Lessons from China – On Going Cashless

Going Cashless

As India pushes its cashless agenda forward, there is a lot that to learn from other countries that have followed a similar path. Perhaps the most important lessons come from China, a country with sizable population like India with relatively similar constraints. Where China is now is a glimpse into the future of the direction in which India is headed.

It is surprising that the country that first created paper is one of the leaders in digital and mobile payments. Perhaps it points to the country’s industriousness when it comes to money. In China’s bold cashless experiment, people have been using mobile phones for everything from paying taxis, utility bills, to cinema tickets and doctor fees. Even street performers have a QR code that enables people to tip them via a mobile app! The penetration of e-payment is very high. Nearly $5.5 trillion was transacted by way of e-payment in China in 2016. The adoption level is so vast that one can even use e-payments to purchase a bus ticket.

There are two major payment service providers — Alibaba’s Alipay, Tencent’s WeChat. Both of them evolved very differently. WeChat evolved from messaging to payments, official accounts platform pages to almost-everything app. Most businesses have a presence there via the official accounts platform. One can basically do anything one does on the Internet within the app’s ecosystem – book cinema tickets, take doctor’s appointments, etc.

Alipay is basically a payments tool which has expanded. Alipay has over 520 million users, which almost 60 percent of the country’s online population. It is focused on payments and payment innovation. Its business model is very similar to that of Paytm. They charge merchants instead of charging the customers and charge while withdrawing money out of the ecosystem. Peer to peer transactions are free.

Mobile penetration and adoption, ecosystem creation, and innovation have driven this phenomenon.

The main driver of the revolution has been people’s adoption of mobiles. Mobiles penetrated relatively quickly and is widely used. Ecosystems have been building on mobiles with the creation of apps. In developed markets, there is a high credit card acceptance rate, which can act as an obstacle as people are already used to it and comfortable. It is harder and costlier to get them to transition to mobile. In China, people have been using mobile phone to do everything. Payment ecosystem directly grew out of the mobile economy.

Ecosystems have also evolved around this phenomenon where even transactions of small amounts on bus travel can be made through apps. Industries are also evolving around this. Alibaba is creating a staff-less, checkout-less super market which is linked to the app.

Innovation is also a key driver. The use of QR codes was the first innovation in the field. QR (Quick Response) codes evolved as a faster alternative to barcodes. WeChat introduced QR codes in 2012 to exchange contact information. As the applications and market demand kept expanding, QR codes facilitated this financial revolution. Adoption was not a problem because of its ease. Since it is low tech, one has to simply print it out on a piece of paper and voila, your payment system is set up. Service providers have also been very innovative. Alipay launched a facial recognition payment service called ‘smile to pay’ which is being trialled with KFC. This service basically uses facial recognition as a mode of verification for payment. This service is provided by Face++, a facial recognition start-up that is valued at over a billion dollars. Payments is one of the application area.

Based on China’s experience, the main lessons for India revolve around pricing, innovation, and ecosystem development.

When we look at financial services, marginal cost pricing can be profitable. Marginal cost pricing refers to pricing of a good or service at the cost of providing the good or service to an additional consumer. Ant Financials is profitable and has been for the past few years. Of course, these aren’t exactly marginal cost pricing (definitely higher than marginal cost), but the concept and approach is applied. Visa and Master card charge a fortune for transacting on their platforms. India needs low cost transaction services that reduce transaction costs and facilitate transaction. This strategy of marginal cost pricing doesn’t just apply to e-wallets, but also others who provide mass based services.

The hour is of innovation and development of ecosystems rather than just apps and wallets. We can see a similar sight in India where e-payment service providers have adopted QR codes. However, the wider market hasn’t been evolving at the desired speed. While demonetization gave a push and forced people to adopt digital payments, there haven’t been significant alterations to the ecosystem. We can’t get a bus ticket using Paytm, can we? The way in which payment service providers are evolving is also very different. They are focused on marketplaces and other platforms rather than payment innovation. While Paytm has added a messaging service to its app, we still don’t have an app with a completely integrated ecosystem.

-Contributed by Bhargav Dhakappa

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