Understanding of Alipay

Mobile Payment Tool (Alipay)
Name
Institutional Affiliation
Mobile Payment Tool (Alipay)
Introduction
The financial sector has undergone rapid developments in recent years. The fintech revolution is driven by the emergence of information technologies such as blockchain, big data, cloud computing, and artificial intelligence. With these technologies, the traditional landscape of the financial sector continues to be largely transformed. The interplay between technology and finance has led to various forms of financial products and services such as digital banking, peer-to-peer (P2P) lending, cryptocurrencies, insurtech, and burgeoning mobile payments. Alipay is one of the mobile payment platforms and is part of the Ant Financial Services Group. The platform illustrates the continued fintech revolution and how mobile payments are increasingly disrupting traditional retail banking models and the entire payment sector (Lu, 2018). With its parent e-commerce giant company, Alibaba, Alipay has grown to be the world’s largest system for mobile payments. Together with WeChat Pay, the two platforms that have dominated China’s mobile payment sector are estimated to be about $5.7 trillion (Lu, 2018). Alipay is present in 70 countries, including the United States, the United Kingdom, South Korea, Japan, and Australia. With the popularization of mobile payment systems, many cities in China are becoming cashless and cardless societies. It is estimated that 40 percent of Chinese people do not carry cash when shopping (Lu, 2018). In contrast to its competitor Apple Pay that uses Near Field Communication (NFC) technology, Alipay employs the Quick Response (QR) code. Today, mobile payments and fintech solutions are raising debates in matters related to regulatory and legal issues. Common challenges that have been addressed in the industry and academia include data protection, regulatory approval regime, fintech financing, and fund security. To resolve some of the challenges, China established a unified clearinghouse for every service provider to enhance the industry supervision efforts. In the U.S. market, both Alipay and WeChat pay gained traction with the availability of merchants across the nation. However, with the trade tensions due to COVID-19 and political campaigns in 2020, there was a halt in the stream of travelers to the United States from China who would use the platforms with their homegrown applications while on holidays, traveling, or on business trips to the country. Up until the collapse of this stream, the Chinese payment applications had gained a foothold in the country’s in-store payment sector. Today, U.S. merchants have realized the cost benefits and simplicity of both Alipay and WeChat in payment processing. They will be expecting similar ways of payments from the payments industry (Consultative Group to Assist the Poor, 2021). In a nutshell, Alipay has very low processing costs, fast receipts of deposits, and zero chargebacks. While card payments remain to be king in many developed economies due to consumer protection, mobile payment apps influenced by Chinese brands are expected to divert transactions away from the conventional payment systems. This paper discusses the development of Alipay as a mobile payment service and its implications on the economy and other traditional payment methods such as cash and credit/debit cards.
Development of Alipay as a Mobile Payment Platform
Founded in Hangzhou, China, in 2004, Alipay is a third-party mobile and online payment system that has seen its rise in popularity due to disintermediation instead of the traditional banking systems (Lai, n.d). The widespread adoption of smartphones and mobile payment systems among consumers has largely transformed Alipay from its initial objective of simply providing an e-commerce platform to individuals to become a financial application. In China, many financial institutions that act as intermediaries are gradually losing relevance in the payment cycle of facilitating monetary transactions. This has become a threat to traditional banks that are constantly being faced with technical and capital disintermediation challenges. In capital disintermediation, consumers can access the capital markets directly without a mediator and carry out investments. This process results in a financial transaction bypass situation where commercial banks run by states are entering a phase of reduced risks that are involved in mutual fund business and wealth management services. This implies that state-owned commercial banks have to innovate with the unprecedented challenges introduced by e-payment platforms. Alipay has excluded intermediaries and reduced the costs of financial transactions. Furthermore, within a single platform, consumers can access services such as insurance, money market, personal credit limits, and credit ratings (Consultative Group to Assist the Poor, 2021). An increasing number of consumers are choosing Yu’e Bao, provided by the money market arm of Ant Financial Services Group, as a virtual wallet to make their savings instead of holding money in their traditional bank accounts. In China, the role of a financial intermediary such as China UnionPay is slowly losing its relevance. This is contrary to the time before the emergence of Alipay when all offline and online transactions required UnionPay, an association of China’s bank card sector. Before Alipay, all funds charged from bank accounts belonging to a consumer would be channeled towards UnionPay and later settled and cleared with the involved bank.
