Digital Payments in China 2016 July 20Th, 2016 - 17:00 – 18:00 Beijing Standard Time

Webinar: Digital Payments in China 2016 July 20th, 2016 - 17:00 – 18:00 Beijing Standard Time

The webinar will start in a few minutes.

For more information and to sign-up to our monthly newsletter, please visit www.kapronasia.com or send us an email: [email protected]. Twitter: @chinafintech Digital Payments in China 2016

Moderated by Zennon Kapron Presented by Denis Suslov July 20th, 2016 Digital Payment volume continues to grow with mobile exceeding online for the first time in 2015

PSP transactions, RMB trillion 45

0 2011 2012 2013 2014 2015 2016e 2017e 2018e

Online payments Mobile payments

Source: Kapronasia Analysis, iResearch, Analysys International Although for consumers digital payments are (mostly free), payment service providers (PSPs) still have costs, often un-recovered…

• Growing volume doesn’t mean payments are profitable – PSPs pay banks for infrastructure (Tencent: 0.1%, total RMB 300 mln in just Jan 2016) • But free for users as PSPs will subsidize the payment service, one exception: Tencent (0.1% for withdrawal) Mobile Payment Market Share Evolution

Source: Kapronasia Analysis, iResearch PSPs, like Alipay, are turning their massive-traffic wallets into ‘one-stop’ online shopping platforms to drive new revenue

China’s Largest Digital Payment Platforms and Functionality

Pay Paying Hospital Taxi Mobile Chat & Credit Ecomm. Bills Queuing Hailing Top-up Social Card

Apple No No No No No No No Pay Taobao & Alipay Yes Yes Yes Yes Yes Chat Tmall WeChat Yes Yes Yes Yes Yes Meilishuo Yes Pay Baidu Nuomi, Yes Yes No No Yes No Wallet Groupon JD Yes No No No Yes JD.com No Wallet CUP Yes Yes No No Yes No No Wallet Acquisitions are helping to move PSPs move into ancillary services and drive revenue

Category Baidu Alibaba Tencent Search Baidu Maps Baidu Maps DeGao Maps map.qq.com Coupons Dianping Meituan Dianping Meituan Group buying Nuomi Juhuasuan Taxi Uber Didi Kuaidi Didi Kuaidi Food Delivery Baidu Waimai Koubei, Taodiandian Ele.me Instant Messaging WeChat Travel Qunar Alitrip Elong, ly.com Hospital Apps Alibaba Hospital Data has become the new currency as PSPs mine consumer data to better tailor offerings to sell more services

• Payments data is extremely valuable • That’s why “everyone is getting into payments” – e.g. Wanda bought 99bill for RMB 2 billion – 400,000 POS terminals by 2020 and 500 mln customers – Merchant credit opportunity – Data to improve customer experience and increase stickiness • Sesame Credit (Ant Financial’s credit scoring arm) used for: – Applying for EU visa with Alipay – Borrowing umbrellas in McDonald’s But banks have been left behind…

• Despite having a massive merchant base, banks have been unable to capitalize on digital payments • PSPs already led in digital payments, and now moving into physical POS • Banks, CUP tried their own NFC wallets, but QR dominates Result #1: China’s banks lost RMB 152 billion (US$20 billion) in card fees in 2015

Total non-cash potential Total fees lost to merchant fees (RMB billion) Internet / Mobile payments (RMB billion) (RMB billion)

1,200 985 1,000

Transaction fee 800 402 lost to 3rd party players 600 547 152 400 Remaining 583 transaction fee 200 93 395

0 2010 2015e 2020e 2015e 2020e

Total fee losses due to Non-Cash Spending Fee losses due to Card Spending Fee losses due to Online Spending

*assumes 0.78% transaction fee Source: EuroMonitor, Iresearch, Kapronasia Analysis Result #2: Also a tremendous loss of transaction data…

Example of 'visible' WeChat / Alipay Data Transaction Settlement Merchant Date Date Currency Code Merchant Name Value 15/02/2016 16/02/2016 人民币元 3847 消费深圳市财付通科技有限公司/CHN Tenpay 人民币元99.85 15/02/2016 16/02/2016 人民币元 3847 消费深圳市财付通科技有限公司/CHN Tenpay 人民币元90.00 15/02/2016 16/02/2016 人民币元 8609 消费支付宝快捷支付/CHN Alipay 人民币元61.74 Finding the solution

“The most amazing part is probably the fact the domestic payments incumbents, for decades protected by regulations from outside competition, have now had to turn to Apple, the only company with the potential of creating momentum strong enough to shift the preferences of a large number of consumers.” But, even though Apple Pay launched successfully in China, uptake has been too slow so far

• Launched in February 2016, currently supports cards from the 19 largest banks • Functionality was limited from the onset as compared to domestic alternatives

Send to 2nd party Receive Payments Pay bank card Apple Pay No Yes No Alipay Yes Yes Yes WeChat Pay Yes Yes No Baidu Wallet Yes Yes Yes JD Wallet Yes Yes Yes CUP Wallet Yes Yes Yes

• So the uptake has been too slow so far Lack of support has hurt NFC uptake, can it surpass QR codes?

