Alipay Leads a Digital Finance Revolution in China

Not many years ago, Jane Yang, a 26-year-old civil servant in Beijing, paid her landlord in three-month installments with a stack of 100-yuan notes. To pay her utilities—water, electricity, and home Internet bill—she went to three separate banks, where she handed cash to a teller. The process was “very time-consuming and irritating,” she remembers. Even as skyscrapers and gleaming shopping malls cropped up around China’s capital, most middle-class residents had never seen or used a simple checkbook.

Today she uses the Alipay app, China’s most popular online payment service, on her smartphone to transfer money directly to her landlord’s account. She pays for her utilities and her mobile-phone account through Alipay as well. Yang even keeps savings in her Alipay Yu’ebao money market account, where money accrues higher interest than it does in a traditional bank account. Yang hadn’t set out to deliberately overhaul her financial habits, but new mobile technology, she says, “made so it easy.”

As of October 2014, Alipay had more than 300 million registered users in China (and 17 million overseas), according to the most recent figures the company has made public. Many, like Yang, originally set up accounts in order to shop at parent company Alibaba’s wildly popular retail sites Taobao.com and Tmall.com, where everything from designer clothes to pet food is for sale. The Alipay payment system works much like PayPal, except that funds are held in escrow and are released when the goods arrive in satisfactory fashion. In a society where consumers have learned to be wary of false advertising and fake products, Alipay’s escrow system helped ease consumer fears—and gave Alibaba’s retail sites a crucial early advantage over rival eBay.

Today Alibaba’s sites sell $300 billion worth of goods annually, dwarfing sales on eBay and Amazon combined. The company, which unlike Amazon doesn’t actually stock and sell the merchandise on its sites, held its initial public offering on the New York Stock Exchange in September, raising $25 billion, the largest debut ever.

Alibaba and Alipay, which has been incorporated as a separate company since 2011, helped drive the very rapid expansion of online sales in China—now the world’s second-largest “e-tail” market. McKinsey Global Institute estimates that by 2020, Chinese e-tailing could generate as much as $650 billion in sales, and China’s market “will equal that of the United States, Japan, the United Kingdom, Germany, and France combined today.”

As much as Alibaba has driven China’s booming e-commerce market, it’s possible that Alipay will ultimately have the bigger impact on the Chinese economy. Alibaba and Alipay “are integral to each other’s success,” says Ben Cavender, principal at China Market Research Group in Shanghai. “But I wouldn’t be surprised if, in the long term, Alipay turns out to be the more important business—it’s so flexible and has so many potential uses.”

Alipay debuted as a simple e-payment system, but it’s now a destination app (and website) in its own right. In addition to easing consumers into online shopping, Alipay, with its huge built-in user base, has recently made a range of financial services available to people who previously lacked easy access to tools for making payments, money market accounts, and small business loans.

As the Chinese fast become accustomed to banking on their phones, Alipay faces new competition from alternatives like Tencent’s Weixin Wallet function, which enables mobile payments.

“In China today, it’s technology companies that are driving innovation in mobile payments,” says Zennon Kapron, a financial technology and digital currency expert in Shanghai. Traditional banks and the government are not the main actors.

Between July 2013 and June 30, 2014, Alipay handled $778 billion (4.8 trillion yuan) in transactions, according to the company. It is able to process more than 10 billion transactions per day. During the popular “Singles’ Day” annual sale—which is like Black Friday in the U.S. but on overdrive—Alipay handled up to 2.85 million transactions per minute, and 54 percent of its transactions are made via mobile device.

Alipay’s back-end technology is similar to that of PayPal, Kapron says, but on the front end the user’s experience is quite different. PayPal is best known as a payment option, a screen you may reach at the end of a transaction on a retail website, but with Alipay, customers can go directly to its app and website to make payments, check their investments, or buy movie or plane tickets. The presentation, says Kapron, is suited “for people who have quickly gotten used to using their mobile phones for everything.”

With these new mobile payment technologies, China has leapfrogged both checkbooks and desktop banking. Jane Yang, for example, went straight from paying rent in cash to paying via Alipay. According to PricewaterhouseCoopers, 79 percent of Chinese consumers surveyed said they were happy to receive coupons via their mobile devices, versus just 53 percent globally. And 55 percent of Chinese consumers said they expected their phone to be the main way they made purchases in the future, versus 29 percent globally.

This is a remarkable turnaround for a country that for years seemed to be stuck in a far earlier, low-tech era of consumer financial services. “The banks did nothing to make customer service easy,” says ­Cavender, who notes that for many years paying a credit card bill required standing in line at a bank. It could not be done through the mail or online. Only those who had significant funds to invest and lived near large bank branches had easy access to wealth management options.

These changes coincide with rising overall incomes in China, and with the government’s desire to build a more consumer-­based society, observes Tjun Tang, senior partner and managing director at Boston Consulting Group’s Hong Kong office. “In uptake of digital finance, China is probably leading the world right now,” he says.