely to ensure that Alipay’s China users will be able to use GrabPay when they visit Southeast Asia and Tencent will make sure that WeChat Pay users have access to Go-Pay.
Aware of the growing tentacles of e-wallet operators and their potential to disrupt banks, Chinese regulators are trying to rein them in. Beijing fined WeChat Pay and Alipay for breaking foreign exchange rules earlier this year. Regulators are reportedly set to announce new rules forcing WeChat Pay and Alipay to obtain banking licences and adhere to minimum capital requirements, similar to banks.
“The opening-up of the payments market creates a potentially existential challenge for banks — and huge opportunities for new non-bank entrants,” Morgan Stanley said in a report last month. “It is not just about the money that can be made from processing payments,” the report argued. “It is also about payments as a gateway to deposits and other financial products, transferring value away from banks and towards non-banks.” Morgan Stanley expects the big winners in Southeast Asia to be independent payment services such as Indonesia’s Go-Pay, Singapore’s GrabPay and Thailand’s telco-linked TruePay, followed by banks. Yet, the biggest winner is likely to be consumers such as you and me, who no longer have to rely on cash, credit cards or cheque books.