Mobile Payment Went Mainstream. Behind Every Scan, There's a New Business

Scan-to-pay service providers helped WeChat and Alipay make mobile payment universal. But transaction fees alone cannot keep them running.

"This QR code thing is so handy now — you scan it and the money comes straight to me, no change to count out." At a neighborhood fruit stall in southern Beijing, the vendor was explaining the hard plastic sign on his counter, the one with the QR code printed on it, to a passerby.

In China today, paying by phone is an utterly ordinary act. From star-rated hotels and chain restaurants to roadside diners and jianbing carts, you find a QR code or a scanner everywhere.

Even the courier who comes to your door to pick up a parcel now asks, "WeChat or Alipay?"

In more than two decades, the credit card never got beyond a small set of shops in China. Mobile payment became almost as common as cash in two years.

During the 2015 Spring Festival, its red-envelope campaign got 200 million bank cards linked to WeChat Pay. But WeChat Pay and Alipay did not become the standard for paying offline on Tencent's and Alibaba's efforts alone.

They spread because of the QR codes on countertops, sheathed in hard plastic, waiting for you to scan them — and the machines a clerk picks up to scan your phone.

WeChat and Alipay got people to tie their bank cards to their phones. It was these machines that made paying by phone a habit.

Most of the devices come from third-party payment service providers: Duolabao, Qianfang, Kelaile, Lakala. Nearly all of them take both WeChat and Alipay, and many also accept money from JD.com, QQ Wallet and Baidu Nuomi.

Everyone in the chain takes a cut of the fee — just not much of one

Whether the customer pays with WeChat or Alipay, the merchant pays something for the convenience.

WeChat and Alipay each offer merchants a payment QR code of their own, charging 0.6% and 0.55% respectively. Next to what the service providers charge, that is still too much, and one code cannot take payments from several apps at once. So merchants mostly go with the providers.

Most providers charge a merchant 0.38%; a rare few charge 0.6%. So for every 1,000 yuan a customer pays, the merchant gives up 3.8 yuan. Once the provider has that money, it owes 0.2% to Alipay, and keeps 0.18%.

Compared with taking credit cards, this leaves a merchant paying less.

Take a milk tea shop doing decent business. Say it takes in 100,000 yuan a month: the provider is left holding 180 yuan.

That 0.2% rate from Alipay and WeChat also comes with conditions. Alipay, for one, requires that a provider's shops together average more than 1,000 transactions a day across the month. A thousand a day is not a low bar. Fall short and the provider owes Alipay 0.3% of that month's takings instead — 80 yuan for every 100,000.

Providers also undercut one another on price from time to time.

The owner of a gimbap shop below Jianwai SOHO in Beijing has been taking payment by QR code for more than half a year, and has already changed codes once. He started with Alipay's Koubei, which was running a promotion and charged nothing. Then Koubei started charging. Now he uses the code from Kaola Shangquan, because it is free.

"That 0.18% rebate really is a lot of money — but only if you are the only one collecting it. Right now everyone in this business is carving up the same market," said Chang Dawei, CEO of Duolabao, when we asked how fee income was going.

Nor do the providers believe WeChat and Alipay are making money on payments. Chang told us that in pushing mobile payment, WeChat is not out to earn a great deal; it may be making little on this, or even losing money.

The money WeChat and Alipay put in is itself part of what Duolabao, Qianfang and their peers earn.

Last April, WeChat launched the Spark Program to subsidize providers, committing 100 million yuan in marketing funds to its partners. Each provider could take up to 500,000 yuan a month in incentives, and the WeChat Pay team also supplied materials and technical help. Alipay launched a similar scheme last August, planning to spend 1 billion yuan in cash over three years to push providers to sign up more merchants.

2016 was also the year they spent the most.

Last year's Double 12 was Alipay's loudest offline subsidy push yet. Besides the usual Double 12 advertising in restaurants and supermarkets, Alipay promoted that day's random-discount offer at amusement parks, parking lots, gas stations and tourist sites.

