WeChat and Alipay Just Ran Their Biggest Cashless Day Campaigns Ever. Why Are They Both So Anxious?

Offline retail is still the most active payment setting in everyday life. WeChat and Alipay both have to win engagement there first, before anything else becomes possible.

If August 8 originally "belonged" to WeChat, Alibaba is now preparing to take it back with great fanfare.

Two years ago, WeChat first called August 8 "Cashless Day" and spent heavily on subsidies to push people into paying by phone at offline stores. This year WeChat's slogan is "building the annual smart-living carnival," and it hired more than 10 celebrities — Hua Chenyu, Song Jia, Zhu Yawen, Li Xian and Xu Weizhou among them — to talk up "cashless payment."

A holiday much like Alipay's Double 12, it spread through freebie-hunting how-to posts on official accounts and quickly became the second day of the year when people study merchant lists and walk in to redeem deals.

Huang Li, WeChat Pay's director of operations, said at the WeChat Smart Workshop on July 31 that only 80,000 offline merchants joined Cashless Day in its first year, and 700,000 last year; this year the phrase is "offline merchants across every industry." The event now starts on the 1st and runs a full month.

Alipay decided to do more.

Eight days earlier, many people had probably seen the ad with The Rap of China contestants MC Jin and TizzyT on the mic — a music video now watched 6.75 million times on Miaopai, and the first wave of promotion for Alipay's "Cashless City Week."

Alipay's campaign for Cashless City Week was simple and blunt: give away gold. On August 8 alone the prize pool came to 88,888 grams of it, with 1.88 million winners. At the going gold price, that is more than 24 million yuan handed out in one day.

The fight over offline merchants was just as fierce. On August 5, in the shopping level below Shanghai's Hongqiao Railway Station, ads for Alipay's reward money hung outside a restaurant every five meters. Walk into any mall in a core shopping district — past Watsons, Herborist, Pizza Hut, MUJI and the packed restaurant floors — and signs reading "Alipay accepted here" turn up between signs reading "This store recommends WeChat Pay."

Several merchants told QDaily that Alipay's sales staff had put the signs up only a day or two before.

Alipay had in fact been pushing the idea of "cashless" since late last year, but this is the first time it has formally launched an "8.8 Cashless City Week," going head to head with WeChat.

In Offline Payments, Alipay Keeps Losing Ground

For Alibaba, the mobile payments market has been three straight years of retreat.

Nearly all the transaction volume of China's largest e-commerce business still runs through Alipay. But in the fast-growing offline market, Tencent's late surge has been striking.

At Tencent's 2016 annual meeting, Pony Ma said WeChat Pay's offline market share had overtaken Alipay's outright the previous year, and handed the WeChat Pay team a 100 million yuan reward — the same honor given to the team behind Honor of Kings.

Figures from Analysys show Alipay's share of the mobile payments market falling by nearly 10% a year since 2014. Who took it is obvious: between them, the two companies have all but monopolized mobile payments in China, and in fighting each other they have turned the business into the most important piece of infrastructure in the mobile internet.

Yet in this war Alipay, which started earlier, keeps giving ground. Three years ago, when WeChat was using Lunar New Year red envelopes and Didi rides to teach people the habit of paying small sums by phone, things were nowhere near this bad.

By active users, Tencent's financial reports say 600 million people in China use WeChat Pay; Alipay has put its own figure at 450 million.

Neither Alibaba nor Tencent makes money directly from mobile payments today. Behind Alipay sits Ant Group, which has always argued that mobile payments are about connecting transactions and data — pulling in as many users as possible so it can sell them financial and marketing products later.

Payments are in fact a shrinking share of Ant Group's revenue, while wealth management, financing, insurance and microloans all grow. Ant Group's business keeps diversifying, and it looks more and more like a bank. But a bank can only sell you other things once you keep money in the card it issued you. Without the payments business, people would have little reason to use any of Ant Group's financial products.

So engagement comes first for Alipay — and offline retail is still the most active payment setting in people's lives. As WeChat's offline share climbs, Alipay has grown more anxious.

Much of what Alipay has tried comes out of that anxiety. The "Circles" feature it launched in late November 2016 set off a public storm: its "Campus Diary" and "White-Collar Diary" sections were accused of putting female college students directly in touch with rich men. Alipay shut the feature down fast, and Ant Group chairman Peng Lei concluded: "Wrong is wrong." The public-good product "Ant Forest," launched that August, did far better, earning Alipay real engagement — it now has more than 200 million users.

The same month, Jing Xiandong replaced Peng Lei as Ant Group's CEO. Jing joined Alibaba Group in 2007, became Alipay's chief financial officer in 2009 and Ant Group's chief operating officer in 2014. He understood plainly that with mobile payments growing this fast, both the pressure on Alipay and Ant Group and their way out would come from offline.

