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The Cashless Society Has Arrived— Only It’s in China

Mobile payments have surged to some $9 trillion a year, way ahead of the U.S., changing how people shop, borrow—and even panhandle. The growth foretells a future where tech firms like Alibaba and Tencent drive innovation in finance.


By

Alyssa Abkowitz

A quick-response code enables shoppers to buy vegetables with their smartphones at MC Box Po Tat Market in Hong Kong.Photo: Anthony Kwan/Bloomberg News

BEIJING—Soliciting handouts near a grocery store, Zhao Shenji, a slender man with shorn hair, made giving easy for Beijing residents accustomed to relying on their smartphones.

“Recommend using WeChat Pay,” said a placard the beggar displayed.

It was a literal sign of the times. Payment via mobile-phone services such as WeChat is sweeping the country. After gaining a beachhead as a means to buy things online, mobile payments moved on to store purchases and are fast becoming the way many people in China pay for just about everything.

That includes small personal debts. Richard Lau, a young management consultant waiting to get into the historic St. Michael’s Cathedral in Qingdao one recent day, found he had no cash for the 20-yuan admission, so he borrowed it from another man in line and immediately zapped him the amount by phone.

Behind the trend are internet titans Alibaba Group Holding Ltd. and Tencent Holdings Ltd., which are elbowing aside banks to take a growing role in daily commerce. Their success offers a glimpse of a future where technology firms drive innovations in finance just as they have in retailing, autos and the media.

A woman scans an Alipay code to make a payment in Beijing.Photo: HOW HWEE YOUNG/EPA/Shutterstock

Though the U.S. saw $112 billion of mobile payments in 2016, by a Forrester Research estimate, such payments in China totaled $9 trillion, according to iResearch Consulting Group, a Chinese firm.

For Alibaba and Tencent, the payoff isn’t just the transaction fees they make from merchants, typically 0.6%. It’s also the consumer data collected, which can transform their apps into marketing platforms for an expanding array of services, from bike sharing to travel.

Some of the repercussions of increasing mobile payments are just coming into view. The payments haven’t been required to go through the central bank’s clearing system, making it harder for China’s monetary authorities to follow capital flows and watch for money laundering and fraud. The People’s Bank of China has ordered a new payment-clearing platform that will require nonbank financial firms to give it a clearer view of mobile payments by the summer of 2018.

Consumers also are being offered more pitches for loans, investments and other financial products via smartphone. Short-term consumer credit in China soared 160% in the first eight months of 2017 from a year earlier, according to the central bank. Some analysts think the growing ease of borrowing is part of the reason.

Chinese, meanwhile, are making less use of old-fashioned cash, as in coins and folding money. They spent about 66 trillion yuan (nearly $10 trillion) that way in 2016, down about 10% in two years, according to a central-bank payments report.

The path to mobile payment was blazed by Alibaba, which hosts online shopping bazaars where merchants sell goods to consumers. More than a dozen years ago, Alibaba, taking a page from the U.S. company now called PayPal Holdings Inc., started a system called Alipay as an escrow service. It would hold payments until shoppers received their goods.

The service caught on among buyers who didn’t always trust vendors to deliver as promised. Alipay evolved into an online- and mobile-payment service and passed PayPal as the largest mobile-payment platform in 2013.

That year, Tencent linked a mobile-payment system to its wildly popular WeChat instant-messaging app. With Alipay already in place, the challenge for Tencent was getting people to link their bank accounts to its service.

It devised a strategy based on the Lunar New Year, when Chinese people give red envelopes of cash. Tencent encouraged WeChat users to send digital red packets to friends for the 2014 Lunar New Year, letting them input a sum of money and send it to friends, who would divide the loot.

In a clever angle, Tencent set things up so those who opened their virtual envelopes first would get a bigger share. Over a 24-hour period, 16 million red packets were sent, and suddenly WeChat Pay was in the mobile-payments game. It now has about 40% of China’s mobile-payment market, versus 54% for Alipay, according to iResearch.

They work in similar ways. People link their bank accounts to the app, then can pay for things either by scanning a merchant’s QR code or having the merchant scan theirs. People also can transfer money by tapping on an icon in WeChat or Alipay.

Zhao Shenji has a WeChat code to encourage people in Beijing to give him handouts.Photo: Alyssa Abkowitz/The Wall Street

At a night market in Taiwan recently, Manni Cheng, a textile saleswoman from Shanghai, paid cash for grilled prawns but then noticed the vendor accepted Alipay. She asked for her cash back and paid with her phone.

Ms. Cheng said she likes Alipay because it lets her track her spending and avoid carrying a lot of cash. Money in her Alipay balance is transferred to the app’s money-market fund.

“It’s a payment tool with wealth-management functions,” Ms. Cheng said.

The seamless use of phones as wallets rarely fails to amaze foreigners traveling in China. Diego Merino, an education recruiter from New York, was in Beijing recently and wanted to buy dumplings for lunch. While he asked a friend for cash, “someone else walked up, paid with his phone and walked away,” Mr. Merino said. “It took about three seconds.”

