From Withdrawals and Transfers to Credit Card Bills: Why Have Alipay and WeChat, Once Free, Started Charging?

One more free lunch is gone.

Starting December 1, paying a credit card bill inside WeChat costs money: the portion of your monthly repayments above 5,000 yuan carries a 0.1% fee, with a minimum of 0.1 yuan.

For most people in most months, this won't add much to the bill. But it is one more fee to keep track of. Pay the same card through your bank and there is no fee at all.

One more thing banks do for free and internet financial services charge for. The list has been growing for a year or so now.

In February 2016, WeChat announced that withdrawals above 1,000 yuan would carry a 0.1% fee. That 1,000 yuan was a lifetime allowance — once you used it up, every withdrawal after that cost money, starting at 0.1 yuan.

Alipay's official Weibo account, which posts like an influencer, said at the time: "So many friends have come asking me first thing this morning, so let me answer everyone at once: withdrawing from Alipay is free!"

Seven months later, Alipay announced that rising operating costs meant it too would charge individual users a 0.1% service fee on withdrawals beyond a free allowance of 20,000 yuan. That 20,000-yuan allowance is permanent.

Withdrawal fees hit more than the people taking out their own cash. They hit transfers too, because whoever receives the money has to withdraw it sooner or later.

That matters to anyone who treats WeChat or Alipay as a bank account. A bank transfer means typing in a dozen-plus digits of account number, plus the recipient's name and their bank. Paying through WeChat or Alipay is faster: tap transfer in a chat window, enter the amount. Smaller companies even use them to pay salaries.

Once withdrawals cost money, that convenience is no longer free. Say you rent out an apartment for 5,000 yuan a month; three months' rent up front plus a one-month deposit comes to 20,000 yuan, and every withdrawal past the free allowance now costs 20 yuan.

Not much. But the same transfer through online banking would cost nothing. It didn't used to work this way.

Once, Banks Were the Ones That Charged for Everything

China began issuing bank cards in 1985. Hardly anyone enjoying today's easy payment tools still remembers that as late as the end of 2001, a bank card could be used across banks and across cities in only 18 Chinese cities.

An employee who joined China Construction Bank (CCB) in the 1990s told QDaily that back then CCB had no personal finance department, only a savings section, and every branch's vouchers had to be sent to the sub-branch's back office to be entered and checked. For the other fee-earning businesses aimed at individual customers — funds, insurance, precious metals — the bank set almost no targets. "As I remember it, nobody bought funds. It was all employees buying them themselves."

Professor Wang Yijiang, a former World Bank consultant, summed up the state of Chinese banks as of 2000: a high share of non-performing assets, weak profitability, backward corporate governance. Their main income was the spread between deposit and loan rates, and performance targets were tied almost entirely to corporate business.

China's banking reform began in the early 2000s. Chinese banks brought in foreign banks as shareholders, opening part of the market while importing technology and management methods. HSBC bought into Bank of Communications, the Royal Bank of Scotland into Bank of China, Goldman Sachs into ICBC — all in that stretch of years. With help from foreign investment banks, the four big state-owned banks also spun off their non-performing assets and listed in Hong Kong one after another.

The unified payment system run by the People's Bank of China (PBOC) was also built for real around then. In 2002, China UnionPay was set up at the PBOC's direction, working with the commercial banks to make bank cards usable nationwide.

Interbank transfers that cleared in real time, around the clock, seven days a week, did not arrive until 2005, when the PBOC launched the Bulk Electronic Payment System (BEPS). Before that, a transfer sent after the banks closed for the day arrived the next day.

This was the banking infrastructure Alibaba faced when it launched Taobao and Alipay.

As the services filled out, so did the fees charged to individuals. Between 2003 and 2006 the banking industry added more than 20 of them: a small-balance management fee if your account held 100 yuan or less; a coin-counting fee if you brought too much loose change to the counter; a few yuan a month for text messages telling you your balance had changed; even checking your balance at a CCB ATM with an ICBC card cost 0.2 to 0.3 yuan a time.

