The birth and rise of Alipay
Launched in 2004, Alipay is Alibaba’s third- party online payment platform in China. Alipay is to Alibaba just as PayPal is to ebay i.e. a payment portal, which processes the online payments not only for Alibaba but also for other e-tailers. While Paypal has mostly focussed on the Western market, Alipay prime focus is its birth country – China. This is justified considering its fast-growing third-party online payment market. However, unlike ebay or Amazon, Alipay enjoys favourable market penetration in China.
300M+ registered users
3x: value of transactions compared to Paypal and Square
With over 300 million registered users trading with over 460,000 Chinese businesses to drive 12.5BN transactions, Alipay has the largest (about 50%) market share in China both in terms of number of users and volume of transactions online. Not only in the domestic market, Alipay has tied up with 300 worldwide merchants to trade in 12 foreign currencies. The domestic and international volumes drive over $520BN transaction revenues and are greater than the volume of transactions at ebay and Amazon put together.
Drivers of growth
The journey to becoming China’s leading and world’s 3rd online payment provider has been a steady one. The meteoric growth of Alipay rests on (3) key factors-
- Alibaba Advantage: Alibaba’s performance has been the growth engine for Alipay.
At the right place at the right time.
The e-commerce market in China has boomed over the past decade. Its revenue growth (2009-2012) has topped 70% compounded annually. Driven by social media and advent of mobile/smartphones, the market is expected to continue to rise and outperform the US e-commerce market for another half a decade. Alibaba has capitalised on the growing China market through Taobao and Tmall.
The following charts show Alibaba’s market share in 2013 in various segments –
Unlike its competitors, Alipay provides two key services that satiate both the buyer and the seller. These two value additions have significantly differentiated Alipay from its competitors and helped in building trust, thereby strengthening the network effect.
Consumer Protection. In light of the volume of consumer complaints in the e-tailing business, Alipay ensures buyer protection through its escrow service. It collects payment from the buyer but releases it to the seller only if the buyer confirms her satisaction with the delivered product.
*78% respondents were concerned about the authenticity of items sold online.
The following flow diagram illustrates the model –
No Fee Is The Key. Alipay is the preferred payment platform for a host of domestic and international sellers. This is primarily due to its competitive and simple fee structure. It does not charge any fee on Taobao and charges a nominal fee of 0.5% – 1.5% to Chinese sellers on Tmall. PayPal, on the other hand, charges anywhere between 2.9% to 3.9% in addition to $0.3 per transaction and cross-border transaction fees.
3. Banking on Financial & Investment Services
Alipay added another feather to its cap in 2013 by introducing Yu’E Bao, its financial & investment services arm for retail customers. With a promise to pay returns greater than what Chinese banks pay, Alipay tied up Tian Hong Asset Management to launch the Yu’E Bao service.
This was a unique service as it was only once that Paypal attempted it in the US before shutting it down in 2011. Also, this service was direct competition to the traditional banks. While traditional banks provide about 3.3% returns on a savings account, Alipay’s returns are more than twice as much (about 7%). Simple maths has given a boost to the investment sentiment amongst the retail customers. This is evident in the sharp rise in the number of users of this service, which rose from 2.52MM in June 2013 to more than 100MM users in June 2014. The assets under management grew 5 times in the past year from $7Bn to $40Bn. The steep rise has been bolstered by a profit of $0.5Bn profit to its customers. Thus, there is clear monetary incentive for customers to leverage Alipay’s savings accounts.
Alipay has coupled high returns with convenience of usage. Customers can transfer amounts as low as 16 cents, and can withdraw money anytime without being penalized. Integration of messaging and alert services through mobile phones has been the icing on the cake. But are high returns and convenience enough to sustain internet finance, and by some extrapolation Alipay’s USPs?
The Road Ahead
In light of a majority share in the growing Chinese e-commerce market, Alipay is surely on the right track for a couple of reasons. Firstly, Alibaba’s brand name and trust will have a huge network effect in looping in more customers and sellers. Secondly, its unique escrow model and zero-domestic fee right from the beginning has given Alipay the first mover’s advantage in terms of protecting buyers and unlocking economies of scale to sellers. This effect is compounded by lack of differentiation and value added services from the competitors. Finally, launching forward looking internet financial services has added value to brand. Thus, with major threat in the foreseeable future, Alipay is set to become a one-stop shop for banking, wire servicing and investing, all done through mobile device. So much for amenities on the go!