What can PayPal learn from Alipay’s business model?

Written by Ashleigh Fernandez || October 17 2017

It is quite obvious that Alipay is the largest mobile payments platform in the world, with approximately 400 million registered users. Third-party payment platforms play an integral role in Chinese consumers’ everyday transactions because of the multi-faceted services offered, such as ecommerce and mobile payment transactions.

According to iResearch data released in September 2014, the Gross Monetary Value of China’s third-party online payments reached 1,840.66 billion Yuan (USD $299 billion), with year on year growth of 64.1%.

In terms of third-party payment platforms, Alipay ranks first for market share with over 48.8%. The USD $146 billion in payments processed by Alipay totally overshadows the USD $55 billion in total payments that PayPal processed during the same period of 2014.

Although services like PayPal have been around for years, Alipay has been dubbed the “PayPal of the East”, but if we really delve into both companies’ business models, it is quite clear to see that they differ slightly from one another and this should therefore be considered when they are compared.

In comparing Alipay and PayPal, it is clear that PayPal is still very much focused on its core business of payment processing, whereas Alipay has expanded from its initial core into other related areas. PayPal has built a strong brand which stands for reliable, secure payment processing, mostly through its association to eBay and has a strong following in the US, Europe and Asia Pacific. According to research by PayPal released November 2016, PayPal’s mobile payment volume is also up 56% over last year and for the first time in the survey’s three-year history, China is the most popular cross-border online shopping destination for global online shoppers.

However, Alipay, is predominantly focused on Mainland China’s market, thereby users with linked Mainland Chinese bank accounts can use their Alipay wallets for purchases etc. Recently, the mobile wallet and payments app enables users to make in-store payments in Hong Kong dollars at merchants such a Watsons and Fortress, as well as supermarkets, like ParknShop. One of Alipay’s most unique and successful aspects is that they are much more integrated into the everyday life of their consumers by offering a wide range of financial services, in-app purchases, ecommerce, in-store shopping, leisure and even travel services.  This enbales them to have a complete and flexible presence in the customer experience, whereas PayPal only operates with regard to the final payment transaction.

What are some overlooked features contributing to Alipay’s success?

One of the reasons for Alipay’s success may have to do with the fact that they have extremely low transaction costs. On average, senders using Alipay have to pay 0.01rmb per transaction + 0.1% for amounts exceeding 20,000rmb. However, for a POS sale the merchant has to pay 0.6%. In contrast, PayPal senders pays $0.30 per transaction + 2.9% and for a POS sale inside the United States, the fee is also $0.30 per transaction + 2.9% for the merchant. However, outside the United States, the fee for the merchant is $0.30 per transaction + 4.4% for up to $3,000 sales for the merchant.

The main reason PayPal’s transaction costs are more than Alipay’s is because PayPal is primarily a third-party settlement system and therefore transaction charges are their main revenue stream, unless the user keeps a PayPal balance where PayPal has the opportunity to invest those funds in liquid investments, in accordance with state money transmitter laws. However, this offers no benefits to the user, who doesn’t have an opportunity to make a return on their balance.

On the other hand, Alipay has offered its users a return on their balance thereby acting more like an online bank. It encourages customers to keep their money in Alipay accounts with a promise of return if they move it to Yu’e Bao, a money market fund linked directly to Alipay accounts which invests the customer’s money to the fund to get a much higher interest than bank deposits. Apart from this, when buying products online through Alipay, it could also automatically redeem the fund for the customer instantly and pay their bill. Essentially, a minimal investment is required in order to have the possibility of earning a 4%-5% annual interest rate every day.

Alipay’s strategy has allowed them to reduce their transaction costs because when money is encouraged to stay in users’ Alipay accounts rather than their bank accounts, it is more feasible for Alipay to reduce transaction costs through network and automation. Furthermore, although banks are not direct competitors, Alipay’s operation costs are much lower because they don’t need to have branches and as many employees.

What can we learn from Alipay?

China’s mobile payment market is dominated by Alipay, which handles more than 50% of all transactions, and Tenpay, which handles 20%. However, it is important to realize that Alipay should not be viewed as a stand-alone entity, as it plays a much larger role as part of the Alibaba ecosystem.

Alibaba started to build the core of its ecosystem in 1999 as a business-to-business trading website, before linking it with Taobao to expand into customer-to-customer e-commerce. Thereafter, delving into business-to-customer online retailing with Tmall and to further support the exponential growth of the group, Alibaba has built its own cloud data service platform, Ali Cloud Computing; entertainment businesses, Alibaba Pictures and Ali Music; and financial ecosystem, Ant Financial. Ant Financial is a technology company that brings inclusive financial services to the world and originated from Alipay founded in 2004.

Alibaba has also formed strategic partnerships with a network of logistics companies and invested in an immense amount of companies across multiple industries in China and overseas. Ultimately, most companies in Alibaba’s ecosystem are interconnected and are all centered around Alibaba’s core Internet finance ecosystem, Ant Financial. Ant Financial is a technology powerhouse in China’s online payments market, by bringing inclusive financial services to to the world through its Alipay service.

Ant Financial is now running Alipay and other services, such as the market fund Yu’eBao, online credit scoring service Sesame Credit, Internet-only bank MYBank, third-party financial service platform Zhao Cai Bao and micro-loan provider Ant Micro. These key services are strategically integrated into the Alipay platform, leveraging its large user base to drive further growth.

The user experience on Alipay’s mobile app is currently unsurpassable. Not only do Alipay users have the ability to pay utility bills, top up mobile phone credit, buy train tickets or check the balance of a connected bank account, additionally, Alipay has partnered with many small businesses to allow users to make payments on Chinese websites and offline shops.

Alipay is a fully integrated and user-centric solution that covers a great variety of payment needs in people’s daily life. It has over 350 million registered users and processes more than 80 million transactions per day. Some of the key services of Alibaba are strategically connected with the Alipay platform, leveraging its large user base to drive further growth.

Paypal seemingly limited its customer exposure and business scope by choosing to concentrate on primarily being a payments company. Alipay on the other hand, took advantage of the unique Chinese market, by diversifying its usages and integrating itself into the daily lives of its customers. In doing so, it has become indispensable to the way people pay for things and the company has shown itself to be a pioneer in the industry. Alipay’s impressive ability to anticipate its customer’s needs has made it a much more attractive value proposition and has paved the way for it to disrupt both personal and corporate banking, as well as the entire financial services sector in China.