Ant Financial, Alibaba’s fintech affiliate, has formed a partnership with six mobile wallet operators in Europe[i], enabling fast and efficient payment via smartphones. Ant Financial, we believe, is firing the starting gun in its initial assault on western banks through its disruption of the payment systems on the banks’ home turf. The six will work towards adopting a single standard based on Alipay’s QR code technology, enabling easy payments via smartphones.
The six European wallet operators will enable full interoperability for their 5 million customers and 190,000 merchants, another indicator that China has been leading the way on early fintech adoption, making inroads into the West faster than many realise.
Ant Financial is firing the starting gun in its initial assault on western banks through its disruption of the payment systems on the banks’ home turf.
Their customers will be able to spend money across each other’s merchant bases. Added to that, when any of Alipay’s over 1 billion customers travel to these countries, their payments will be accepted too. Over 14 million Chinese travellers visited Europe in 2018, up 14.4% on the previous year.
QR (Quick Response) codes have been around since 1994. They are effectively two-dimensional bar codes, with fast readability and greater informational capacity. While they are used in the West, they are near-ubiquitous in China, and increasingly common across Asia for mobile payments in stores.
Crucial to the QR code’s success is that it only needs an entry level smartphone. This, we believe, is one of the reasons why Alipay and Tencent chose it as the interface for their payment systems. It enables payments, online and in-store, to be initiated without the need for a credit card scheme to be involved, and to take a cut.
Payment systems are two-sided markets, so as well as consumer acceptance, merchants too need to buy in. Alipay reduced the barrier to merchants – no more equipment is needed than, again, a smartphone. Alipay typically charges a fee of less than 1% of a transaction’s value, much lower than the typical of 2-3% charged by the merchant’s acquiring bank via the global card schemes, adding further to the appeal.
We believe that traditional banks and the card schemes have been sheltering under the same competitive barriers that the pre-digital, now anachronistic, payment methodologies afforded them. They have been shielding each other, allowing them to maintain the excessive profits they make from payments, and to perpetuate the status quo.
Payments, in effect, are highly secure messages. While this may be overly-simplistic given the need for security and integrity in the financial system, we think that the analogy could be close enough such that payments, like email, could eventually be cost-free. Paytm in India is already demonstrating this. The quid pro quo for the new payment systems operators could be the value they harness from the data they gather, albeit data protection regulation might limit the scope for this in some markets. They could instead benefit from broader financial services relationships, much like today’s banks which use free checking accounts as loss-leaders for mortgages, savings accounts, overdrafts and other loans.
What is clear is that the competitive barriers that maintain the stranglehold of Visa, Mastercard and the banks over consumer payments are breaking down. We’ve been expecting Alibaba and Tencent to lead the assault with their highly successful domestic payment systems, giving developed market payment schemes a run for their money – pun intended!
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Trinetra Investment Management LLP and are subject to revision over time. Trinetra is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
[i] The six operators are: Bluecode (Austria-based, but also in Germany); ePassi (Finland-based, but also in Sweden, Spain and Poland); Momo Pocket (Spain); Pagaqui (Portugal); Pivo (Finland); and Vipps (Norway).
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