WeChat's Social Side Gives Its Payments Room to Innovate — and to Add Value

How did WeChat win in the first place?

Any answer has to mention how, in 2015, WeChat Pay used red envelopes to tie 200 million bank cards to the app overnight. Spending the small change inside those envelopes was the beginning of the habit of scanning a code to pay with WeChat, and the beginning of the fight between WeChat and Alipay.

On top of that, both companies took the offline market with the same two tools: the invention of QR-code payment, and heavy subsidies for users and third-party service providers.

The first windfall came from a gap in fees. A QR code cost less to promote, less to set up and less to get in front of a merchant than card acquiring on an offline POS terminal, and it paid out a higher commission than POS did. That is also why credit cards have only ever been a mainstream way to pay in China's first-tier cities.

With that advantage, both companies used the reach of third-party service providers to get a "this store recommends" sign into the hands of every merchant near you, large or small.

QDaily reported in March this year on the new business born out of QR-code payments. The providers earn razor-thin fees, but at the smallest stir in a payment product, the providers these giants have recruited are the fastest channel for spreading the word.

UnionPay, which had signed an exclusive deal with Shanghai Disneyland, could only stand by and watch WeChat's and Alipay's street teams hold out QR codes for visitors to scan.

In April 2015, WeChat Pay launched the "Spark Program," 100 million yuan in subsidies for service providers. In August 2016, Ant Group's "Spring Rain Program" — meant to douse that spark — planned to put 1 billion yuan of cash incentives into service providers over three years.

As with Cashless City Week, in almost every campaign and every subsidy of the past year, Alipay appears to have spent more than WeChat.

The owner of a dessert shop near East China University of Science and Technology in Shanghai told us that in March, probably because his store took Alipay often, a notice popped up in the app telling him he could apply on the home screen for a "Collection Code" and have Alipay mail him the QR-code materials free. "Plenty of customers pay with WeChat too, but WeChat never offered to mail anything," he said. When a customer wants to use WeChat, he still has to take out his own phone.

The Collection Code is Alipay's newest feature, launched in February this year for small merchants and given a prominent spot on the app's home screen. Merchants use it to start a face-to-face collection. Compared with the old personal payment code, a merchant with a Collection Code withdraws money free of charge, and takings are booked separately from personal transactions, with their own statement of income and outgoings.

Alipay calls the Collection Code "the lowest-barrier tool for taking money ever": a free sticker, no scanning gun needed, so street stalls, snack shops, fruit sellers and corner stores — the places mobile payments used to struggle to reach — can take payments too. By Alipay's own figures, applications passed 13 million in under three months.

Even so, people open WeChat far more often each day than Alipay, which gives plenty of merchants reason to print their own WeChat Pay QR code and stick it next to the acrylic stand holding the Alipay Collection Code.

The two years when the mobile payments market, and WeChat Pay in particular, grew fastest were also the loudest years of the O2O on-demand subsidy wars, and small merchants have always been the group most willing to take it up. Internet-borne changes to how transactions work have genuinely made running a shop more efficient.

Large brands and chain retailers are a harder, more cautious sell.

Starbucks still does not take Alipay, but since striking a strategic partnership with Tencent last December, the two companies have gone deeper together. "Say It With Starbucks," the WeChat coffee-gifting feature launched in February, folds brand promotion, small payments and new-product introductions into roughly one thing, and made Starbucks the first retail brand to move into third-party services inside the WeChat client.

MUJI takes Alipay, but its membership-card system runs on WeChat's. Carrefour likes to talk about the social sharing that comes with WeChat Pay, which has pushed coupon redemption to 87%, and about what Moments ads could spread further. Ajisen Ramen, which completes 60% of its orders through mobile payment, now leans on WeChat to grow its membership, and plans to build a mini program as the gateway for both payment and membership management.

Huang Li told 21st Century Business Herald earlier that of all the industries connected to WeChat Pay, retail is currently the largest. "E-commerce has kept battering it in recent years, so the industry has plenty of motivation to change. Retail has also been among the first to overhaul its structure and management systems."

The way big companies vote shows what WeChat's "social nature" opens up in payments — room to invent, and value on top. So beyond stickiness and engagement, this is also why Alipay spent so long trying to build social features of its own. After failing at it again and again, Alipay has started to rethink where it is going.

Alipay's Counterattack May Come From Taobao — Back to the Playbook It Knows Best

The W Hotel on Shanghai's Bund, open barely a month, is known for its modern design and is Marriott's new calling card for young Chinese consumers. On the evening of August 7, Alibaba Group CEO Zhang Yong announced there that Alibaba and Marriott had reached a strategic partnership.

