Digital Payments in China Are Cheap and Convenient

In “China Is Dominating Ecommerce,” contributor Marcia Kaplan addressed that country’s innovation in online shopping. Digital payments in China are equally innovative. I’ll address what that could mean for North American merchants in this post.

Lesson 1: High Fees

High credit-card fees motivate merchants to look for alternatives. Lower fees drive profits and investments.

Consider the average fees a merchant in China can expect to pay for processing three popular payment methods.

• WeChat Pay, the most popular payment method, is accepted by 72 million merchants in China and claims to process over 1 billion transactions every day. WeChat Pay’s average merchant processing fee is 0.6 percent.

• Alipay, China’s second most popular payment app with usage statistics similar to WeChat Pay, has an average merchant fee of 0.55 percent.

• China Union Pay, China’s most popular credit card, has an average merchant fee of 0.8 percent.

The average card-present fee in North America is approximately 2.2 percent; card-not-present is roughly 3.5 percent. Thus the difference is clear: North American merchants are paying a lot more to process fewer transactions. (There are approximately 100 million daily credit card transactions in the U.S. versus 1 billion in China.)

To be sure, the incredible growth of ecommerce and mobile payments in China cannot be attributed exclusively to reasonable transaction fees. However, if fees in China were similar to those in North America, adoption would presumably be much lower.

High merchant fees could eventually prompt North American merchants to:

• Seek alternatives to card-based payments. An example is the Starbucks mobile wallet. Customers load funds into their accounts and use those funds (plus loyalty-based rewards) to pay for purchases. The stored funds allow Starbucks to avoid interchange and card-assessment fees on every purchase. Expect other merchants to adopt their own stored-value wallets and reloadable gift cards.

• Call for more regulation on card brands (Visa, Mastercard, American Express, others), including more antitrust lawsuits.

• Adopt less expensive payment methods, such as debit cards, direct-from-bank payments, and peer-to-peer payments.

Lesson 2: Consumer Credit-card Debt

Crushing credit card debt causes consumers to look for alternatives.

Credit card debt is as much of a problem in China as in North America. In 2020, Chinese cardholders accrued roughly $2.5 trillion of credit card debt; Americans accrued $930 billion.

In 2019, recognizing the risk of credit card debt to the country’s economy, the Chinese government capped credit card interest rates at 12 to 18 percent, depending on the type of card. Those rates are more or less in line with North America.

Nonetheless, excessive debt continues to plague consumers in China and North America, which could drive shoppers to “debt-free” alternatives, such as:

• Debit cards and direct-from-bank payments, which allow consumers to make purchases only if sufficient funds are in their account. Merchants should expect more debit card payments and more bank-based payments.

• Buy-now-pay-later, while still a form of credit, may help consumers manage their debt. Despite the relatively high fees, merchants are accepting BNPL payments as shoppers are looking for alternatives to card-based debt.

• Prepaid cards, which could gain wider acceptance because they act like credit cards but do not allow consumers to pay with money they do not have.

Lesson 3: Point-of-sale Hardware

In China, payment apps such as WeChat Pay and Alipay use QR codes. A reported 98 percent of urban Chinese consumers use their digital wallet for daily purchases. Most consumers do not carry cash.

The result is that Chinese merchants are not burdened by expensive registers and point-of-sale equipment. Merchants simply display QR codes for customers to scan.

North American brick-and-mortar merchants could reduce equipment costs by implementing QR code-initiated payments, such as from PayPal and Square.

Lesson 4: Super Apps

In China, entertainment, shopping, social media, payments, and more are combined in “super apps” — typically WeChat. Chinese consumers use one app for:

• Internet surfing,
• News consumption,
• Chat messaging,
• Payments and money transfers,
• Shopping,
• Social media,
• Image sharing,
• Gaming,
• Entertainment.

North American consumers use a single app for one or two purposes, typically. An example is Instagram for sharing images. Only recently has Instagram expanded into shopping and payment acceptance. Perhaps Amazon will evolve into super app status by combining entertainment with shopping.

Despite the political rhetoric in the U.S. to break up Big Tech, merchants should closely monitor the emergence of super apps. If they become anywhere near as popular as in China, those apps could help merchants reach enormous audiences.