China’s state-owned clearing network UnionPay is partnering with some of the world’s biggest smartphone brands to launch mobile payment services in the country. But allying with Apple AAPL +0.83%, Huawei, Samsung and Xiaomi is doing little to overturn the market dominance of Alibaba and Tencent.
Last year UnionPay lost at least $22 billion in transaction fees to Alipay, the payment service operated by Alibaba affiliate Ant Financial, and Tencent’s Tenpay, according to Shanghai-based financial market research firm Kapronasia. Ant Financial eschews UnionPay clearing for transactions made with money people transferred from their bank accounts to the Alipay wallet, a payment app that has a 48% share in China’s 11.8 trillion yuan online payment market, according to Beijing-based consultancy iResearch. Tenpay has 20%.
Chinese smartphone maker Xiaomi is the latest to work with UnionPay. The two launched a payment service in April that so far works only on Xiaomi’s flagship Mi5 smartphone. It replicates the bankcard association’s earlier collaborations with Apple, Samsung and Huawei in using a data-transmission technology called near-field communication, or NFC, to allow consumers to directly swipe smartphones at point-of-sale machines for purchases. Alipay and Tenpay, by comparison, require users to log into individual apps for check-outs.
“UnionPay is partnering with kindred spirits,” says Zennon Kapron, founder of Kapronasia. “The smartphone brands see it as an opportunity to offer value-added services.”
The payment services haven’t posed a threat to Alipay and Tenpay, says iResearch analyst Will Tao. Currently about 7 million POS machines in China support NFC, according to data from the country’s central bank, the People’s Bank of China . Alibaba and Tencent, however, are bolstering their market positions with investments in local services such as food delivery and taxi hailing, where consumers have grown used to paying with the companies’ apps.
“There are so many daily service apps that use Alipay and Tenpay,” Tao says. “It will be difficult for UnionPay to get a lot of market share in mobile payment.”
Despite the market dominance, it is difficult to assess whether the apps make money from handling mobile transactions, analysts say. The companies must pay a certain fee to Chinese banks if users aren’t paying with funds already deposited in the two apps. They are also subsidizing shops to discourage bank card payments. Tencent in January alone spent 300 million yuan ($46 million) in bank fees associated with money transfer on its payment apps, according to its annual report.
For Alibaba, the real gold mine lies in banking, loan and insurance services Ant Financial provides, says Zhang Yi, founder of Guangzhou-based consultancy iiMedia. Handling mobile transactions is a good way to channel traffic to the company’s other business lines. Tencent also has a bank and an insurance service.
But UnionPay is not without a chance, Zhang says. It can still win if it upgrades China’s total 23 million POS machines. Plus, being a state-owned network helps with consumer confidence, which means people are more willing to transfer large amounts of money through its services, he says.
China’s central bank in December officially limited money transfer through non-bank payment accounts to a maximum of 200,000 yuan ($30,800) per year, according to the state-run Xinhua news site. The new regulation is to “avoid large sums of money being deposited in third-party payment accounts, which are beyond the protection of bank deposit insurance and will leave consumers vulnerable to possible risks,” Xinhua writes.
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