Double 12 Has Become Alipay's Holiday, But the Payments War Isn't Over

To be precise, it's getting further from over.

Double 12 has become Alipay's holiday.

In the shopping arcade one floor below Shanghai's Hongqiao Railway Station, a red pull-up banner stands every 5 meters, each carrying the same message: the characters for "50% off" take up most of the banner, with "1212 Alipay · Koubei" printed across the top.

At the entrance of an RT-Mart in Hangzhou, a large electronic screen directly overhead reads, in white on red: "1212 Alipay · Koubei Global Carnival."

Until last year, Double 12 was still Taobao's holiday, and Alipay only played a supporting role.

This year is completely different. Alongside the usual restaurants and supermarkets, amusement parks, parking lots, gas stations, passenger trains, car washes and service shops, China Unicom outlets, hotels and tourist sites have all joined the Double 12 campaign.

Pay with Alipay at any of them and you get a discount — a random amount knocked off the bill, for instance. After you spend, you can collect the "Four Koubei Treasures" — Eat, Drink, Play and Fun — much like the Lunar New Year's "Collect Five Blessings," each one standing for a discount in one of these spending categories during Double 12.

"Double 12 is like Double 11 — the discounts are pretty big. We subsidize, merchants subsidize some too, everyone subsidizes together," Fan Chi, CEO of Alipay's Koubei, said at a media briefing before Double 12 began. "Normally Koubei doesn't subsidize at all."

According to Alipay Koubei's figures, 49 million people took to the streets on December 10, the first day of the campaign. In a DQ ice cream shop, if you reach for a credit card or WeChat, the clerk will nudge you toward Alipay and the discount that comes with it.

It looks as though Alipay has taken over offline payments — until you walk into a Starbucks.

Mobile payments have gone mainstream, but the war between WeChat and Alipay shows no sign of ending

On December 8, two days before Alipay's Double 12 campaign began, Starbucks announced a strategic partnership with Tencent, and its mainland China stores started accepting WeChat Pay.

Until then Starbucks took only credit cards, Apple Pay and stored value in its own app. WeChat is the first Chinese mobile payment service it has let in.

Ant Group, Alipay's parent, replied that Starbucks was one of many merchants Alipay Koubei was in talks with, and that the two sides planned to work together on payments, membership and marketing. It did not explain why WeChat got there first, and at this particular moment.

Outside Starbucks, too, you can see what the fight between the two companies has left behind.

At Shanghai's Hongqiao high-speed rail station these days, every merchant with an Alipay poster at the door still has a "Smart Railway Station" sticker in the window from the day it took WeChat Pay a few months earlier. On the streets of Myeongdong in Seoul over this year's National Day holiday, next to Alipay posters promising "up to 999 yuan off, at random," you could usually find the WeChat Pay logo as well.

The payments war between WeChat and Alipay really broke out during the 2015 Lunar New Year. Its red envelope campaign got WeChat Pay linked to 200 million bank cards — a number it had taken Alipay eight years to reach.

At the peak of WeChat's Spring Festival Gala red envelope event, the app logged 880 million shakes a minute, and users sent and received 1.01 billion red envelopes in all.

Duolabao helps offline merchants connect to Alipay and WeChat. Its CEO, Chang Dawei, told QDaily in an earlier interview that the red envelopes people piled up over the holiday did a great deal to popularize mobile payments. "After that, selling got easy for us. Customers kept asking merchants whether they could pay with WeChat, so merchants warmed up — one salesperson could sign three or four deals a day, and once summer came, seven or eight."

The two sides have gone at each other every so often since. This past Spring Festival, Alipay paid 269 million yuan for exclusive red envelope rights on the Gala.

In first- and second-tier cities you can now expect to pay by phone anywhere. Restaurants big and small, the man who applies screen protectors, the roadside barbecue stall at night — Alipay or WeChat works at all of them.

The ride-hailing war, the food delivery war: Chinese internet users have watched one subsidy war after another. Each ended with the two sides merging, or with one of them giving up.

Neither ending looks available to WeChat and Alipay.

