If you do any business with China these days, you are most likely familiar with WeChat. Often dubbed China’s “life operating platform,” WeChat—an amalgamation of social media, instant messaging, e-commerce and more—has 650 million monthly active users worldwide.
In mid-November, Tencent, the parent company of WeChat, announced that it had made its popular mobile payment service WeChat Payment (微信支付) available in more than 20 countries.
WeChat Payment allows WeChat users to make purchases from overseas businesses using RMB, at which point the payment system automatically settles with retailers in their local currency. The move is widely believed as a strategy to tap into the stratospheric growth of Chinese outbound tourism. (And, most likely, take on rival Alibaba’s increasingly international Alipay service.)
According to a recent report by the Fung Business Intelligence Centre (FBIC) and China Luxury Advisors, the number of Chinese tourists headed overseas is poised to double by 2020 to 234 million. This year alone, their overseas spending is expected to reach $229 billion.
Currently, China UnionPay dominates market share for Chinese tourism spending. Thanks to its monopoly status as the only bank card operator in China, virtually every Chinese traveler has at least one UnionPay card in his or her wallet.
That competition, however, is getting more intense.
Last October, the Chinese government announced that it would open the credit card market to foreign players like Visa, MasterCard, and American Express, technically ending UnionPay’s monopoly status in the credit card market.
In the online payment sector, UnionPay is already behind. In less than three years, Alibaba Group’s Alipay has gained control of nearly half of the online third-party payment market, compared to just 11 percent owned by UnionPay.
Tencent’s moves to take its WeChat Payment service overseas come at a time when more Chinese consumers, especially millennials, are shifting quickly toward mobile payments. According to the latest data released by the China Central Bank, the total value of mobile payments in China reached $4.2 trillion in Q2 2015, an increase of 445 percent year-on-year.
WeChat is clearly reaping benefits from this trend, as it becomes the de facto app for daily life in China. According to Xinhua, 60 percent of WeChat users have activated the payment service, and since the launch of WeChat Payment less than two years ago, more than 200 million users have bound their credit cards to their accounts.
What makes WeChat Payment stand out from the competition?
Unlike other third-party payment solutions, such as Alipay and ApplePay—where payment services are incorporated into a merchants’ own platforms—WeChat developed an in-app ecosystem around its payment service.
Initially launched as a vehicle through which people could exchange virtual red envelopes (红包) during Chinese New Year, WeChat Payment has since expanded its service to include retail, e-commerce, and even banking.
In March, the company launched a popular pilot program called City Services where users could access essential daily services such as booking medical appointments, reporting incidents to the police, booking flights, and hailing a taxi—all in one platform. This level of convenience helped boost customer loyalty while simultaneously fending off competitors.
Take the taxi-hailing market, in which Uber is locked in a bitter war in China with Tencent’s Didi to earn market share. Unlike in the United States, a significant portion of Uber’s users in China accesses the service through WeChat. This summer, in a rather dramatic move, WeChat ejected Uber from its system, throwing the San Francisco-based tech giant into panic mode.
Another strong suit of WeChat lies in its deep understanding and leveraging of unique Chinese consumer behavior.
Over the past few decades, Chinese society has largely operated on cash. It is uncommon, for example, to split the bill at Chinese restaurants using credit cards. WeChat developed a fast cash transfer function to allow one person to pay the bill and have friends reimburse them. The function eventually expanded into a full cash remittance service, allowing individuals to transfer cash or make cash payments to merchants within the WeChat app.
Security is another major appeal. Credit card fraud is still a huge concern for Chinese consumers, especially when traveling overseas—where point-of-sale systems often do not require a PIN. WeChat Payment requires the cashier to scan a QR code on the user’s phone to complete the transaction. For larger amounts ($50 or more), the user is asked to enter a pre-set payment code. For safety, the QR code is refreshed every 60 seconds, or with a swipe.
Who is likely to benefit from the global expansion of WeChat Payment?
Many tourist attractions, retailers, and hotels are already using WeChat to promote their businesses. WeChat Payment provides an easy solution to engage customers and complete transactions in one integrated platform that target consumers already use on a daily basis. Currently charging a 0.6 percent transaction fee, compared to 2-4 percent for major credit cards, small businesses that hope to attract Chinese business might also find WeChat Payment appealing.
Theme parks and popular museums could use WeChat Payment to shorten their ticket lines, while a sales person who’s already communicating with customers on WeChat could directly process transactions or take deposits to reserve items.
While still in its overseas infancy, WeChat Payment is likely to become a useful tool in the arsenal of smart brands, retailers, hoteliers, and more as they look to better capitalize on, and cater to, the demands of their Chinese clientele.
Charlie Gu is a director at China Luxury Advisors.