A worker scans a driver's smartphone to charge a toll on an expressway that links the Chinese cities of Shanghai, Hangzhou and Ningbo.Photo: VCG/Getty Images

Tencent has created a platform for businesses so customers can “follow” them for news and discounts. Customers who follow Gap Inc., for instance, might be alerted to promotions and discounts when they return to the store, potentially generating more sales for Gap and revenue for WeChat.

No cash? No problem. A trip to Shenzhen, China highlights how the explosive growth of mobile payments is driving a wallet-free society. WSJ's Jason Bellini reports.

Alibaba can monitor the shows people watch on its Youku Tudou video-streaming site and push ads targeted to them, generating ad commissions and product sales for Alibaba, plus a clearer picture of consumer behavior. While using the data within their ecosystems, both internet giants say they don’t sell it to others.

Conditions in China made it ripe for this innovation. Credit cards never caught on in a big way. Discretionary spending wasn’t an option for most people until recent years, and there has long been a cultural aversion to debt in China. On top of that, the government made it tough for Visa Inc. and Mastercard Inc. to set up shop.

The rise of tech companies as financial powers has dealt a blow to traditional banks. China’s state-owned banks lost nearly $23 billion in fees in 2015 they might have collected from card fees, according to a November 2016 report from EY (formerly Ernst & Young) and Singapore’s DBS Bank. The report projected the annual fee loss could widen to $60 billion by 2020.

The larger problem for banks might be that Alibaba and Tencent often know more about their customers than they do. If a Beijing car dealer uses a bank debit card for a business trip to Shanghai, the bank knows what airline he or she flew, as well as the hotel and restaurants patronized. “But if the ‘customer interface’ is happening elsewhere, the bank has zero visibility over transactions,” said James Lloyd, Asia-Pacific FinTech Leader at EY. “That’s not a good situation to find yourself in.”

U.S. payment-processing firms have been ramping up their own digital-wallet efforts. Visa and Mastercard both have mobile apps that allow users to pay via near-field communication and are incorporating biometrics into their offerings. They also work with Apple Pay and Samsung Pay.

PayPal, which allowed people to beam money to each other via Palm Pilots in the late 1990s, has formed partnerships with more than 20 other companies to extend its mobile payments, including Alphabet Inc.’s Google and Chinese search giant Baidu Inc. About 34% of PayPal’s payment volume is mobile, said Bill Ready, chief operating officer.

Smartphones are vastly more common than Palm Pilots ever were, yet Apple Inc. has struggled to get consumers to use its Apple Pay service, now accepted at more than 50% of all U.S. retail locations.

Just 19% of iPhone users have tried Apple Pay at least once, according to an estimate by Loup Ventures, a venture-capital firm. Loup said about 35% of all new iPhones sold in 2017 have activated Apple Pay. Apple said in November that active users of the service more than doubled, and annual transactions are up threefold.

A payment made using WeChat in Bangkok. WeChat and rival Alipay have about 90% of the mobile-payment market in China and want to expand in other countries.Photo: Xinhua/ZUMA PRESS

In some parts of the world, changes that resemble China’s are taking place. In Scandinavia, Nordic and Dutch banks have cut total branch levels by about 50% from peak levels, and Sweden hasn’t had checks since the late 1980s, according to Citi Research, part of Citigroup Inc.

Tencent and Ant Financial Services, the Alibaba affiliate that operates Alipay, are forming partnerships with payment processing companies across Europe and investing in mobile-payment firms in India, Thailand and other countries.

Ant Financial also sought to buy U.S. money-transfer firm MoneyGram International Inc., whose 200-country network enables users to send cash through banks, stores and kiosks. But the companies said Tuesday that a U.S. national-security panel refused to approve the $1.2 billion deal.

WeChat Pay and Alipay are gaining attention in U.S. tourist centers after striking deals with hotels and resorts. A group of Chinese tourists recently dined at the Bacchanal Buffet at Caesars Palace in Las Vegas, where the menu includes T-bone Australian lamb, chilled crab legs and handmade dim sum. They settled their bill with a smartphone.

“One couple stopped to watch the WeChat Pay transaction and asked for an explanation,” said Bruce Bommarito, a Caesars executive. “They were surprised…and wanted to know if this payment method was available to Americans as well.” Americans can sign up for WeChat but can’t link it to U.S. bank accounts. Alipay isn’t available for Americans as of now.

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Tencent and Alibaba say they have no plans to push their payment platforms to U.S. consumers. Many Americans don’t see the need for mobile payments, since their plastic cards and cash are welcomed and some merchants still accept checks.

“Any new way of paying has to prove itself to be incrementally better than any other options you have,” said James Wester of research firm IDC Financial Insights. In the U.S., “plastic is convenient, widely accepted and understood by the customer.”

—Junya Qian and Liyan Qi contributed to this article.

Write to Alyssa Abkowitz at alyssa.abkowitz@wsj.com

Corrections & Amplifications
An earlier version of this article included a quote from Jim McCarthy, and incorrectly named him as a Visa executive. Mr. McCarthy is no longer with the company. (Jan. 4)

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