Lakala Started Early and Is Finally Going Public — But Mobile Payments Are a Different Business Now

One of the first companies into mobile payments, Lakala broke in with hardware. Software services beat it in the end.

Up at dawn, late to the fair — the old saying fits Lakala well. Its reverse-merger listing fell through last year, and it is now queuing for approval on a fresh IPO application.

If you grew up straight into the "Alipay or WeChat" era, you have probably never heard of Lakala. It was in fact one of the first companies into mobile payments. Back in 2005 — when Tencent still made its money from QQ memberships and avatar skins, when middle schoolers were working billing loopholes in coin-operated payphones to top up their QQ coins, when paying for something on Taobao meant filling out a form at a bank or post-office counter, and when most people still did not trust online banking — the Lakala machines in convenience stores let you swipe a card to pay your own water, electricity and gas bills. For plenty of people, that was the first time paying for anything felt convenient.

Those "convenience services" are how Lakala opened up the market. During the five or six years of vacuum between online banking and mobile payments, it moved into nearly 100,000 offline merchants, and by 2015 it had passed 100 million individual users. As late as 2013, founder Sun Taoran still thought his company had a good chance of getting out ahead of Alipay.

By 2016 the "first tier" had become a duopoly: Alipay and WeChat's Tenpay. Lakala, once above 20% of the market, was down to about 3%. Meanwhile companies holding payment licenses were being picked off by big corporations in a hurry to get into finance — even a license attached to a company with nothing to show for itself was going for several hundred million yuan.

Unwilling to sell, unwilling to die, Lakala seemed to have one way out: an IPO.

In early 2016 it had already tried an asset injection, using main-board listed company Tibet Tourism as a shell. Everything was in place for the deal — priced at 11 billion yuan and skirting the edge of the rules — until a mid-year market crash, and the tighter listing policy that followed, threw it off. Tibet Tourism then became a company under close regulatory watch; even after Lakala reorganized its payment-tools and financial-services businesses and applied to inject only third-party payments into the listed entity, it still got an inquiry letter from the China Securities Regulatory Commission.

Lakala had dropped the overseas listing route that Yirendai took. It had no shot at the fast-track approval Ant Group might get. Unlike JD.com and Baidu, it did not package its financial business into securities products. In the end it applied directly for an IPO on the smaller Innovation Board, cutting the fundraising target to 2 billion yuan, to be spent "upgrading" its current third-party payment business.

But the bigger question for Lakala is not how or when it lists and raises money. It is that twelve years in, the payments business has changed completely, online and off. And while it waits for its IPO to clear, it may lose more market openings and slip further out of consumers' minds.

Terminals, POS Machines, Phone Card Readers, Wristbands — What Kind of Company Is Lakala?

From opening up the market and building out its merchant business to moving into personal payments, almost every new line Lakala has launched over the years went to market as a piece of hardware.

The original "Lakala" was a multifunction machine in city convenience stores that paid water, electricity and gas bills, topped up phone credit and settled credit card statements.

After paying out of its own pocket to install 60,000 of these terminals across 300 cities, Lakala went looking for a business that would throw off steady cash: folding those same functions into POS machines, which merchants used far more often, and modernizing the acquiring link in the transaction chain.

Because it takes a cut of every transaction, much as UnionPay does on the clearing side, this segment now brings in more than 70% of Lakala's revenue and most of its profit. In acquiring alone — the business-facing side — Lakala's market share trails only UnionPay Merchant Services and Allinpay.

For personal payments, what Lakala offered was a 199-yuan card reader that plugged into a phone's headphone jack, with a 0.5% fee on every transfer on top — a device that looked and worked strikingly like the one from the American startup Square.

Sun Taoran aimed the product at people who spent heavily online and found paying online a chore. As he told CBNweekly in an interview in early 2013, that was a base of 30 million users who would go on to pay for other services later. The NFC technology behind Apple Pay, the QR codes that are everywhere now, and the fingerprint, iris and facial recognition Alipay had tried out he dismissed as offering "no real improvement in function."

A few years later Lakala tried NFC anyway, putting bank card and transit card payment into a fitness wristband and calling it a "payment solution for wearable devices."

Lakala spent ten years building a series of payment hardware products

2005.6

Lakala founded

2007.6

Starts building Lakala convenience-payment points in Beijing and Shanghai

2010.4

Releases the Mini Lakala home payment terminal

2012.5

Launches the phone card reader

2014.10

Launches Kaidianbao ("Shop Opener"), a community e-commerce O2O service

2015.7

Launches Kaola ("Koala"), a multifunction payment wristband

The run of products says what kind of company this is: one weighted toward the merchant side, and one that likes to lead with hardware as its calling card.

Lakala Grew Fastest in the Vacuum Between Online Banking and Mobile Payments

People who first got online in the early 2000s mostly marveled at how fast information moved in the virtual world and how easy it was to talk to anyone. They also remember vividly how painful every online shopping service was to use.

