Why millennials are driving cashless revolution in China

BEIJING - When Ms Frida Cai left Beijing to study abroad in 2013, China’s financial tech boom was just beginning. She used a debit card for her big expenses and carried cash for everyday spending.

By the time she came back, just three years later, everything had changed.

“I tried to buy a watermelon from a street seller,” she recalls, “and he told me that he only took mobile payments through the WeChat app.”

Ms Cai now says she cannot even remember the last time she got cash out of an ATM, but it was “more than a year ago”.

The mobile payments revolution in China has happened with breathtaking speed and scale.

In only five years it has transformed daily life in Chinese cities and also laid the foundations for the country’s mammoth financial tech industry, which last year generated revenues of RMB654 billion (S$131.85 billion) according to iResearch.

Last year, the value of mobile payments in China overtook the worldwide totals of both Visa and Mastercard.

Almost half the world’s digital payments in 2017 were made in China, through apps such as Alipay (owned by Ant Financial, an affiliate of e-commerce juggernaut Alibaba) and WeChat (owned by Tencent), according to PwC research.

Alipay and Tencent have now also outstripped PayPal, the US’s biggest online payments operator. They each handled more payments in one month this year than Paypal’s US$451 billion (S$617.81 billion) for the whole of 2017, according to market research firm Analysys.

This transformation has been spearheaded by millennials, who were the early adopters of mobile payments, but it has rapidly spread across generations.

Millennials’ parents — the 40-60 age group — have adapted to the technology, especially in big cities, although they tend to use it for fewer functions.

“My parents now complain if they leave a parking lot that doesn’t take mobile payments at the exit,” says Ms Cai.

Only the older generations cling on to cash. A survey by research company Ipsos, commissioned by Tencent, shows that the average person born in the 1990s now carries RMB172 of cash compared with RMB557 by those born in the 1960s.

THE FORMULA THAT SPARKED CHANGE
China’s mobile payments revolution was partly spurred by the inconvenience felt by many of using traditional banks, from having to travel long distances for rural customers to having to queue in branches in the cities.

But it was the unique formula offered by China’s tech giants that generated the explosion: by blending social, e-commerce and payment functions into single apps, customers could manage their finances at the same time as managing their social lives.

“When users use this kind of fintech, they don’t think of it as doing their finances, they think of it as part of the daily necessities of life,” says Ms Li Chao, fintech analyst at market research firm iResearch.

The revolution was enabled by the dominance of Tencent and Alibaba, along with the latter’s sister fintech company Ant Financial (recently valued at more than US$150 billion).

Together they have created an interlocking network, or “ecosystem”, of services that complement each other and can be accessed via a few “killer apps”.

These have become the natural playground of millennials. Imagine Facebook bolted on to email with a built-in payment platform for splitting bills among friends: that is Tencent’s WeChat.

Or Amazon, with its own payment system that lets you send money to friends using only their phone number: that is Ant Financial’s Alipay.

The network effect of such platforms is vast; if all your friends are using them, it is difficult to opt out.

To activate an app, users must first link it to a bank card. All payments are then routed through Ant Financial or Tencent. Users often treat the “mobile wallet” on their smartphone as a deposit account, which can be used to pay at checkouts by scanning a QR code, make payments to family and friends, and buy “O2O” (online-to-offline) services from retailers, from haircuts to grocery deliveries.

“The way Beijing is developing, living without a smartphone will be difficult because of all the places that are starting not to take cash,” says Ms Chauncey Zhang, a 23-year-old tech company employee. In large cities some stores, markets and food stalls now only accept mobile payments.

Not only is a smartphone necessary for shopping, it has also become indispensable for hailing and paying for taxis. Beijingers joke that it is now more important to carry a phone charger than a physical wallet.

Mr Ray Chan, vice-president of Ant Financial, says it is millennials’ rapid adoption habits that have created the company’s extraordinary success. “When we consider new products, we create them for this era, one in which young people have become the main driving force of our society.”

The development of fintech in China has relied on trust between strangers, he explains, whether paying someone for an unseen item on an online platform, or one person lending to another.

