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Analysys Mason Document Apple and Samsung’s mobile payment success against Internet players in China depends on regulatory change April 2016 Enrique Velasco-Castillo Apple launched its Apple Pay mobile payment service in mainland China in February 2016, followed a few weeks later by the launch of Samsung Pay. This article explores Apple and Samsung’s potential for success, given the growing dominance of ChinaUnion Pay (CUP), and how changes in regulation may enable operators in the region to tackle changes in China’s mobile payments competitive landscape by adopting a broader array of digital services to increase growth in mobile commerce.1 Apple faces strong competition from entrenched local players like Alibaba and Tencent in China Mainland China is one of the few markets in the world where mobile payments replace, rather than complement, many traditional financial services, and for this reason the Chinese mobile payments market has reached critical mass in terms of user adoption and payments acceptance. The market is dominated by over-the-top (OTT) and e-commerce players, such as Alibaba (which operates Alipay through its subsidiary Ant Financial Services) and Tencent (WeChat Pay and QQ Wallet). WeChat’s success has been based on first driving user engagement using messaging, stickers and other social features and then increasing users’ adoption of payments and ecommerce facilities, such as person-to-person (P2P), bill or in- store payments. Alipay dominates because of Alibaba’s position as China’s largest ecommerce player, as well as its attractive features, such as interest-bearing deposits and free transfers to any bank account. For these companies, payments complement a wider range of value-added features that keep users highly engaged with their platforms. This strategy has proven successful for Tencent: WeChat reached the milestone of 650 million monthly active users (MAUs) in September 2015, with over 100 million bank card details tied to these accounts worldwide. Similarly, 68% of Alipay’s more than 400 million active users primarily accessed the service on mobile devices as of April 2015. We expect China to reach over 370 million mobile money active users in 2016 (see Figure 1). Our research also suggests that nearly 57% of subscribers of the most popular platforms are active users (that is, they have used the platform in the last 90-day period). Apple and Samsung’s payment initiatives have yet to gain significant adoption since their launches Apple and Samsung’s mobile payment solutions complement their digital service ecosystems, helping them to differentiate themselves at a time when smartphone sales in China are at an all-time high. Smartphone sales are up 17.7% year-on-year according to China’s Ministry of Industry and Information Technology (MIIT), with 457 million units sold in 2015. China is a key market for Apple, representing 24% of its revenue in 2015, but for 1 For an in-depth discussion of mobile money trends in emerging Asia–Pacific, see Analysys Mason’s forecast report Mobile money in emerging Asia–Pacific: trends and forecasts 2015–2020. © Analysys Mason Limited 2016 April 2016 Apple and Samsung’s mobile payment success against Internet players in China depends on regulatory change | 2 Apple Pay to gain any significant adoption it will have to provide stronger differentiators than the simplicity of its contactless in-store payments experience. This is because contactless point-of-sale terminal availability in the country is still low, whereas Alipay and WePay’s QR code-based solutions enjoy wide acceptance. The real opportunity for Apple and Samsung (and perhaps mobile operators) is in customer-not-present (CNP) transactions, because over 50% of ecommerce in China occurs on mobile devices (Alibaba accounted for 85% of mobile commerce transactions in 1Q 2015). Moreover, China is the only market where Google does not compete directly with mobile payment providers, having ceased most operations in the country in 2010. Figure 1: Advanced mobile wallet (AMW) 2 active users, China, 2010–2020 600 500 400 300 Users (million) 200 100 0 2015 2011 2012 2013 2014 2016 2017 2018 2019 2020 2010 Changes in regulation could challenge online players’ dominance and represent an opportunity for operators Apple Pay has initially been made available to customers of the largest state-owned commercial banks – 19 banks are listed as Apple Pay partners in China. One of these is the Industrial and Commercial Bank of China, which is the largest bank in the world by assets and market capitalisation, with 465 million personal customers at the end of 2014. Behind these high-profile bank partnerships lies CUP, the country’s sole bank card network and the rails upon which all card payments in the country run. CUP is backed by China’s central bank, its members are mostly state-owned banks and it has become the world’s third-largest payment network by transactions value, after Visa and MasterCard. Changes in regulation are expected as China’s electronic payments market matures, and these could strongly affect Alibaba and Tencent’s dominance. The People’s Bank of China issued a draft proposal to regulate online financial services in June 2015. These new rules would mandate interoperability between payment platforms; force payments over CNY200 000 (approximately USD300) to go through the traditional banking system, rather than online P2P platforms, and would strengthen know-your-customer (KYC) requirements. 2 An AMW is an app or service that is associated with one or more accounts or cards at one or more financial institutions. An AMW may also include other advanced functionality, such as near-field communication (NFC) contactless payment capabilities, loyalty cards and vouchers. Examples of AMWs include Apple Pay and Google Wallet. © Analysys Mason Limited 2016 April 2016 Apple and Samsung’s mobile payment success against Internet players in China depends on regulatory change | 3 These regulations could represent an opportunity for operators and companies like Apple or Samsung, which operate their payments systems on top of CUP’s payment processing network, in the China and Asia–Pacific region. They could use this opportunity to regain a role in the mobile payments value chain by partnering with financial institutions and device manufacturers to offer interoperable, pan-Asian ecommerce and payment enablement services, thus captialising on the fast adoption of mobile commerce in the region. CUP, in particular, has dramatically expanded its reach through partnerships with banks and merchants in much of Asia, and is expected to strengthen relationships with players in other regions. However, until regulatory and competitive pressures actually challenge Internet players’ dominance, we expect operators in China to accrue less than 11% of revenue from mobile money, because their mobile payments services will continue to lose market share to Alibaba and Tencent. © Analysys Mason Limited 2016 April 2016 .
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