By late October 2003, Alipay was already being tested inside Taobao, itself only recently launched. But early users paying money into Alipay almost always had to go through a postal money order or a bank counter and then fax the receipt over for confirmation. The "instant" quality that every third-party payment tool now advertises did not arrive until 2011, when Alipay and several banks jointly launched Quick Pay.

Back then, transferring money straight out of a bank account meant using the "U-shield" — the little physical key now gathering dust in the corner of a drawer somewhere. Every bank required one for online payments, and it did make things a lot safer, but incompatible systems, lost shields and the fuss of spending half an hour to pay a few dozen yuan still left plenty of people fed up.

"There was no better solution online back then. Quick Pay didn't exist yet. Every online solution at the time — Alipay included — I thought was too complicated, not something users would accept. People shopping online in the future are going to be shopping for convenience. … Buy online, swipe your card offline — we thought that was a simpler solution." Sun Taoran said this in the book The Golden Age of China's Payment Industry (《中国支付行业的黄金时代》). Lakala was not alone: Hezi Zhifu, Leshua, 99Bill and similar payment tools were all fighting for users with hardware.

In small-ticket, high-frequency personal payments, Sun Taoran actually saw the potential of mobile payments earlier than most, and began working on prototype phone card readers as early as the end of 2011. "Once smartphones are everywhere, people will want to get things done on their phones. If you're in mobile payments and your users are on their phones, you can reach them anytime, anywhere."

Chinese demand for smartphones took off in 2012. IDC reported that the country's smartphone shipments jumped 135% that year, and that of the nearly 100 million handsets shipped each quarter, 80% were smartphones.

By then Lakala had been running for six or seven years and had grown into a mid-sized company with a fairly settled business model.

Lakala Used Hardware to Make Card-Swiping Easier. Mobile Payments Went Cardless Instead

As Sun Taoran tells it in The Golden Age of China's Payment Industry, the terminal machines came out of several market openings he saw converging just as he decided to build a payment tool:

"After 2007 the banks pushed credit cards hard, and issuing credit cards raised a problem: how do you pay them back? There was no good way to repay — other than going to a bank counter. Online banking wasn't widespread enough yet, and it was very complicated. So we solved it with UnionPay's new type of terminal. We put these machines in convenience stores, turning every convenience store into a branch, a terminal, where people could pay off credit cards, top up their phones and pay water, electricity and gas bills on the Lakala machine right there in the shop."

Lakala's thinking always circled back to swiping a card. Today WeChat Wallet and Alipay have both absorbed enormous numbers of the same convenience services: utility bills, phone bills, credit card repayment, traffic fines, social security and housing fund balances, printing tax statements, visa applications, booking a hospital appointment and more.

Verify your identity once, link your debit and credit cards once, and after that you can just spend, online or off, as much as you like. In practice you are still tied to a bank card, but in daily spending that link has gone completely invisible.

By Alipay's own earlier count, between 2004 and 2014 its four main convenience payment categories — utility bills, credit card repayment, phone top-ups and transfers — added up to about 6 billion transactions, each one saving the user an average of 10 minutes.

Mobile Payments Grew Faster Than Anyone Expected, and Neither Rules Nor Technology Stopped Them

In mobile payments, Lakala rarely compares itself directly with WeChat or Alipay.

Analysys put Tenpay and Alipay's combined share above 88% in the third quarter of 2016 — outright dominance. Tenpay in particular, the company Sun Taoran once thought he had left far behind, went from under 5% of the market to more than 38% in three years.

Lakala was wrong about China entering a "bank card era." This has always been a country that likes cash, and the conservative habit that comes with it — save, don't borrow — has kept credit cards scarce. By the end of the first quarter of 2011, 2.553 billion bank cards had been issued nationwide, of which only 242 million were credit cards, under 10%.

The mobile payment habit Alipay and WeChat built through ride-hailing, food delivery, movie tickets and offline spending never tried to break with that tradition. Every payment still comes out of the debit card you linked; it just goes out faster, and you barely feel it. Leave the house with a phone and you need no wallet, let alone loose change — and that turned out to be far easier to accept than swiping a bank card on your phone.

Lakala saw the potential of O2O early too. By 2013 its terminals had a button for buying movie and event tickets, ahead of online ticketing platforms like Maoyan and Wepiao and ahead of the ticket-collection machines later installed in cinemas.

In big cities, the people who go to convenience stores tend to be white-collar workers with money to spend and an appetite for new things. Subsidize them first, then work outward to educate everyone else: that is the playbook nearly every third-party payment tool has arrived at.

The clearest example is the offline "Double 12" promotion of the past few years. By subsidizing half-price purchases at convenience stores, supermarkets and other key retail outlets, Alipay made its name even among middle-aged and older shoppers.