In fact, every time a user pays by phone and gets half a yuan or a yuan knocked off, the discount comes from a WeChat or Alipay subsidy behind it.

Beyond paying for subsidies, WeChat and Alipay do not take much of the fee either. On a payment made from an account balance, they keep 0.2%. If the user has linked a credit card for quick payment, Alipay and WeChat also have to share with the issuing bank.

There used to be another way to make money. The central bank has closed it

Going only by the share WeChat and Alipay leave behind, these providers cannot make much. But there used to be a gray way to raise the number.

After a customer scans and pays through Alipay or WeChat, the money usually reaches the merchant's bank card a day later. So many payment companies fronted the cash themselves, getting merchants paid sooner — and charged more than 0.38%, pocketing the difference.

The practice is called secondary clearing, or erqing. The customer's money does not go straight from Alipay or WeChat to the merchant's bank card; it lands first in the provider's own account, then moves on to the merchant. The danger is that if the company fronting the money runs off with it, the merchant loses.

Plenty of companies have run this business, in the old days of credit card payment and now with QR codes.

But early this year the People's Bank of China issued a "Notice on Cleaning Up and Rectifying Unauthorized 'Aggregate Payment' Services," which bars these providers, as outsourced acquiring agents, from directly handling the clearing and settlement of money in merchant accounts. Violators can have their payment licenses revoked, or not renewed when they expire.

Some companies have already been fined heavily. A recent case: Allinpay and China UnionPay Merchant Services were fined more than 48 million yuan between them last July.

With little to earn in fees, providers sell merchants extra services

Open WeChat and you may find accounts in your list you never chose to follow. They might belong to a restaurant, a milk tea shop, or a WeChat or Alipay service provider.

And after every scan, the official accounts of providers like Duolabao and Lehui pop up to tell you how much you just spent, reminding you they exist.

Following an official account automatically after a scan is in fact a service most providers sell their merchants. It is part of what every provider now talks about: value-added services for merchant clients.

"What Qianfang is doing in the end is still O2O. But rather than O2O that drives traffic to a merchant, what we really want is to help them hold on to repeat customers by giving them these business services," said Li Yinghao, CEO of Qianfang Haojin, explaining the current thinking.

To get merchants to pay, providers are concentrating on bringing them customers and raising their takings.

• To make customers stick, they built membership services

In Qianfang's version, each merchant gets its own dedicated code, and a customer becomes a member of that shop the moment they scan to pay. That way Qianfang sells the merchant a direct channel to its customers.

Qianfang also launched a points card. It works like the card a milk tea shop hands out, where ten stamps buy you a drink: a set number of purchases earns a discount.

Qianfang, Duolabao and others also offer stored-value cards. A merchant can decide whether to issue them. They turn up most often at hair salons, foot massage parlors and beauty salons.

The cards let these shops build up a pool of prepaid money. Duolabao's salespeople make a point of pitching this service. A rep will suggest you spend 200 yuan to try a month of the stored-value membership service, repeating that it brings the shop money up front and lifts its income.

What all these services do, at bottom, is take the link to the consumer that the provider built through the QR code and sell it on to the merchant.

• Easy management tools for the shop

Besides making the payment itself easy, providers push their bookkeeping systems, which let a client square the books inside a single app. Any employee in the shop downloads the provider's app, logs in, and can see the day's takings and get a notice each time money comes in.

Merchants then do not have to check their income across several payment tools; all of it, plus how often customers come back, can be read in the app.

This is also, from what small merchants told us, the one feature they find most useful.

• Advertising for merchants

Duolabao is happier to talk about this one. Using the consumer data it already holds, it recommends ads to merchants.

The ads run as a strip at the bottom of the payment page. The data behind them comes mostly from what consumers generate when they scan a Duolabao code: how much they spend, which shops they visit most, where they spend most often.

The service is really the provider trying to trade consumers' behavior data for money from merchants.