Setting up online banking cost more still. A fee schedule ICBC put into effect in 2004 shows its online-banking USB security key starting at 80 yuan and an annual online-banking fee of 12 yuan, both compulsory. Other charges included out-of-town remittances at counter rates and 4 yuan a month for transaction alerts by text.

Also in 2004, Alipay appeared, and it was free.

Thirteen Years Ago, Alipay Used "Free" to Force the Banks' Payment System to Change

Alipay started as a feature Alibaba built to make transactions on Taobao safe, using what it called third-party escrow. In 2004 Alibaba set up a separate Alipay company offering users and merchants free payments and transfers. Money a buyer paid sat with the Alipay company until the buyer confirmed the goods had arrived; only then did it go to the seller.

In the early days, though, the banks kept Alipay on a short leash. In 2004 Alipay could not debit a bank card directly. Users had to move money from a card into their Alipay account first, then have it deducted at checkout.

Later, Alipay's Quick Pay let users skip the top-up and pay straight from a bank card at checkout. But switching it on meant taking your ID card, your online-banking USB key and your bank card to a branch in person, and each payment was capped at 500 yuan.

Alipay also worked out cooperation agreements with bank after bank, making cross-bank transfers possible — money from an ICBC card into Alipay and then out to a China Merchants Bank card, say — with the funds arriving in one or two business days.

Alipay was nearly as fast as the PBOC's real-time payment system, charged nothing, and its web interface was far friendlier than anything the banks offered. Other things banks charged for — transfers between Alipay accounts in different cities, text alerts — were free here too.

Over the next few years, as Taobao grew, Alipay connected to one bank after another. Linking a card gradually came down to a single text message.

Yu'e Bao, launched in 2013, made Alipay more than a payment tool.

Yu'e Bao is, at bottom, a money-market fund — the sort of product banks had been selling for years, except that hardly anyone knew about it.

Buying a fund at a bank back then meant carrying your ID and card to a branch, opening a dedicated wealth-management account, then typing a six-digit code you had to go find out for yourself into a client app. Yu'e Bao took a few taps to accept the terms and confirm your identity; then you moved money in and it started earning interest.

That turned Alipay into something close to a current account. Users put money in, kept part of it liquid in Alipay and parked the part meant to hold its value in Yu'e Bao, and paid for meals, water and gas bills, shopping and transfers with a few taps on a phone.

The money and the users piled up. By the end of its first year Yu'e Bao had 40 million users, and 124 million by the first half of 2014. As of the first half of this year it held 1.43 trillion yuan for more than 300 million users — close to Bank of China's 1.63 trillion yuan of demand deposits at the end of 2016, and more than China Merchants Bank's demand and time deposits combined.

WeChat came later, but by the time it did, Alipay had already solved the problem of how an internet company works with banks. Inside a financial system far better than the one Alipay was born into, Tencent quickly turned WeChat users into WeChat Pay users. After Chinese New Year in 2015, WeChat Pay had 400 million users. By the first quarter of this year it had more than 600 million, handling 600 million transactions a day.

Free and easy to use: that was the impression Alipay and WeChat left.

Now That They're Charging, Both Alipay and WeChat Say Their Costs Are Too High

After announcing withdrawal fees in 2016, Pony Ma answered the criticism by explaining that moving money from WeChat to a bank account carries a 0.1% fee, charged both on the way in and on the way out, which came to 300 million yuan a month. Until then Tencent had paid it. CICC put the rate at 0.15%.

Because Tencent books its payment business together with cloud computing and the rest under "Others" in its accounts, the exact cost of WeChat Pay is unknowable. But after Tencent began pushing WeChat Pay in 2014, the operating costs of the "Others" segment climbed fast, passing its revenue in the third quarter of 2015. Tencent has explained more than once that this was the bank fees tied to payments rising quickly.

