Why online payment provider Alipay is more than just the Chinese equivalent of PayPal

30 Jul

I am happy to share with you today my latest article, co-written with my colleague Alan Chan. We are looking at Alibaba’s Alipay versus PayPal and take it into context of the Chinese ecosystem approach.

Preface

The recent events of PayPal and eBay splitting into two separate entities and the newly released version of Alibaba’s mobile payment app Alipay 9.0 inspired me to take a closer look at these two unequal rivals. However, comparing Alipay with PayPal directly doesn’t seem to do the former much justice. As with many of the leading Chinese digital players, Alipay is an integral part and closely connected within Alibaba’s ecosystem. In fact, Alipay has created its own Internet finance ecosystem. So instead of reviewing the strengths and weaknesses of those two players, we decided to first take a closer look at the role that ecosystems play in China’s business landscape.

The rise of Chinese business ecosystems

China is a highly complex, diverse and very dynamic business environment. Developments are often multidimensional, non-linear and even discontinuous, and they take place multiple times. Such conditions provide the breeding ground for a new generation of entrepreneurs who have formidable sensing capabilities to identify market opportunities, take risks and develop businesses, often with new and unconventional business models.

Fast-changing market conditions and rapidly evolving consumer behavior present challenges to established businesses with narrowly focused core competencies and limited capabilities. Many traditional companies find themselves unable to capture new opportunities or stay ahead of future disruptions.

Chinese entrepreneurs, such as Jack Ma, Lei Jun or Pony Ma have started to grow their core businesses into collaborative ecosystems, which often involve cross-industry partnerships, acquisitions and investments in companies that can provide complementary capabilities. Such ecosystems are flexible and scalable, allowing their orchestrators to leapfrog into other industries and build a more complete customer experience. Over time, companies can adjust the focus and exact direction of their business as they gain more insights and clarity.

The ecosystem play is particularly prevalent in China, with companies such as Alibaba, Tencent and Xiaomi being among the most innovative and successful. Many of these companies were only founded in the last 10-15 years – some even less, the lack of legacy allows them to innovate and take risks without the limitations of following established policies, rules or procedures. This makes these players even more dangerous for century-old, traditional companies.

Lei Jun, the founder of Xiaomi and Shunwei Capital is building an Internet of Things (IoT) ecosystem. Founded in 2010, Xiaomi forms the core of the ecosystem. It started as a low-cost smartphone maker but then grew into a smart device company with extensive software, hardware and services layers. The five-year old company is now valued at USD 45 billion. Together with Lei Jun’s venture capital firm Shunwei Capital, Xiaomi expanded its capabilities by acquiring, investing and partnering with more than 30 companies in multiple industries, ranging from manufacturers of wearable devices for health monitoring to smart home appliances, from online video content producers to online streaming sites, which are all centered around MIUI, Xiaomi’s own operating system.

A different form of ecosystem has been built by Haier, the leading Chinese white goods manufacturer. Haier has been revolutionary in transforming its traditional pyramid-shaped, top-down corporate structure into a platform-based, decentralized and flat organization by injecting corporate entrepreneurship into its ecosystem. Zhang Ruimin, the chairman of Haier group, led the transformation and encouraged his employees to set up their own “micro-enterprises” within the organization. As a result, employees contribute to the process of designing and shaping Haier’s ecosystem.

Both Xiaomi and Haier leverage their online platforms to crowd-source customer feedback and new product ideas. By incorporating customers into their ecosystems, it has helped both companies to facilitate and accelerate their idea generation and product development cycles, while at the same time increasing alignment with consumer needs.

Advantages of ecosystem play

The traditional western management theory of “core competency” introduced in the early 1980s has become quasi obsolete in today’s China. Building static competitive advantages and maintaining a narrowly defined core business limits Chinese companies to adapt to disruptive market changes and capture tomorrow’s opportunities. Constant evolution is essential for companies to survive and thrive in a dynamic market with blurred boundaries. Companies staying at their own core are merely backward-oriented and will struggle to leap forward.

Chinese ecosystems usually start out by co-developing a collaborative environment and creating network effects around the core. Such collaborative ecosystems enable the core company to overcome capability gaps and access new opportunities in adjacent industries that were previously out of reach. Companies in an ecosystem embrace “co-opetition” – both competing and cooperating simultaneously to maximize their benefits.

The merger of Didi Dache and Kuaidi Dache, the two leading car-booking apps in China backed by Tencent and Alibaba respectively, is an example of such “co-opetition”.

Inside many business ecosystems, there is not just one but various types of business models. Different industry focuses can co-exist and prosper next to each other. This “biodiversity” makes the ecosystem difficult to be disrupted and hence promises long-term business sustainability and co-evolution even in a chaotic and uncertain business environment.

The beginning of online payment solutions and the rise of PayPal

Before looking at today’s situation of PayPal and Alipay, we ought to start with the beginning when online payment solutions first started to emerge.