• They also want to sell financial services to small merchants

For now the providers are not the ones leading this. Duolabao and Kelaile both talk about consumer finance, but what they mean by financial services amounts to working with wealth management firms and recommending their products to the merchants on the platform.

Only a few companies, Lakala among them, hold the licenses to sell wealth management products themselves or to lend money and earn interest. The rest can only advertise other people's products.

Getting small merchants to pay for these services is not easy either

The owner of Shifan, a restaurant open for more than a year in Wangjing SOHO, bought Qianfang Haojin's business service package last year. It bundled official-account follows, points, stored-value membership, red envelopes and more.

The package lists at 2,499 yuan a year, but the owner said he saw it at 90% off late last year and paid under 250 yuan.

Whether he renews when it runs out is another matter.

Of the ten merchants we interviewed in shopping districts, most had barely touched any value-added service beyond the QR code. The manager of a fried chicken shop below Jianwai SOHO talked with real enthusiasm about how convenient the payment method is for them, but when we asked whether he used the membership service, he took out his phone, looked, and said: "There is a function like that, you can see who comes in most often, but we don't use it, because we have our own membership system."

To win clients, providers keep trying new kinds of service. Qianfang Haojin built one that runs a merchant's official account, but merchants do not necessarily bite. V Coffee, open two years in Wangjing SOHO, is one case: what its owner values most in Qianfang Haojin is the scan-and-follow function for his own WeChat official account. When the Qianfang salesperson brought up account management, he did not pick it up.

On value-added services, providers keep wanting to do more, which also means spending more. When we went to interview Duolabao and Kelaile, the interview lists on their front desks showed the candidates coming in over the next few days — mostly for technical jobs. According to GeekPark's 2016 China Programmer Salary Report, published last year, the average monthly salary for a programmer in Beijing has reached 12,000 yuan.

For the providers, making money in this market is getting harder.

Now Meituan and UnionPay want in

Soon there will be new payment services in shops besides WeChat and Alipay.

Wang Wei, CEO of Kelaile, told QDaily that Meituan is preparing to roll out this kind of QR code payment at scale. He worries that once Meituan is in, it will hit his restaurant business directly, because the great majority of those merchants are already Meituan users.

Meituan is a major gateway into restaurants; Meituan and Dianping together have 35 million daily active users. Dianping also built a mobile payment product, Shanhui, in 2015, though that business never took off.

Last September Meituan bought Qiandaibao, a partner of China UnionPay that holds licenses for internet payment, telephone payment and bank card acquiring. Next to these providers, its paperwork is complete and its regulatory risk lower.

And Meituan is not pushing QR code payment for the thin slice of fees it would earn.

The companies it is investing in already compete head-on with the value-added services providers want to sell.

Meituan Cloud, the internet infrastructure service Meituan started in 2013, now pushes restaurant cloud and hotel cloud — solutions built for exactly these businesses. And most of Meituan's investments have gone to startups that serve merchants, such as the restaurant point-of-sale system Canxingjian.

Meituan has also obtained a microloan license, which lets it lend to small merchants and collect interest.

All of this is what the providers want to do, and Meituan can do every piece of it better.

Another rival, once slow to move but enormously powerful, is coming to QR codes too: UnionPay.

UnionPay used to push credit cards. After Alipay and WeChat took off, to win back the mobile payment market, it pushed NFC contactless tools — Cloud QuickPass, Apple Pay, Samsung Pay — but all of them need particular phone hardware, and none caught on.

Now UnionPay is doing QR codes as well. Banks have begun signing up one after another. China Merchants Bank and SPD Bank, two banks with active credit card businesses, have each launched a digital payment service of their own.

Going by experience, UnionPay's scan-to-pay will at least appear quickly wherever a card could once be swiped. Because the banks are in it themselves, they will not have to share with card issuers the way WeChat and Alipay do. They will keep more of the fee.

However the fight ends, one thing is settled: paying by phone is here to stay.

Chart by Xiuxia Feng

Cover photo by Fangyi Gong