Meanwhile, some everyday services run by big companies are cutting Alipay out

A study of China's third-party food delivery market from BigData-Research puts transactions at 49.33 billion yuan in the third quarter of this year, with Ele.me, Meituan Waimai and Baidu Waimai first, second and third by market share at 36.4%, 30.1% and 21.8%.

When Baidu Waimai launched, it took both WeChat Pay and Alipay. Now, once a user is drawn in by a "X yuan off" label and orders once, Alipay never appears at checkout again.

Meituan Waimai users see different payment options depending on who they are. Some cannot use Alipay at all and get only bank cards, WeChat and Apple Pay. Others can find Alipay by tapping the payment page to expand a menu. Meituan Waimai looks like it is testing what removing Alipay does to spending.

In short, the two companies that together hold nearly half the food delivery market are both backing away from Alipay.

The group-buying market Meituan dominates is no different.

BigData-Research's 《2015 China Internet Local Services Market Research Report》 found that as of the end of the third quarter last year, Meituan held 63.2% of China's O2O platform market — group buying, that is — and Dianping 22.1%, against 11.2% for Baidu Nuomi and under 4% for everyone else.

The two companies that between them hold more than 90% of this market have both buried Alipay in their lists of payment options.

At the end of 2015, China's online travel market was worth 430 billion yuan in transactions. Trip.com Group and the companies it controls, Qunar and eLong, held more than 70% of the domestic online travel market; Trip.com Group alone accounted for 51.7% of all flight bookings by value.

Trip.com Group still takes Alipay, but on its payment page it marks WeChat Pay "Recommended."

Other industries offer the same picture. Ziroom raised several billion yuan from Tencent this past August; rent can now be paid online only through WeChat — though when it launched, the service took Alipay and not WeChat.

A pattern shows through: companies whose main backers are Baidu or Tencent are gradually moving away from Alipay.

Big companies have every reason to build payments of their own

Jack Ma has said that business infrastructure is his goal, and Alipay is one piece of it.

But any company that can get a payment license also has every reason to build its own payments and get out from under Jack Ma's infrastructure.

In September, Meituan bought Qiandaibao and with it licenses for internet payment, telephone payment and bank card acquiring. Neither side disclosed the price; one market guess put it at 800 million to 1.3 billion yuan.

The payoff is that Meituan saves the fees it would pay third-party payment companies, and pockets the spread between the card-swipe channel fee it pays banks and the acquiring fee it charges merchants.

A staff member who worked on POS terminals at China Construction Bank's Shanghai branch told QDaily that this spread usually runs between 0.1% and 0.3% of the transaction. Against the 200 billion yuan in transactions Meituan handled in 2015, that spread alone comes to 400 million yuan.

Money that consumers pay Meituan also does not reach merchants right away — settlement usually takes 7 days. With its own payment license, every extra day that money sits in Meituan's account is another day of working capital and demand-deposit interest.

At the same time, Meituan keeps its transaction data out of a competitor's hands. Alipay's Koubei competes with Meituan directly.

Ten years ago, linking a bank card meant a trip to a bank counter, an extremely tedious business. Alipay's work made quick payment ordinary; today, linking a card to any payment service takes a card number, a phone number and an SMS code.

Alipay taught the market. Now the competitors have walked in.

Other companies have bought payment licenses of their own lately. In October, Vipshop fully acquired Zhejiang Beifu and its internet payment license; that same month, Midea Group bought Shenzhou Tongfu, gaining internet and telephone payment licenses; earlier this year, Xiaomi spent 600 million yuan on Jiefu Ruitong and its license.

Handset makers — Apple, Xiaomi, Huawei, Samsung — are a separate category. They negotiate payment rates with banks one by one, then have users tie a bank card to the phone and confirm each purchase with a fingerprint.

Banks like this. After Apple Pay formally arrived in China, banks from the "Big Four" — China Construction Bank, Bank of China — down to ordinary commercial banks such as SPD Bank and China Merchants Bank all offered rewards for linking a card to Apple Pay.

