A case study by Better than Cash Alliance has presented ways in which the developing world can learn from China when it comes to digital payment modes. The study, titled Social Networks, e-Commerce Platforms, and the Growth of Digital Payment Ecosystems in China: What it Means for Other Countries, examined two of China’s biggest apps WeChat and Alipay, and their role in the development of one of the world’s largest and most sophisticated digital payments ecosystems.

The report showed how incorporating digital payments into existing services has unlocked economic opportunities for millions of users, by introducing new services such as low-risk savings accounts, new credit assessment and lending and by opening up new markets for micro, small, and medium enterprises.

It also aims to provide lessons that can be assessed, and where relevant, applied in other markets beyond China. This is especially so in poor communities, where digital payments have been opening up new economic opportunities and markets for individuals and small businesses, helping to transform their lives.

One such person is Kaiyu Ma, who runs a small store selling used clothing on Taobao. She says this is a great way to earn money on the side while she looks after her young daughter.

At a macro level, digital payment services have the potential to dramatically improve living standards for large sections of the population, especially in developing countries, through increased transparency, security, cost savings, and financial inclusion, particularly for women.

The rise of Alipay and Tencent

Alipay was first launched in 2004 as an internet-based payment service using the e-commerce platform Alibaba and then further developed for mobile with the Alipay application (app) in 2009. By 2016, Alipay was processing 175 million transactions per day, 60 percent of which were completed through a mobile phone.

Tencent was founded in 1998 and now provides digital payment options utilising its two major social apps, QQ and social media and chat app Weixin (WeChat, as it is known in English), which have a combined monthly active user rate of 846 million as of 2016.

The rise of both apps took place during a transformative period in China. Starting in 2011 and ending in 2015, China’s GDP per capita grew 31 percent, from US$4,971 to US$6,497, while access to Internet services in China increased from 38 people out of every 100 to 50 in just five years (2011-2015). The economy also began restructuring itself: exports fell from 26.5 percent of GD in 2011 to 22.1 percent in 2015, while retail sales grew from 38.6 percent of GDP to 44.1 percent over the same time frame.

One example on how Alibaba is opening financial opportunities for low-income earners is working with Tianhong Asset Management to launched Yu’e bao (meaning “leftover treasure”), a low-risk money market account similar to a bank savings account. Customers can take the money “left behind” on their digital wallets and invest it on the Yu’e bao product.

While these services usually involve small individual amounts, they nonetheless provide benefits that can be helpful particularly for people living on low incomes. Yu’e bao has grown from having 0.2 billion RMB (US$29 million) in assets under management (AUM) in 2013 to more than 810 billion RMB (US$117 billion), serving more than 152 million customers three years later and making it one of the largest money market funds in the world.

Lessons learn

The potential of digital financial for China is huge. A 2016 report from the McKinsey Global Institute estimated that digital finance could add US$3.7 trillion to global production by 2025, a 6 percent boost from current levels. For China, it could mean an additional US$1.05 trillion (RMB 7.25 trillion), a 4.2 percent GDP boost.

For payment providers, e-commerce firms and social networks, one lesson they could apply is to attract users by building on existing e-commerce platforms and social networks, using strategic incentives to deepen usage, the case study pointed out.

For example, Tencent was able to build a widespread digital payment product within an existing service, which helped it gain rapid acceptance. Majorpayment platforms in China have developed a variety of additional incentives for users, such as vendor promotions and discounts, and creative gamification concepts around popular cultural events.

Making software development tools, such as application program interfaces (APIs), available can enable third-party vendors and Small and Medium Enterprises (SMEs) to make their own innovative additions to the ecosystem in response to user needs and preferences, thereby organically growing the ecosystem.

Governments would also need to support a regulatory environment that strikes a careful balance between encouraging innovation and managing risk. In its efforts to strike a balance between these two objectives, China has announced policies to foster domestic development and competition, and support innovation. It also prioritises setting public investment priorities that encourage digitisation, said the report.

And to improve security across digital payment platforms, businesses and governments can work together through public-private partnerships (PPPs) to develop an ID verification system or similar method to identify payers and payees accurately, the report noted. It is also important in order to advance Know Your Customer (KYC), Anti-Money Laundering (AML), and Combating the Financing of Terrorism (CFT) efforts, and meet international standards in these areas.

Featured image: Digital Payment via Pixabay