Many Americans traveling to China will find something unusual: in restaurants, shops and markets, when they are ready to pay, people will take out mobile phones instead of credit cards. Nowadays, the Chinese people are shopping, saving money, and transferring money, and all these behaviors have no cash participation. Instead, they are using Alipay and Wechat.
In China, fund flows in the two digital ecosystems mentioned above that integrate social media, business, and banking, and are operated by two of the world’s most valuable companies. This contrasts with the United States, where, many companies are charging fees for payment process and handling payment. Western bankers and credit card company executives are facing the same anxiety: Without banks and credit card company, payment may be cheap and easy.
Payment Apps such as Alipay and WeChat have rapidly become omnipresent forces in China’s consumer economy, with 520 million and 1 billion monthly active users. According to the data of payments consultancy AIT Group, the two systems jointly traded $2.9 trillion in transactions in 2016, accounting for half of all consumer products sold in China. In contrast, U.S. consumers still rely on banks to complete most non-cash payments, including cheques, debit cards, credit cards and so on – all payment systems are tied to bank accounts.
If the payment apps capture the U.S. market with a similar proportion to China, it will steal $43 billion in revenue from commercial banks. This is only part of the fees charged by U.S. banks. They also collect fees through cash withdrawal services. If third parties pay for App to replace paper money – which is becoming more and more visible in China, such revenue will also be hit hard.
Alipay has signed agreements with a number of payment processors in the United States. Some taxi drivers in New York are offering passengers this payment option. Alipay said its expansion aims to help Chinese tourists, but few in the payments industry believe it will stop there.
In addition, Chinese consumers are saving more money in payment apps. In 2013, Alipay began to provide money market accounts. By last year, it had built the business into the world’s largest money market fund with a total value of about $243 billion. For the U.S.bankers, this is another pain point. They have always held customer savings and used the funds to make external loans to make a profit. If U.S. consumers follow Chinese people, banks will have to find other (and possibly more expensive) sources of funding.
In short, even in China, money is not from Alibaba or Tencent; it must be loaded from a bank account. Although the threat is real, U.S. bankers have enough time and choice to implement it. Banks need to try to integrate their payment systems into social media platforms and e-commerce platforms instead of having technology companies do all the work and get all the rewards.