They do it because through the whole business of linking a card and spending, money moves only between the customer's bank account and the merchant, and the fees stay with the bank.

That is not how Alipay was treated in 2014, when the China Banking Regulatory Commission and the central bank jointly issued a directive governing how commercial banks work with Alipay, in the name of protecting funds and customer information.

Ant Group is spending more on subsidies

Ant Group's financial figures, as reposted on Xueqiu, show that payments still bring in more revenue than anything else.

In 2015, Ant Group's revenue was 24.9 billion yuan, up 84.46% year on year. Payments accounted for 16.107 billion yuan of that, or 64.4%. In 2013 and 2014, payments had been 98.4% and 87.1% of revenue.

Payments shrank as a share mainly because Ant Group no longer only handles payments: revenue from wealth management, lending and insurance has grown, diluting the share payments once held.

Ant Group is in far more businesses than it was three years ago, its revenue is growing an average of 87.28% a year, and it says it has been profitable three years running. What Ant Group has not said is that its gross and net margins are thinner than in 2013.

The author of that post attributes this mainly to heavier subsidies for users — on personal transfers, credit card repayments, and water, power and gas bills. All of it follows from how competition in the payments market has changed.

Ant Group's businesses are varied, but for it and for Alipay, take away the payments business and people have little reason to want any of the financial services attached to it.

So Ant Group has to get people using Alipay more. Once someone is in the habit of paying with Alipay, they have reason to leave money in a Yu'e Bao account linked to it and earn daily interest, or move it into the higher-yielding Zhaocaibao.

Any talk of engagement comes back to the fight with WeChat

Alipay started in payments and has worn itself out trying to build social features. WeChat started in social and simply added payments, and has had a far easier time of it.

Again, it was the red envelope campaign during the 2015 Lunar New Year that got WeChat Pay linked to 200 million bank cards — a number it had taken Alipay eight years to reach.

An iResearch report found that by the end of the first quarter this year, Tenpay, the platform behind WeChat Pay, had taken 38.3% of the third-party mobile payment market, closing in on Alipay's 51.8%.

Pulling people in with red envelopes and other direct marketing was only WeChat's first step. Because WeChat has so many active users who spend so long in the app, it is more likely to sit on the phone's first screen, and more likely to be the app people pay with.

You can go a day without Taobao or Alipay; it is hard to go a day without WeChat. So people stayed.

A report from the data service QuestMobile found that as of the first quarter this year, WeChat, QQ and mobile Taobao were the top three apps on both Android and iOS by monthly and daily active users.

Per user, WeChat took up 1,769 minutes a month on Android and 1,910 minutes on iOS. That is about an hour a day.

Mini programs, which opened for closed testing on September 22, could win WeChat still more of the mobile payment market.

First, WeChat merchants opened service accounts and hooked them up to Weidian storefronts, which let them run e-commerce businesses inside WeChat and take money through WeChat Pay. Now mini programs have arrived too. Zhang Xiaolong, head of the WeChat team, once posted a photo of a phone home screen filled with mini program icons.

Their launch opens a new space between the app store and ordinary apps, where users can buy movie tickets, play games and read novels. The documentation for connecting a mini program to WeChat Pay has been up for a while already.

WeChat, which began as a way to chat with the people closest to you, has become the daily "super app" of Chinese life. Keeping up with family and friends, work, news, paying for a meal, everyday services, managing money… every day, 700 million users spend more and more of their time in a world Tencent controls completely.

With a rival in the market that could outgrow it at any moment, Ant Group can hardly help being anxious.

So Alipay keeps pushing to get users more active. It is no longer content with payments and everyday services; it wants to be a "super app" like WeChat, pulling social in too and keeping users inside the Alipay app longer.

Bit by bit, after you pay a merchant through Alipay, you are automatically subscribed to that merchant's service window, which pushes you text-and-image messages every day, much like a WeChat subscription account.

In April, Alipay introduced a membership system that sorts users into four tiers — Ordinary, Gold, Platinum and Diamond — by how often they have used Alipay. Financial services usually rank customers by the wealth they bring in rather than how often they show up, the better to attract the rich ones.