Trust was not widespread in China after the cultural revolution of the late 1960s and early 1970s. But “young people are more open-minded”, says Mr Chan, adding that the first Alipay transaction, in 2003, involved a Chinese student buying a second-hand camera from another student living abroad, using the Taobao online marketplace.

Millennials have even created internet slang out of mobile payments. For Ms Yuanxi Li, a 28-year-old entrepreneur in Beijing, love letters from her boyfriend come in the form of mobile payments — of either RMB52.0 or RMB131.4.

Spoken aloud in Chinese, these numbers sound like “I love you” and “With you for life” respectively.

“I use fintech to connect with people,” she says, adding that it is much easier and more immediate than writing a card by hand.

Now, the newest emerging natives of the smartphone-internet world are the “post-00s”, post-millennials born after 2000.

As Mr Chan says of his own primary school-age son: “Before, when parents took their kids shopping and they would scream for a toy, the parents could say ‘I don’t have any change’. Nowadays my son says, ‘Daddy, can you scan the QR code?’”

Alibaba’s promotional video for its e-commerce platforms Taobao and Tmall features a young mother saying of her pre-school daughter, “Now when the doorbell rings, instead of running to the door and saying ‘it’s Daddy!’, she says ‘it’s the delivery courier!’”

APPS LEAVE OLD LENDERS IN THEIR WAKE
Familiarity with mobile payments has also made customers more comfortable with other new fintech innovations, in areas such as peer-to-peer lending, investing in money market funds, and consumer loans.

On the surface, China looks an unlikely place for this to happen. Saving, rather than borrowing, is what Chinese people typically do to afford big purchases. The country has one of the highest household savings rates in the world. When it comes to investment, property is viewed as the safest asset.

However, many citizens and small businesses are still under-served by traditional banks, and fintech companies have seen the opportunity for mobile platforms to leapfrog the old lenders.

As a result, millennials, the original smartphone adopters, have become surprisingly adept at handling their money, despite often being stereotyped as the least financially savvy generation.

“Fintech has made young people familiar with many different ways of managing their money,” says Mr Zhechi Nathan Zhang, a 28-year-old tech company employee in Shenzhen.

“My parents only had a low-level understanding, because traditional investments were so complex.”

Feidee, a company that makes personal financial management apps, says that 93 per cent of its users are young customers born after the 1980s, and 42 per cent of these were born after the 1990s.

Millennials’ shifting attitudes to finances have helped the growth of new fintech products.

“China is special. Elsewhere, consumer credit is an important financial market but here the post-1970s generation generally can’t accept the idea of borrowing to spend,” says Mr Darcy Fang Liu, vice-president at Lexin, a major instalment-lending platform that listed in New York last year, one of a number of Chinese fintech initial public offerings.

“But young people are very optimistic about their earning potential, and pursue what they want.”

CREDIT THAT LETS YOU 'BUY, BUY, BUY'
The rise of e-commerce has made borrowing to spend convenient: retailers such as JD.com can sell goods to be paid for by instalment with a few taps on a screen.

Lexin has followed its target audience, which it describes as educated young adults, as their needs grow. It now expects to expand into travel services and childcare items as its millennial customers grow older. The user base is expanding rapidly, reaching 8.2 million in April, up 64 per cent from a year ago. It takes only a few seconds for Lexin’s algorithms to approve a new user’s credit line.

Huabei, meaning “just spend”, the credit service integrated into Alibaba’s e-commerce platforms, promises that “with no money in your balance, you can still buy, buy, buy”. It lends amounts of RMB500-RMB50,000 to be paid back in instalments of up to a year.

Like Lexin, Huabei has found that its youngest users are more likely to buy smaller goods on credit more frequently, suggesting that instalments are becoming the default way of managing spending, rather than as a special tool for big purchases.

China’s government has become worried by this surge in access to credit.

Regulators as well as companies are now cracking down on opportunistic lending and high-interest rate loans. Policymakers are particularly concerned about young people falling prey to bad lenders, and last year launched a push to stop such companies advertising scams on university campuses dressed up as “entrepreneur loans”, “trainee loans” and “jobseeker loans”.

