In part one of this article, we wrote about the background of mobile payment platforms in China. In this second part, we talk about how these platforms work and the benefit to their providers.
So, how (and why) do these payment solutions work the way they do? In short, third party payment platforms have reserve accounts with all the banks.
For example:
X has a card of bank ‘a’, Y has a card of bank ‘b’. When X transfers the money in the card of bank ‘a’ to Y by Alipay, both X and Y will find their Alipay account balance changed.
Actually, Alipay has accounts with both bank ‘a’ and bank ‘b’. The money of X was transferred to the Alipay’s own deposit account in bank ‘a’, when Y wants to withdraw, Alipay’s own cash deposit account in bank ‘b’ will transfer the corresponding amount to Y’s card of bank ‘b’.
Then the clearing will be finished between Alipay’s own cash deposit account of bank ‘a’ and ‘b’ via PBOC (The People’s Bank Of China) payment system.
So if you keep your money in an Alipay account, in reality the money is saved in Alipay’s own cash deposit account.
When you transfer the money to Yu’E Bao, money will be transferred from Alipay’s own cash deposit account to the account of a monetary fund which belongs to Alipay, then the money will be used by Alipay for the fund operation. Meanwhile, the balance of your Yu’E Bao account will be reduced accordingly.
So why do they do it like this? Well, once Alipay has more and more money in their cash deposit account, Jack Ma will be able to ask for a higher interest rate from the bank. The profit made by the bank is only the commission fee of clearing, while their cost of attracting savings has increased. More so, Alipay could also stimulate customers to transfer their money to other financing products which are similar to Yu’E Bao, resulting in the loss of bank deposits.
This is why even though Alipay charges for Cash-out, people can still withdraw the money in Yu’E Bao account for free – Alipay wants to stimulate customers to transfer the money to their Yu’E Bao account. From the perspective of the bank, the money is transferred from Alipay’s cash deposit account which is supervised strictly by regulation, to Alipay’s fund account and thus becomes the accounts operating capital – which is restricted by much less regulations.
Therefore, although the banks will get lots of cost savings by opening a deposit account for Alipay. Offering a cash deposit account service will increase the operation cost, reduce the income of intermediate businesses, and even worse, create a competitor.
So in Occident, no banks would like to do this kind of low-profit, or negative-profit business. The internet based payments can currently only be based on a fully matured credit card payment system.
Whereas in China, most of the internet payments is linked to a debit card, from the strategic perspective of bank management, this situation will lead to loss. Only the Chinese banks are to undertake these losses as these banks are responsible for offering basic financing services to the the public.
It is very rare that a person can easily use a third-party mobile payment for money transfer with only a debit card. Even Apple cannot launch a money transfer function as the Euramerican banks will never agree with this kind of function. Sweden achieved a cashless society in 2015 because all the merchants, churches and government had a POS machine. However the profit chain was still controlled by the banks.
Hence, only in China, because of the widespread bank branch, well-developed banking system, and the related policies which disregard the cost, the third-party payment platforms could achieve rapid adoption. This is why Alipay is still not successful internationally even though Taobao is already world renowned.
Imagine if China adopted the US system that focuses heavily on credit cards: high entry barrier bank cards that only allow payment but not transfer. WeChatpay and Alipay would never succeed in this environment even if the apps themselves are designed perfectly.
That is why the mobile payment in other countries is not as widespread as in China. Considering the cost and benefit, banks outside of China will not support the third-party payments that integrate spending, money management and clearing functions together.
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