In the late 1990s, smaller online businesses with relatively low sales volume were unable or unwilling to accept credit card payments due to high transaction fees. In those days, it was also costly and time-consuming for online businesses to build their own e-commerce checkout systems with sufficient fraud protection and a user-friendly interface.

Consumers typically had to enter their payment and shipping information every time they made an online purchase. In addition, there were concerns about revealing personal and financial details on e-commerce sites that lack proper protection. For peer-to-peer payments, wire transfers, paper checks or cash payments were the dominant means of transaction.

In 2001, PayPal entered the market to tackles these pain points. It originated from two start-ups Confinity and X.com that merged in 2000 and renamed themselves PayPal a year later. Confinity, founded in 1998 by Peter Thiel, Max Levchin and Luke Nosel, focused on securely transferring money on PDAs, whereas X.com, founded by Elon Musk, was centered on payments by email.

PayPal’s early payment solution was an encrypted digital wallet that stored and safeguarded bank, debit or credit card details enabling users to make online payments on websites via their PayPal accounts without giving away sensitive personal information to sellers. It provided a convenient and secure online payment experience as users only had to register with their email account and input their payment details once in order to make purchases globally. For sellers, it provided a ready-made checkout system, allowing small and medium sized businesses to accept online payments via PayPal.

Besides offering solutions for businesses and their customers, PayPal also understood the need of individuals to make personal transfers to other individuals in their own country or abroad, using PayPal’s global multi-currency platform.

In the early days, PayPal’s major rival was Billpoint, a peer-to-peer money transfer service founded in 1998. It was purchased by eBay in 1999 and re-launched as a joint venture with Wells Fargo Bank as the payment solution for eBay. PayPal eventually became the more preferred payment option among online buyers and out-competed Billpoint both in terms of the number of sign-ups and overall eBay user adoption.

PayPal had its IPO in 2002 and was acquired by eBay for USD 1.5 billion later that year. eBay benefited from PayPal’s large user base and improved its user experience by fully integrating PayPal’s payment features.

Today, PayPal is active in 203 countries in 26 currencies. With 165 million active users, PayPal handles on average 12.5 million payments per day. In the year of 2014, PayPal processed USD 228 billion worth of transactions, generating a total revenue of USD 7.9 billion (44% of eBay’s total revenues).

PayPal’s future outlook

eBay, PayPal’s parent company decided in early 2015 to spin off PayPal as a separate company, allowing both eBay and PayPal to grow more independently. PayPal started trading as a separate business in July 2015.

Going forward, PayPal is facing potential threats from emerging players such as Apple Pay, Square, Stripe, Google Wallet and Alipay. The spin-off is intended to give PayPal greater flexibility and develop a stronger focus on future opportunities in the area of mobile payment.

In 2014, more than a quarter of the payments made with PayPal were conducted on mobile devices. Given the continuous shift of users from PCs to mobile devices, PayPal recently launched a new mobile-first feature called PayPal One Touch. This allows users to pay with a single touch without having to log into PayPal or download PayPal’s app onto their phones.

PayPal is also experimenting with its mobile payment and shopping solution PayPal Beacon, leveraging Bluetooth low-energy technology to create an innovative location-based online-to-offline retail experience.

While PayPal remains to be the global leading online payment service provider, it has been struggling to gain a significant market share in China, the country with the largest Internet population in the world – 668 million active Internet users (49% of China’s population) and 594 million total mobile Internet users. China’s online payment market is dominated by Alipay (50%) and Tenpay (20%).

Alipay as part of Alibaba’s ecosystem play

Looking at China’s online payment market, we see Alipay right in the center, handling more than 50% of all transactions. However, rather than looking at Alipay as a stand-alone entity, we must recognize Alipay’s role as part of the Alibaba ecosystem.

Alibaba started to build the core of its ecosystem in 1999 as a business-to-business trading website (Alibaba.com). In 2003, Alibaba expanded into customer-to-customer e-commerce (Taobao) in 2003 and business-to-customer online retailing (Tmall) in 2008. To further support the exponential growth of the group, Alibaba has built its own cloud data service platform (Ali Cloud Computing), entertainment businesses (Alibaba Pictures and Ali Music) and financial ecosystem (Ant Financial). It has also formed strategic partnerships with a network of logistics companies (Cainiao China Smart Logistics) and invested in numerous companies across multiple industries in China and overseas (Kuaidi Dache, SingPost, Snapchat, Kabam, Paytm, etc.).

Most companies in Alibaba’s ecosystem are interconnected and centered around Alibaba’s core e-commerce business. Collectively, they are strengthening the capabilities of the entire group and thus extend Alibaba’s reach into multiple sectors and industries.

Alipay, in the center of Alibaba’s Internet finance ecosystem

Alipay is the origin and forms the core of Alibaba’s Internet finance ecosystem. Launched in 2004 as an online payment and escrow service, Alipay may at first appear as the China’s equivalent of PayPal. But the latest version of the Alipay mobile app (9.0 in Jul 2015) has proven once more that it has grown from being “only” a payment system into a one-stop portal for payment solutions.