Fig 1 Major milestones in Alipay development (Wenbo, 2020)
Based on Fig 1 above, the historical development of Alipay shows how the Hangzhou-based company, formerly known as Ant Financial, spread from its early beginning in 2004 to become one of the most indispensable payment platforms with 730 million active users in China per month (Wenbo, 2020). Ant has played a critical role in enabling China as the world’s second growing economy as a platform where users can obtain loans and buy investments and insurance products. Alipay was launched as a fintech arm of Alibaba Group, the parent company that worked with ICBC, the country’s largest commercial bank, in developing the tool to facilitate online shopping on the Taobao e-commerce platform. Alipay rapidly became China’s equivalent to the U.S. PayPal and guaranteed robust security of online transactions made by its customers. In 2013, Alipay surpassed PayPal as the world’s largest platform where buyers and sellers could securely carry out their transactions. The early success of Alipay could be attributed to the role of regulators who did not expose Alipay to strict supervision the same way as banks. This was meant to strengthen competition and bolster innovation within the mobile payment industry. Besides, Alipay seemed to solve many years of challenges presented by banks, such as lack of investment options, a high threshold for loan issuance, and low efficacy in providing banking services. Yu’E Bao’s launch in 2013 was to help Alipay users to invest in their idle funds. This innovative tool also allowed users to shop online and cash out their funds as they demanded. During the Chinese New Year in 2014, Yu’E Bao announced that it had raised about 500 billion yuan barely nine months after its launch. Yu’E Bao became a game-changer and made banks lose significant customer deposits. About 90 percent of Yu’E Bao funds comprised agreement deposits that stayed idle in bank accounts, and many depositors moved their funds from banks to settle on the new platform (Wenbo, 2020). As opposed to banks, Yu’E Bao promised high liquidity, more profits, and improved convenience.
The development of Alipay and China becoming a likely candidate to launch a new payment system was improbable. At the time of Alipay’s development, China had strong banking rates for all its citizens due to the role played by the government in extending benefits to the citizens via the banking systems. Many Chinese people have at least two different bank accounts as the government offers subsidies for various benefits and different banks. At the same time, Chinese banks have worked together and established UnionPay, which serves as a Chinese-based card network. Today, China boasts as the largest card network country in the world, with over 7.6 billion subscribers (Klein, 2020). The Americans have spent years upgrading their bank-based magnetic strip cards with new technologies that use chips instead. However, the Chinese big mobile payment companies such as Alipay and WeChat Pay have completely revolutionized and experienced a radical revolution that has seen the companies leapfrog the card-based systems to a wholly new system that has dominated retail, person-to-person, and many different business transactions. The systems in China for mobile payments are built on digital wallets that use the QR codes that run through their giant tech companies, with Alipay running through the parent company, Alibaba, and WeChat running through Tencent, which serves as the Chinese version of Facebook. The Chinese system usually disintermediates the banking industry from payment transactions and thus robs banks of a critical and long-lasting revenue source (Consultative Group to Assist the Poor, 2021). The system creates an alternative payment ecosystem with different incentives between payment providers, consumers, and merchants. The system also challenges the long-standing payment placement on the side of banking contrary to commerce. This implies that the Chinese system opens up an opportunity for new incentives which could realign the existing models of doing business and the correlations between banks, tech providers, and merchants. The new payment system only emerged less than a decade ago in China and advanced from inception to a major dominance in the market. The power of network incentives has been realized with more than a billion subscribers on every platform. This new system has replaced the conventional cash and cards at the registers, how families exchange gifts, and how beggars receive donations.
