QR Codes helped define Alipay and WeChat Pay, but now they might be their biggest challenge

Written by Zennon Kapron || August 09 2017

We have talked before about the development of QR codes in our commentaries as well as in more depth in our Social Networks, e-Commerce Platforms, and the Growth of Digital Payment Ecosystems in China report. In brief, QR-codes provide a quick, convenient, and secure mobile proximity payment solution without the need for NFC hardware and since their launch have since dramatically changed China's retail spend habits.

They also allowed the 3rd party players to develop their own payments infrastructure without the involvement of other eco-system players including China's banks, UnionPay and the telcos who are only involved if absolutely necessary (e.g. moving money from a traditional bank account to a digital wallet).

A double-edged QR-code

But, the same dynamics that drove the growth of Alipay and WeChat Pay's QR-code based mobile payments platforms, are about to be their biggest challenge for two reasons: 

Firstly, China is in the midst of setting up the 'Online Settlement Platform for Non-Bank Payment Institutions,' or Wanglian. The platform is effectively a China UnionPay (UP) for digital payments that will eventually be the central point of clearing and settlement for all 3rd party online payment platforms. By June 2018, all the 3rd party online payment players will need to be routing transactions through this platform. 

Secondly, EMVCo has create a set of global, standardized QR Code Specifications for Payment Systems which means that eventually global payment players will likely be using similar QR-code standards within the next few years.

If we consider these two trends together, we could very well be at the cusp of 'forced' mobile-payment interoperability in China, if not globally. If a merchant accepts WeChat Pay, but you only have Alipay, no problem, swipe the WeChat Pay QR-code with your Alipay wallet and you're off. 


Not that they have a choice, but incumbent players are not particularly excited about the launch of Wanglian. For several years, by leveraging their proprietary payment infrastructure, they have been happily taking a ~0.5% merchant fee for themselves and more importantly the transaction data behind it.

They then built platforms around the payment infrastructure, giving rise to lifestyle platforms that include a diverse set of digital and O2O products and services. Interoperability would break this model leaving a potentially much more fragmented infrastructure. Previously, if you owned the merchant, you also owned the consumer as to use Alipay at checkout, you needed an Alipay wallet. In the future, this may not be the case. 

It would also affect payment revenue. With the new Wanglian system, the government has indicated that payment fees will not rise for merchants or consumers, so that merchant fee will likely now be split between players, similar to the typical four party card model in China. 

Right now the merchant fee for B2C digital payments is about 0.5% and C2C 0.1% depending on the platforms and exact payment methods. China’s credit card market used to work on a 7:2:1 merchant fee model where the issuing bank received 70%, acquiring bank 20% and UnionPay 10% of the transaction fee. The overall merchant fees have since dropped, but the breakdown is roughly the same today

As we have argued before, more important than the fees is the transaction data, which will now will likely also be split. In a typical four party credit card model, the acquiring bank and payment network have very little data about the transaction, nearly all of the data will reside with the issuer, which, in this case, would be the consumer's digital wallet of choice. Previously, if a consumer made an Alipay transaction, Ant Financial would have access to all of that payment information. 

Scanning the future

The incumbents will have their work cut out for them to adapt to the changes. The lost payment fees will hurt, but pale in comparison to the lost data. How they deal with that will be critical.   

Another interesting angle is how the move to interoperability will affect competition. It should open the market for smaller players, and some bigger ones that were largely left out of the payments revolution so far. Did you know that e-commerce giant JD has a mobile wallet? They do, and they've had it for awhile. It was originally mainly used for e-commerce transactions, but now they have a QR-code solution that runs across UP's new QR-code payment network. 

JD is of course a multi-billion RMB company, but there are many smaller payment providers that have payments licenses. Today, if I buy something at a merchant that accepts multiple different brands of credit card, I pick whatever card is going to give me the most rewards, whether that's cash back, airline miles, etc.. I really don't care about which bank the card is with, only the amount of reward I will receive.

Similarly, if I can use any digital wallet, as the ease of use on all of them is fairly similar, I'll go with the one that provides the biggest benefit. That openness will allow very unique value-propositions from some of the smaller market-share digital wallet providers.

China's consumers have shown themselves to be quite fickle and are quick to jump on a better deal, so we could see significant churn if a company gets the value-proposition correct.


In many respects, Alipay and WeChat Pay have also done all the heavy lifting. By being the first to market, they blanketed merchants all across China with their QR-code solutions. A decision that was smart at the time as they ramped up their acceptance quickly, but may have ended up paving the way for other competitors to take marketshare. If QR-codes are interoperable, UP doesn't need to worry about displacing Alipay or Tencent at the POS, but rather just get the customers using their digital wallet.   

We started looking at mobile payments in China in 2010 and at that point, it was difficult to imagine that a 3rd party non-financial institution (Alipay) would come to dominate mobile payments and further, that another 3rd party (WeChat) would disrupt the first five years later. We are at another inflection point with regards to not just payments, but fintech in general in China, and the future of digital payments is a key part of that. 

The implications of Wanglian and the QR-code standardization are not yet clear. It may even be that we don't see the payment interoperability that we are predicting, but there will be changes.