WeChat did not negotiate clearing with the commercial banks one by one. It settled transactions through the centralized collection-and-payment channels of PBOC branches. A clearing-center employee at a bank told Economic Observer in an earlier interview that besides the Shenzhen Financial Electronic Settlement Center, the channels WeChat Pay had used included "the centralized collection-and-payment channels of PBOC branches in Tianjin, Shaanxi and Shanxi."

This May the PBOC barred those institutions from providing collection-and-payment services to any enterprise or public institution outside utilities and charities, and told those already doing it to disconnect by the end of the year. So WeChat has to find new channels. Clearing resources like these were scarce to begin with, and the PBOC is now shutting them down one by one, so the fees on WeChat's new channels will very likely be higher.

Alipay went around the clearing centers and negotiated with each bank itself. It has never disclosed what its withdrawal fees cost it, but given the scale of its online transactions and the way it clears them, its fees are probably somewhat lower than WeChat's.

Credit card repayment works the same way: at settlement, the side receiving the funds pays a fee. Banks don't charge for it because each runs its own credit card business. When a user spends, the merchant pays a fee, and the more a user owes, the likelier they are to pay in installments and hand the bank steep interest.

While their costs were going up, third-party payment companies like Alipay and WeChat also lost a source of interest income.

Under the old escrow model, money a customer paid sat in an account held by Alipay or a similar service until the goods arrived and were confirmed. That pool is known as reserve funds. Under the rules the PBOC issued in 2011, the interest on customers' reserve funds belonged to the third-party payment company.

A CCTV Finance investigation found that interest on reserve funds made up 11% of third-party payment institutions' total revenue. Going by CICC's estimate of 64.7 billion yuan in gross third-party internet payment revenue in 2016, that works out to 7.1 billion yuan of interest.

Then in April this year the PBOC rewrote the rules on centralized custody of payment institutions' reserve funds, requiring them to place a set share of those funds in designated special deposit accounts that, for now, pay no interest. Payment companies used to use that interest to cover their fee costs. Not any more.

The Other Reason Internet Companies Don't Mention: People Are Used to Them, and a Fee Won't Change That

Alipay reached 200 million users in 2009, when China had 384 million internet users — about half of everyone online had an Alipay account, and the share kept rising. Once WeChat Pay joined in, third-party mobile payment arrived in ordinary life for good, and more people were using it than were using online banking.

The 2016 annual report of the PBOC's Payment and Clearing Association shows the value of electronic payments in China running at three times the value of bank card transactions. Non-bank institutions such as Alipay and WeChat handled close to 100 trillion yuan, twice what people spent on bank cards.

According to the 2017 China E-Banking Survey Report, third-party payment has the widest reach when people pay online, ahead of online banking and mobile banking.

Another CICC research report expects third-party payment volumes to keep growing at a fairly brisk pace over the next four years, averaging 27.1% a year. Bank card spending over the same period grows an average of 4.3% a year.

Through all that, CICC expects Alipay and WeChat Pay to keep close to 90% of the internet payment market between them. And as of the first half of this year, Tianhong Asset Management, the fund company behind Yu'e Bao, managed more than 1.5 trillion yuan, 2.5 times the assets of second-place ICBC Credit Suisse. Alipay is both China's largest payment company and its largest fund company.

Internet businesses habitually buy users with heavy subsidies, free service or outright cash, which works well early in a fight. Didi, Meituan and Ele.me all lost money first to build the habit, then raised prices bit by bit to win the money back.

In 2014 Tencent used red envelopes and subsidized Didi rides to teach people the habit of paying small sums by phone. Early on, a payment account required neither real-name verification nor a linked bank card, so with red envelopes and transfers alone, the bar for turning WeChat users into WeChat Pay users was very low.

