Alipay is the leading digital payment platform in China, known for standardizing the use of QR codes at merchants and mobile payments by consumers. Let us explain.
Hard to imagine, but a generation ago China was largely a cash-based society. All at once, an edict from the top assigned consumers a bank account, a debit card and required businesses to pay their employees electronically. Chaos ensued. Citizens didn’t believe they had actually been paid because they couldn’t see and hold the money. Further, no one knew what a debit card was, there were not enough ATMs to service the sudden crush of demand, and those mechanisms (made by western manufacturers) would either break down or run out of cash so frequently that the underdeveloped support infrastructure couldn’t keep up. It literally became a 24/7 problem in metropolitan areas). What’s more, adoption was extremely slow for merchants. Small and medium sized retailers were in no rush to install point-of-sale (PoS) equipment due to lack of familiarity, counter space and incremental cost.
Enter Jack Ma, Co-Founder of Alibaba Group – Better to ask for forgiveness than permission.
AliPay was originally designed as a payment platform to enable the purchase of e-commerce goods and services for Alibaba (a very large Chinese e-commerce company). AliPay extended its payment services to the physical world with small and medium sized retailers by leveraging the consumer’s mobile phone, and similarly the merchant’s mobile phone or tablet. This cheap, easily accessible, all-inclusive approach to service the hard-to-reach and greenfield (cash based) SMB marketplace jump-started the adoption of electronic payments in China. AliPay bypassed China Union Pay (CUP; the government’s nationwide payment system), and didn’t need a debit card or PoS device to do it. All one needed was an AliPay account. Adoption was so explosive, and generated so much volume in such a short period of time, CUP’s domestic TAM was greatly reduced.
AliPay is accepted at 90% of China’s retailers in medium and large cities, 50% overall share in the country (WePay is its biggest competitor, primarily in rural areas). Over 700 million consumers and 70 million retailers utilize AliPay in China which generates an astonishing gross payment volume (GPV) of over $10 trillion from 50 billion transactions per year (for comparison these are Visa type numbers). Also noteworthy, its merchant discount rate (MDR; the cost to the retailer to accept electronic payments) is well under 1%. This is in contrast to the US where the SMB is charged the highest MDR of any merchant class, frequently 2.5% to 3.5%, sometimes more. The brainchild of its founder, Jack Ma, today AliPay operates as a unit of Ant Group, which is one third owned by Alibaba and a series of Chinese based institutional investors. We view AliPay as a remarkable success story which we think is worthy of discussion.