The two will set up a joint venture and fully connect the tangled membership systems of Marriott's hotel brands with Alibaba's "88 Membership."

A week earlier, Alibaba had announced it was merging the old Taobao and Tmall membership systems into a single "88 Membership," and naming August 8 each year "88 Membership Day" — another 88.

Under 88 Membership, the Taoqi Score is the sole basis for membership tier, at three levels: 300, 1,000 and 2,500 points. Super members, those above 1,000, are in Alibaba's view "the backbone of consumption upgrading."

"Tomorrow, more than 500 million consumers will have an 88 holiday of their own," Zhang Yong said. As he did, plenty of people in the audience joked among themselves: "Alibaba has invented another holiday — this time it's 'Baba (Dad)' Day."

At this first 88 Membership Day, opening the Taobao app showed that most of the participating merchants' "12%-off membership cards" were open to prize draws for super members only. Fifty brands — GAP, Ray-Ban, The Beast, Starbucks and Macy's among them — were the first batch offering membership perks.

Marriott is special enough to get its own press conference because, among all those retailers, it is the only one tied to travel, which stands for more possibilities — and for the "prestige" that a five-star hotel signals.

Back in September 2015, Marriott had already announced that 10 of its hotels in Shanghai, Beijing and Hong Kong would accept Alipay, letting guests pay by scanning a QR or bar code at check-in and check-out. The partnership went no further than that.

"Haven't you noticed that Chinese companies don't know how to run membership [programs]?" one Alibaba staffer at the event said.

Next to Double 11, Alibaba's 88 Membership Day feels more like a holiday invented for the "consumption upgrade" crowd. Through it, Alibaba "sells" the high-value customers Taobao and Tmall have accumulated over the years to its partner merchants in one go, and talks more companies into joining its ecosystem.

In March this year, the Cashless Alliance was founded in Hangzhou. As one of its initiators, Alipay's parent company Ant Group said it would put up 6 billion yuan over the next two years to help members — Carrefour China, Lawson Shanghai, the yellow bikes of ofo and the Finland Tourism Board among them — move the "cashless process" along.

For any retailer of size, that kind of change can drag on, and it is hard to argue its pace can keep up with the growth of the mobile payments market itself. A February report in Caixin Weekly noted that Inditex — the world's largest apparel group and ZARA's parent — fully adopted Alipay at the end of 2015 and took a year and three months to finish the integration. The Spanish company demanded that its accounts be visible in real time, which meant Alipay had to rebuild the back-end reconciliation process for its stores. With companies like this, Alipay cannot leave the legwork to third-party service providers; it has to work through them one project at a time.

Both Ant Group and Taobao denied to QDaily that 88 Membership Day and 8.8 Cashless City Week had anything to do with each other. But look at where some of the "offline stores only" coupons flow, and Taobao is plainly planning to steer more of its best users into offline payment.

This is really just subsidy in another form. Seen that way, how 88 Membership Day works is no different in kind from the massed merchant promotions of Double 11. It is the playbook Alibaba knows best.

Tencent is also looking for a more "sustainable" way to spend this money. Answering reporters at a recent WeChat Open Class, WeChat stressed that this year's 8.8 Cashless Day differs from the previous two: the subsidies used to come mostly from WeChat alone, and this time it has brought in far more promotional budget from merchants themselves.

"WeChat's red envelopes really did knock our teeth out, but thinking it over calmly, social media may not actually bring companies value. What brings value is still data." Jack Ma said this in March this year, at the opening ceremony for the third cohort of Hupan University, where he is president.

The payments war between Tencent and Alibaba will not stop here. If anything, expect it to get worse.

Worth noting: while Alipay and WeChat are locked together, Caixin reported on July 31, citing people familiar with the matter, that the plan for the "Online Payment Clearing Platform for Non-Bank Payment Institutions" — the regulatory body commonly called NetsUnion — led by the People's Bank of China has taken shape, and is meant to be finished by the end of this year.

NetsUnion means an online UnionPay. With Alipay and Tenpay, both of which connect directly to banks, having become the online payment clearing platforms in practice, the central bank wants to use NetsUnion to pull online payments back under supervision. Seeing every movement of money is the precondition for the central bank to fight money laundering, manage the currency and regulate effectively.

The NetsUnion platform began trial operation on March 31 this year. That day, the first cross-bank clearing transaction was started with a WeChat red envelope.

As a Goldman Sachs report once pointed out, national governments are the biggest beneficiaries of a cashless society, through the higher tax take that the transparency of digital transactions brings — which is, presumably, one more use for data.

Graphics: Xiuxia Feng

Intern Jinzi Lin also contributed to this article.