After a major redesign in August, "Friends Circle," Alipay's answer to WeChat Moments, took up more than half of the app's home screen. Alipay also launched "Ant Forest," a farming game in the vein of the old vegetable-stealing games, to get users opening the app often to collect the carbon energy they and their friends earn by spending through Alipay.

"Friends Circle," which caused an uproar not long ago, was the most extreme of these attempts.

Ant Group's hurry may also be about going public

At the end of November, Ant Group chairwoman Peng Lei sent an internal letter addressing the Friends Circle affair. In it she mentioned that she was on a business trip in the United States.

Bloomberg reported that the visit was meant to lay the groundwork for an Ant Group IPO that could come as early as next year.

Reports about a possible Ant Group listing have circulated since April, when the company closed a $4.5 billion funding round at a $60 billion valuation.

Ant Group's answer to such reports has always been "there is no timetable for a listing," "going public is not a goal." Alipay's internet-celebrity of an official account put it more bluntly: "Not a shred of a plan — call it a phantom stock," "this rumor has to come around every two or three months."

All of it suggested a company in no rush. As late as October, Ant Group was still denying reports of a listing in Hong Kong and on the mainland A-share market.

Then in November the tone changed completely.

Alibaba's two most important executives, Jack Ma and Joseph Tsai, both spoke publicly in early November about the chances of an Ant Group listing in Hong Kong.

At a Hong Kong summit, someone asked Tsai what the city would have to do to attract Ant Group. Tsai said he would not offer specific suggestions, but that Hong Kong should try to accept new things and move its tightly regulated listing system toward one based on disclosure.

Jack Ma, in an interview with the South China Morning Post, addressed the conditions for a Hong Kong listing directly: "There's a lot of media speculation right now about whether Ant Financial will list in Hong Kong. We'll come only when we feel this city is ready."

Ant Group has three plausible venues: the United States, Hong Kong and mainland China.

The main American stock indexes have been hitting record after record. Alibaba is already listed there, and Ant Group, which uses the same corporate structure, would meet few institutional obstacles. Listing in the U.S. quickly at a high valuation would suit Ant Group, Alibaba and both boards.

But a private equity investor told QDaily that a U.S. listing would be the easier route for Ant Group. "You have to queue up in the U.S. too — Hong Kong is actually the loosest of the three. Lately it only asks a company planning to list to find the required number of institutional investors, and then it can approve the listing. The trouble with Hong Kong is that it doesn't allow a corporate structure like Ant Group's — no so-called dual-class shares with unequal voting rights."

That is precisely what Jack Ma and Joseph Tsai were asking the Hong Kong Stock Exchange to fix last month.

An investment analyst who once worked at an American-owned bank thinks the A-share market would give Ant Group its highest valuation. The National Council for Social Security Fund owns 5% of the company, and a mainland listing would be chased by public mutual funds.

Ant Group's ties to the A-share market do not end there. Jack Ma holds shares in Baiyunshan and is the person in effective control of another listed company, Hundsun Technologies. "If he wants to take Ant Group public, those two are ready-made shells," the analyst said.

Whichever market it picks, though, time is getting short.

At more than $60 billion, Ant Group is the most valuable unlisted internet company after Uber. But its business is still largely confined to China. What the capital markets think it is worth depends heavily on that market — one whose GDP growth rate has now printed the same digits, before and after the decimal point, three quarters in a row.

Funding for technology startups is also far tighter this year than last. Figures compiled by Thomson Reuters show that Chinese companies raised just $28.8 billion through IPOs at home and abroad in the first three quarters, down 31.6% from the same period last year, and 60% of that money went into traditional sectors such as finance and industry.

The few internet giants still private do not look like going public soon either: Meituan is struggling to turn a profit, and Didi faces regulatory trouble.

When the American tech bubble burst in 2000, even companies whose scale and profits were perfectly sound — Intel, Microsoft — could not avoid single-day drops of 22% and 15.6%.

Ant Group had better hurry.

Cover image from Ant Group and Pixabay