The convenience functions Lakala had spent seven or eight years putting into hardware close to users offline were suddenly reproduced by a few taps inside an app.

On the merchant side, the QR code — which needs nothing more than a printed sheet of paper — has become the way small and medium merchants prefer to take money. Alipay recently built a promotion around that demand, letting merchants apply online for payment-code materials and waiving withdrawal fees for a year.

In 2014 the People's Bank of China halted the rollout of QR code payments, arguing that the security technology behind them was too weak and could cost consumers money. UnionPay, which had been testing QR codes on a small scale, immediately suspended every related service. Alipay and Tenpay played along for a while, then quietly went back to breaking the rule and kept pushing QR codes.

"Our competitors deserve respect. The internet companies built a beautiful offline QR code ecosystem. Their success made UnionPay understand that in offline mobile payments, promotion matters more than the product," an anonymous UnionPay insider told Caixin.

So the ones who had to change fastest, and who lost the most, were the acquirers that wanted POS hardware in every offline shop: UnionPay, Lakala and the rest. Zong Yongliang, CEO of the cloud-POS company Aikeshi, told QDaily that smart POS machines combining card swipes and QR scans became the new favorite from 2014: "Traditional financial POS makers like Landi, PAX and Newland were all racing to develop and produce smart POS machines."

In an earlier interview with 36Kr, Sun Taoran said that 30% to 40% of the WeChat and Alipay QR scans then happening in the market went through Lakala's equipment. Lakala could still take 0.1% off each transaction.

"But it's basically asking a tiger for its hide. When we deployed POS machines for UnionPay, UnionPay was only the referee, not a player — in the end they needed us. Deploying QR scanning tools for payment companies like WeChat and Alipay is almost laughable: today they leave us 0.1% to earn, tomorrow they might cancel it, and that profit can disappear in a minute. We are always the passive party."

At Mining and Using Consumer Data, a Tool Company Like Lakala Is No Match for Alibaba and Tencent

Between its various hardware products, Lakala also discussed selling services to merchants. Terminals and smart POS machines that had been running for years, after all, should have built up consumer data worth something for deciding what to stock and what to promote.

At the end of 2013 Lakala set up an e-commerce subsidiary to push into O2O, then launched the Kaidianbao smart tablet terminal and a service called Shenbian Xiaodian ("Shop Around the Corner"). The idea was to put the inventory of the neighborhood shops in its national network to work, partner with online retailers, move into community O2O and build a business-to-business-to-consumer model.

But spending data that thin still made it hard for Lakala to see who its users were and what they liked to buy. Tenpay, by comparison, could in theory draw on every social tie a user had built inside WeChat, plus their reading habits on official accounts, video and other content platforms. Alipay was fully wired into Taobao, the largest online shopping platform in the country, which gave it a much fuller picture of how people spend.

The utility payments discussed above count as personal data too. In Europe and the United States, credit reporting is mature and closely tied to spending behavior. China's personal credit system — and the hundreds or thousands of data dimensions needed to run one — is nowhere near complete, and what exists is scattered between online and offline, traditional institutions and internet companies.

Whoever connects more of those links faster and holds more dimensions of data can understand each consumer more deeply, and quietly sell them more goods and services. That is hard for Lakala to do, with no spending platform of its own and no real skill at mining consumer data.

From Payments to Microloans to Banking, a Full Set of Licenses May Still Be Lakala's Biggest Opportunity

By this point it is clear why Lakala, having started so early, could not hold its lead against Alipay and WeChat.

It did not foresee how badly mobile payment technology would break traditional financial technology, and its hardware-first approach lost the market quickly to one software solution after another. As its share shrinks, a tool like this may gradually lose its value to merchants too.

For now, smart POS machines and other merchant-side products and services still bring Lakala more than 2 billion yuan a year, with room for about 20% profit growth. But by the time it split off the payment business for a separate listing, it was already thinking about bigger stories: microloans, wealth management products, private banks. Sun Taoran put those businesses inside a financial services group called Kaola ("Koala"), to run on their own.

Once Alipay became Ant Group, a group spanning payments, lending, funds, wealth management, private banks and personal credit reporting — nearly every kind of financial institution business there is — almost every third-party payment company of any size spent the following years trying to copy the same expansion. Regulation tightened to match: private banks, the newest of these lines, have had licenses issued in only two batches so far, and remote account opening is restricted, which badly blunts the old advantage of not needing branches.

But getting a full set of licenses earlier also gives a company more chips to play — whether it is expanding, or being bought by a bigger company that comes calling.

If Lakala still cannot lift its valuation inside the bubble of China's domestic stock market after it lists, then packaging up its payment license along with its huge offline transaction volume and selling the whole thing might not be a bad ending either.

Graphics: Feng Xiuxia

Cover image from Ebrun