How China’s Payments Firewall Crashed the American Dream

China has one of the most hostile environments for foreign entrants and Apple Pay coming to Hong Kong may become another lesson for bold Western companies trying to get into the big game with advanced competitors on the mainland (just like Uber’s two-year-$2-billion lesson, or Groupon’s miserable failure in the country).

The contactless payments industry in China is heavily dominated by local – originally non-payment – companies with extremely deep pockets to firmly root their position. Nevertheless, the competition for vast consumer base is increasingly intensifying. A little earlier this month, Xiaomi, one of the largest smartphone vendors in China, holding 9% of the market in Q1 2016, was reported to be launching its proprietary mobile wallet, called Mi-Pay. Since China’s mobile and internet payment markets grew more than 40% from 2014 to 2015, no wonder companies of all origins will be rushing to the payments goldmine to capitalize on the opportunity. As for the user base, 675 million people in China use smartphones with 40% of smartphone users making mobile payments.

As Vladislav Solodkiy, Managing Partner at Life.SREDA, a Singapore-based FinTech VC, suggests, The most rapidly growing e-wallet markets are China and India: the countries with a large number of unbanked customers and a high level of smartphone penetration. <...> Despite the huge domestic potential, the competition in these countries intensifies quarterly.

However, not everyone will get to represent a threat at all. While Western solutions like Apple Pay are simply digitizing an existing bank card, e-wallet providers in China (such as WeChat and Alipay) use more advanced technology, which some professionals believe to be years ahead in their digital payment methods.

As Norm Johnston, Global Chief Strategy and Digital Officer at media network Mindshare Worldwide, commented recently to SCMP, Asia has really led the way when it comes to mobile overall, and payments are no exception. Arguably the WeChat app is the global poster child for seamless commerce integration. You can make payments, loans and can even apply for visas through the app.

And it’s not even the weight, scale and range of services China’s payment leaders possess. Let’s look at some figures: China’s Tencent has 700-million-plus users on its WeChat messaging platform, where it offers financial services including payments. Alipay is reported to have about 450 million users. Regardless, it appears to be advanced technology and vast networks, as we have mentioned, that have built an almost unbreakable wall for Western explorers.

Alipay and Tenpay (the platform behind WeChat Pay) have their own payment network. As explained by Forbes, when a user pays, money moves from the user’s bank to the user’s account on the Alipay platform, then to the merchant’s account on Alipay and then eventually to the merchant's bank. By doing so, Alipay and Tenpay and disintermediating the payments process, cutting off card issuers and global network owners. The bank and card issuer would have no idea where the user was or what they were buying – only Alipay and Tenpay can see that. And by owning the data, they really secure control over the market (knowledge is power).

It is also worth also mentioning that Alipay sits on shoulders of Ant Financial, the powerhouse of China’s online payments market. Ant Financial is China’s most valuable financial technology company, which just completed a $4.5 billion funding round – giving it a valuation of ~$60 billion. The company holds an immense power in the country also due to its state-backed investors. The $740 billion sovereign-wealth fund China Investment Corp. and the country’s national social security fund are now among its biggest shareholders after Ant Financial began introducing outside investors, as reported by the WSJ.

Moreover, according to the report on digital disruption by Citi, published this March, China’s e-commerce ecosystem is now larger than any other country in the world in terms of transaction volume. China’s top FinTech companies (Alipay, Tencent and others) often have as many, if not more, clients than the top banks.

In addition, the hallmark of China’s market is that unlike the US and Europe’s telecom and Internet companies, China’s Internet giants have been strategically expanding into payments/finance and their local consumer banks are more sophisticated. The powerful parent company in telecom or Internet business ensures significantly faster and smooth entrance into the payments space and immediate access to the large consumer market. That is why the entrants with a strong umbrella are able to deliver more convenient, reliable, fast and cost-efficient alternatives to traditional bank payments and are able to keep foreigners struggling in the market.