Then came the "shake for a red envelope" campaign over Chinese New Year in 2015, which got users to link 200 million bank cards in eight days. Alipay had needed six years just to reach 200 million registered users, not all of them with a card attached.

But users arriving that fast usually means subsidy costs climbing just as fast. So once a company has enough users that ending the free offers or cutting the subsidies won't send the numbers into a slide, it generally stops paying, to keep costs down.

Alipay and WeChat have already won their crowds. They can keep them now without subsidies.

Internet Companies Made Traditional Payments Work Better, and Ended Up Part of the System

In 2008 Jack Ma said: "If the banks don't change, we'll change the banks."

The banks did change. In recent years they have scrapped or cut a range of fees, including bank card annual fees and out-of-town withdrawal charges. Some fees, such as the cost of making an online-banking USB key, are still chargeable by the rules, but some banks now cover them out of their own pockets.

Next to foreign banks, Chinese banks' old fee schedules were low to begin with. Bank of America, for instance, generally charges US$30 for a domestic interbank transfer, and it still doesn't arrive in real time.

For a while, Alipay looked as though it had gone around the financial system the PBOC had built.

A few years after Jack Ma's line, the banks stopped blocking Alipay at every turn. In 2011, CCB launched a savings card with Alipay built into it, the Alipay Dragon Card. Users no longer had to activate online banking and then link it to an Alipay account; if the Alipay balance ran out at checkout, the money came straight off the savings card.

We have written before about how Alipay negotiated directly with banks to clear funds, in effect stepping around the interbank settlement system that UnionPay leads.

A clearing institution checks payment instructions and the details of both parties to a transaction, and releases the money only once everything matches. It is the middleman the funds pass through, standing between the two sides so they never connect directly.

Transfers between Alipay accounts, in fact, are not supervised by any of it — not the PBOC's clearing centers at any level, not its payment systems, not UnionPay. By settling funds directly with banks, Alipay became a clearing institution in all but name.

Alipay's Huabei and JD.com's Baitiao are credit-card-like businesses that internet financial services built for themselves. Each runs its own credit scoring.

But at least so far, the end user still has to move the money into a bank, and that is where the fee appears, at settlement with the bank. A user cashing out means the funds are still circling through the banking system, so fees keep being generated. At that point internet financial services look less like outsiders and more like participants in the traditional system.

With two new institutions set up under the PBOC, the road internet companies once cleared for themselves may be closing.

One is NUCC, the Nets Union Clearing Corporation — formally the "Online Payment Clearing Platform for Non-Bank Payment Institutions" — founded by the Payment and Clearing Association. Both the general clearing center and UnionPay are members of that association.

NUCC's single largest shareholder is the PBOC's clearing center. Government bodies including the State Administration of Foreign Exchange, through its Wutong Tree investment platform, also put up capital; together they hold 37% of NUCC's equity.

Alipay and Tenpay are joint third-largest shareholders, which gives them a voice. But NUCC's existence means the PBOC is taking back the clearing channels that currently run between internet companies and banks.

From the second half of 2018, every online payment has to clear through the NUCC platform.

The other is Xinlian, which will handle credit reporting, a core function of any financial system. The PBOC already had a credit-reporting system of its own, but not the data internet companies hold — Zhima Credit, WeChat Credit, JD.com's Xiaobai credit score.

Caixin has reported that the PBOC has decided to have the National Internet Finance Association lead the creation of a personal credit information platform, with formal approval to begin preparations due by the end of 2017. The PBOC had already, in a notice issued in early 2015 on preparing to conduct personal credit reporting, told eight companies including Alipay and Tencent to get ready to run personal credit-reporting businesses — their data would feed a unified national credit database.

Thirteen years after Alipay was born, internet companies have pushed the banking industry to work more efficiently and serve customers better, and the regulators have said as much.

But in the end they could not get around the banks' system. As the new regulatory framework has taken shape, they have gone from disrupting that system to being part of it.

Cover image: Unsplash