The success of Alipay as a mobile payment platform owes its credit to the parent online shopping giant Alibaba or Taobao. Alipay was created as a platform to protect online transactions made between merchants and consumers. During the early stages of its development, Alipay users associated their user accounts with bank account details. When users made purchases, Alipay used to hold the money until the consumers confirmed that they had received their products. Merchants were also assured that they would have the money to collect upon dispatching the products. In such a society where merchants and customers were devoid of mutual trust, such a payment system was crucial and a necessity. With this need, Alipay became a dominant and ubiquitous online shopping and payment platform that transformed the consumption habits of consumers. At this point, Alipay continued to seek opportunities after smartphones became affordable and as network services improved in terms of service and stability throughout China. This saw Alipay tapping into the mobile payment business in 2008 (Lee Kuan Yew, 2018). At this time, Alipay users used Alipay Wallet to make payments for their Taobao products and pay utility bills. In 2011, Alipay introduced the QR code payment method that facilitated offline partnering with stores to receive payments in real-time through scanning QR codes in Alipay Wallets. Since this method was cost-effective and convenient, Alipay attracted 500,000 taxi partners and 200,000 offline partnering stores. Later in 2016, more than 450 million users signed up as real users, with 71 percent of all transactions done on mobile platforms (Lee Kuan Yew, 2018). Besides the popularity of Taobao, the success of Alipay is attributed to many other factors that drove its growth.
Alipay as a platform continued to expand its business constantly, and the QR code payment approach was one of the leading innovations in mobile payment (Klein, 2019). At the same time, Alipay made its service affordable compared to the traditional payment systems such as the point-of-sale (POS) machines. For example, offline partnering stores were required to pay only 0.6 percent per transaction to Alipay compared to accepting cards with POS machines that could cost users 1.25 percent in addition to the cost of purchasing and maintaining the machines. In 2017, when Alipay had proved its convenience, the platform invested RMB 1 billion to promote the business and enhance its consumer loyalty to use the mobile app. During the promotion, consumers could receive a digital “red envelope” that contained a random amount of money that they could use either in offline or online stores. At the same time, Alipay wanted to attract its users further. Therefore, the company created an Internet finance ecosystem within the app that included services such as Sesame Credit, a social credit scoring system, Yu’e Bao, a money market fund platform, and Ant-micro, a micro-load provider. Together with Alipay Wallet, these services transformed Alipay from a single application for payment processing to an integrated consumer and financial platform where its users could enjoy holistic services within the app. By creating such a comprehensive user experience, the platform caught the attention of many users as they integrated the app into their daily lives. Besides, Alipay was known for its security system that won the trust of many Chinese users. A survey in 2018 showed that 90 percent of respondents found Alipay to be a safe platform and trusted their data with the company. Earlier in 2015, Alipay had invested a total of US$6.5 million in research and partnership with different software companies in developing security measures that could protect its user’s data and money (Lee Kuan Yew, 2018). From this beginning, Alipay has grown to be a dominating app within the financial ecosystem.
Since 2017, the consumer landscape has been transformed with new technologies and the adoption of mobile phones among consumers. These factors have opened new opportunities for rapid innovations in payment systems (Heng et al., 2019). Throughout China, retailers and consumers have embraced the evolution of alternative payment systems ranging from e-payments to mobile payments. In the country, the rapid growth of mobile payment systems results from the fast penetration of smartphone users and the mobile internet. In the world, China is one of the global leaders with the highest number of users that have embraced mobile payment systems recording 731 million internet users by the close of 2017 and about 95 percent using smartphones compared to 60 percent who use computers (Heng et al., 2019). China has become the leading country globally with a mobile payment system, and many cities within the country have moved closer to becoming a cashless society. It has becom...