“Taking out loans online is easy and extremely fast,” says Ms Liu Di, a 30-year-old music teacher. She prefers online instalment loans to her credit card, which she says is more expensive and inconvenient. But she warns: “These things can create dependency, since the money comes so easily.”

Investment, too, has been normalised by being bundled up with Alipay and Tencent’s apps: in a couple of taps a user can deposit leftover money from their mobile wallet balance into a fixed-term investment. As a result, Ant Financial’s Yu’E Bao, meaning “leftover treasure”, became the world’s biggest money market fund just four years after launch.

CAN IT WORK ELSEWHERE?
The rapid uptake of fintech in China means customers, investors and entrepreneurs are asking whether the same tools can succeed abroad.

“When I leave China, I feel I’ve gone back 10 years... Tencent, why don’t you launch (WeChat Pay) here?” complained a young French man in a video that went viral in China.

Earlier this year, Mr Pony Ma, Tencent’s chief executive, replied to the video, saying that it was “very difficult” to localise mobile payments abroad. “We went out and explored many markets to realise that China was actually very advanced in this respect,” he said.

Tencent and Ant Financial have expanded internationally by following the surge of Chinese tourists travelling abroad, and are considering how best to serve local customers.

WeChat Pay is starting to expand partnerships with shopping malls in Paris and Japan’s Hokkaido. The company applied for a third-party payments licence in Malaysia “but when we got it, we found basic infrastructure was lacking,” says Mr Ma.

It took Ant Financial and Tencent years to build the links with hundreds of Chinese banks that makes their services possible.

Ant Financial’s Alipay signed a deal last year with US payment infrastructure company First Data. Together they have installed Alipay devices in the stores of some US retailers, initially targeting Chinese tourists but hoping to roll out to local citizens too.

At the start of this year, however, Ant’s US ambitions were partially scuppered by the US government blocking its attempt to acquire MoneyGram, the payments company, on national security grounds. Ant has been better received elsewhere: together with Alibaba it owns a majority share in Indian fintech group Paytm.

“The Chinese market is very different from other markets,” says Mr Christophe Uzureau, research vice-president at Gartner, a market research company. “In most countries, consumer trust in banks is higher than in other providers.”

Not so in China where, he says, “Alipay and WeChat enjoy stronger brand recognition.” The threats from mainland fintech disrupters are being felt in Hong Kong. Big banks such as HSBC are concerned about being crowded out; Alipay has already signed up more than 1 million users for its Hong Kong joint venture.

Despite the difficulties of exporting mobile payment systems abroad, Chinese fintech is an attractive model for foreign businesses, says Mr Cliff Sheng, co-head of financial services in greater China for Oliver Wyman, the management consultancy.

“Fintech ideas that originated in China are likely to be copied in the west, for example flight delay insurance, and automatic refund shipping insurance. China is gradually becoming a centre of innovation for these ideas — the platforms have millions of customers and transactions (and) they can experiment and find new products their customers need.”

The heads of banks in North America and Europe are also watching closely. Previously when they wanted to see the future of their industry, they just went to Silicon Valley. Now they go to China as well.

After a recent visit to the country, Royal Bank of Canada chief executive Dave McKay launched an overhaul of consumer operations at Canada’s biggest lender. He aims to mimic the likes of Alibaba and Tencent by becoming a “platform”, offering extra services such as location advice for housebuyers and accounting services for start-ups.

China’s revolution leaves one great question unresolved. How will data regulators across the globe respond to the rise of fintech companies that could, as they already do in China, track every commercial decision in a person’s life?

It is a question, too, for consumers.

“Considering how many Chinese people pay for groceries, daily meals and entertaining with smartphones, that scale of data accumulation is beyond our imagination,” says Ms Cai, who adds that despite her concerns about privacy, mobile payments are just too convenient to opt out from.

But she is cautious, too, about where this path may be leading, adding: “Whether we are constructing a futurist society or a cage for ourselves, I cannot tell.” FINANCIAL TIMES