• Apple Pay has inspired Samsung, Xiaomi, Huawei to partner with CUP • Samsung is not only NFC, but also MST => more acceptance • Banks and CUP like non-QR code solutions as they receive transaction data and better fees

QR Codes (PSPs) NFC MST Traditional POS Very Low Medium High Acceptance Phones Enabled Very High* Low Very Low Consumer Uptake High Low Very Low Platform Approach Yes No No Payment Rails Completely PSP Banks / CUP Attractiveness for Banks Very Low High *Any iPhone or Android smartphone can be used for QR code payment

Example of ‘visible’ Apple Pay Data 21/02/2016 22/02/2016 人民币元 5476 消费华联罗森有限公司/CHN Lawsons 人民币元99.85 22/02/2016 23/02/2016 人民币元 5476 消费顶全便利店有限公司/CHN Family Mart 人民币元90.00 23/02/2016 24/02/2016 人民币元 5476 消费上海福满家便利有限公司 /CHN Shanghai Family Mart 人民币元11.80 Apple Pay expose data for the banks

Example of 'visible' WeChat/ Alipay Data Transaction Settlement Merchant Date Date Currency Code Merchant Name Value 15/02/2016 16/02/2016 人民币元 3847 消费深圳市财付通科技有限公司/CHN Tenpay 人民币元99.85 15/02/2016 16/02/2016 人民币元 3847 消费深圳市财付通科技有限公司/CHN Tenpay 人民币元90.00 15/02/2016 16/02/2016 人民币元 8609 消费支付宝快捷支付/CHN Alipay 人民币元61.74

KYC • Only need an email address to register an account – 300 million out of 600 million Alipay users are not real-name

Deposit Risks as some PSPs in fact hold deposits • No deposit insurance • RMB 110 billion held in Alipay customer accounts

Channel for risky internet finance • PSPs the only payments channel for risky peer-to-peer lending platform

Unclear Rules • Some online firms process payments without holding a license New payments regulations were published at the end of 2015 and aim to solve most of the existing problems

• Guidelines for Non-bank Financial Institutions Engaging in Internet Payments • In effect since July 1st 2016, but implementation slow: deadline delayed until November 1st 2016

Measure Effect Will encourage large transactions to be channeled Restricted payment amounts through a payer’s Internet banking provider More KYC measures (multiple ID, 2 bank Will help to prevent fraudulent account openings accounts, etc..) Ban PSPs from opening accounts for companies Client funds of 2,000+ P2P companies funds will engaged in financial businesses (tentative) need to be held in traditional bank accounts

Regulators will seek to control risk, but not limit growth. Payment licenses awarded in 2011 will expire in 2016 and we should expect consolidation

• First and second batches of payment licenses expire in 2016 • Many license holders operating at loss, “zombie” companies • New license issuances halted in Shanghai, Beijing, Guangzhou, Zhejiang, Shenzhen • Consolidation is encouraged by the PBOC, not pure license buying though • Licenses still in demand – Payments are seen as the basis for a distribution channel for other products (e.g. Alipay Wallet) – Qihoo 360 Technology, China Pacific Insurance, GRG, Tianyu all in line for new licenses Summary

• The business model of digital payments is changing – Although for consumers its free, every payment still has costs, and of course the PSPs want to make money – Charging transaction fees doesn’t work anymore – customers have grown accustomed to making payments for free – Merchant fees are extremely competitive • So PSPs are leveraging payments traffic and and mining data to create value • The current uptick in digital payments has left the banks behind – They are losing payment fees, but more importantly, data – as it is just as important for banks as it is for BAT • More traditional solutions could help make banks relevant again – Apple is based off NFC and ‘exposes’ more transaction data to banks – Samsung is not only NFC, but also MST => more acceptance – Xiaomi and Huawei • More mature regulation now in force • China payments license consolidation is coming Webinar: Digital Payments in China 2016

Thank You

For more information about the topics covered in this webinar or Kapronasia, please visit www.kapronasia.com or send us an email: [email protected]. Twitter: @chinafintech