The user experience on Alipay’s mobile app is designed based on actual usage scenarios. For example, users can transfer money to other Alipay members and share or split bills among them using QR codes. Alipay can be used to pay utility bills, top up mobile phone credits, buy train tickets or check the balance of a connected bank account. Alipay has partnered with many small businesses to allow its users to make payments on many Chinese websites and at an increasing number of offline shops. Alipay most recently struck deals with Wal-Mart and Carrefour to enable its members to pay through Alipay when shopping at these supermarkets. During Chinese New Year, users can send “red envelopes” (small monetary gifts) to friends and family members. Alipay is a fully integrated and user-centric solution that covers a great variety of payment needs in people’s daily life.

Alipay has over 350 million registered users and processes more than 80 million transactions per day. It is reported that Alipay handled USD 778 billion in the year ending June 2014. According to Juniper Research, this is three times the amount handled by PayPal, and the equivalent to one-third of the USD 2.5 trillion in total global online payments in 2014.

In 2014, Alibaba established its finance affiliate Ant Financial to consolidate its various financial service activities under one roof. Ant Financial is now running Alipay and other services, such as the market fund Yu’eBao, online credit scoring service Sesame Credit, Internet-only bank MYBank, third-party financial service platform Zhao Cai Bao and micro-loan provider Ant Micro.

Yu’eBao, launched in June 2013, is the largest money-market fund in China. It allows Alipay users to earn high-yield returns on their idle cash, with interest rates much higher than those offered by banks. The fund has captured 186 million users and accumulated USD 93 billion in assets by the end of 2014.

Sesame Credit, launched in January 2015, uses big data collected from Alibaba’s various platforms and partners, as well as the online and offline history of transactions to generate credit ratings of consumers and small businesses. It enables credit providers to obtain more accurate and data-driven insights to assess user’s creditworthiness and offer credit-related services, such as loans and microfinance services.

MYBank, debuted in June 2015, is the first privately owned Internet bank in China. It provides innovative financial solutions for the under-banked urban and rural consumers and small businesses.

These are some of the key services of Alibaba’s Internet finance ecosystem. They are fully integrated within the Alipay platform, leveraging its large user base to drive further growth. Alibaba is on a promising trajectory to disrupt personal and corporate banking and financial services in China, which today is still largely controlled by state-owned banks.

Ant Financial is constantly working on new, innovative payment technologies. As part of that, it is experimenting with a service called “Smile to Pay” that uses face-recognition technology for payment verification.

On the global front, Ant Financial is engaged in a number of initiatives. It invested in Singapore-based security technology company V-Key and Indian payment service Paytm, which strengthens their overall technological capabilities and global presence. On the commerce side, Ant Finance launched a product called Alipay ePass that offers U.S. retailers like Neiman Marcus and Saks Fifth Avenue logistics and financial support selling to customers in China. In Europe, Alipay has entered into a partnership with the Swiss tax refund company Global Blue that allows Chinese tourists abroad to credit value tax refunds on their overseas purchases directly to their Alipay accounts.

Generally, Alibaba’s Internet finance ecosystem is well-aligned with the group’s overall mission of supporting small and medium-sized businesses in their efforts of globalization, cross-border e-commerce and market penetration in rural China. Alibaba will continue to orchestrate China’s Internet finance development and thus pose high-entry barriers for new entrants, like PayPal. It remains to be seen how much Alipay can use their ecosystem play to grow outside of China and compete with the likes of PayPal.

PayPal versus Alipay – so who wins?

Comparing Alipay and PayPal, it seems that PayPal is still very much focused on the core of its business of payment processing, whereas Alipay has moved ahead and expanded from its initial core into other related areas. PayPal has built a strong brand, standing for reliable, secure payment processing, mostly related to eBay but also beyond. It has established a followership in the U.S., Europe and parts of Asia. Alipay on the other side, is predominantly focused on the Mainland Chinese market. In Hong Kong for example, where over 30 retail chains accept Alipay payments, only users with linked Mainland Chinese bank accounts can use their Alipay wallets for their purchases.

Alipay is much more integrated into the everyday life of their consumers and offers a much more complete customer experience, whereas PayPal only gets involved when it comes to the final payment transaction.

While both are successful companies, Alipay is pursuing a much bigger picture with a much more attractive value proposition to its users. This is something that many people would hardly expect from a Chinese player. Within the broader context of Alibaba and other Chinese digital companies who have developed impressive ecosystems, we will see more and more innovative business models coming from China that will hopefully inspire entrepreneurs around the world. In their home country in China, the likes of Jack Ma, the founder of Alibaba have already inspired the generation of 20-30 year-olds to follow their footsteps, creating a new breed of young innovative and risk-taking entrepreneurs.

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