How the shift in retail drives card adoption in China

Nearly one-third of total retailing in China is expected to come from online channels by 2022, marking a nine-percentage point gain from 2017. This shift has resulted in several non-traditional financial service providers gaining share by reaching previously unbanked consumers through mobile devices and online marketplaces. With greater competition in the digital payment arena, payments are increasingly seen as an additional channel, where merchants are able to be more connected to their customers and offer a range of products and services.

In 2017, there were 277 million more banked consumers in China than five years ago. Driving this rapid adoption has been the steady transition to online retail from traditional in-store channels. The total value of internet retailing in China, as well as its share of total retailing, are the largest globally and a number of factors have contributed to the faster adoption rate, including innovation from technology firms, broad distribution of mobile devices throughout rural portions of the country and the increased capabilities of smartphones.

The prime example of a Chinese technology company adapting to offer payments and financial services is the payment company associated with Alibaba, ANT Financial. As the shift towards online channels became more pronounced in China, the traditional financial service sector was unable to provide an effective digital payment platform to facilitate transactions. Additionally, basic financial services were not available to a large portion of the population either due to a perceived lack of value from lower-income consumers or from consumers residing in a rural environment where there was limited access to mainstream financial institutions.

Alipay’s platform in China focused on enabling quick, reliable and secure payments without disrupting the broader traditional financial services sector. Starting with only online processing in Alipay, ANT Financial quickly identified other gaps that were limiting online retail: basic consumer lending, insurance, credit scoring and investment services. Alipay was able to leverage their customer relationships from Alibaba and the brand strength built from facilitating commerce as a digital payment platform to offer these additional products and services. As the company expanded into financial services, it became clear that not only could they reach a wider consumer base through mobile devices, but they could also offer financial services at a far lower cost because they did not have a legacy branch network to support.

Alibaba is not the only company that has made the transition from online marketplace or social media provider to financial services and payments in China. Suning, JD.com and Tencent have all capitalised on this rapid shift in consumers’ retailing preferences. With further growth for the internet retailing sector in China, these companies are expected to expand offerings both in terms of products and services, but also throughout the region.

With online retail continuing to grow and financial services becoming widely available, the way consumers pay has also registered a significant shift over the past five years. Card payment value surpassed cash payment value for the first time in 2017. The discrepancy of the growth of payment functions is expected to accelerate from 2017 to 2022 with a compound annual growth rate of 7.8% expected for consumer card payment value compared to cash with 0.3%. As consumers become more comfortable using cards for online payments, there is an increased expectation for offline merchants to also accept cards. In the end, this makes the payment function more convenient for consumers.

Debit cards drove the majority of card payment value growth from 2012 to 2017; many newly banked consumers had limited access to credit products due to a lack of credit rating services as well as the lack of consumer information.

From 2017-2022, the driver of card payment value is projected to shift away from debit to credit cards. Chinese consumers are expected to generate an additional USD 2.6 trillion on credit products compared to USD 1.7 trillion on debit cards from 2017 to 2022.

Despite the significant growth, debit is expected to continue to generate more payment value in 2022. Unlike the retail sector, the card payment landscape has remained consistent among card issuers. The top four issuers by card payment value – China Construction Bank, Industrial and Commercial Bank of China, Agricultural Bank of China and Bank of China – accounted for 61% of total card payment value. On the network side, the limitation of meaningful competition has resulted in UnionPay International becoming the world’s largest card network by payment value. However, the Chinese government has allowed other companies to apply for a licence to process payments which could lead to greater competition for the projected trillions of dollars of additional card spend generated by 2022.

This editorial was first published in our Payment Methods Report 2018 – Innovations in the Way We Pay. The Payment Methods Report 2018 presents the key trends and developments in global and regional payment methods by highlighting the innovation, challenges, and developments in the use of the most important payment methods across geographies and verticals.

About Kendrick Sands

Kendrick Sands is the Head of Consumer Finance Research at Euromonitor International, which he joined in 2010. In his current position, Kendrick coordinates Euromonitor’s consumer finance research, providing strategic analysis and in-depth coverage of financial cards and payments worldwide.

About Euromonitor International

Euromonitor International is the world’s leading independent provider of global business intelligence and strategic market research. We create data and analysis on thousands of products and services around the world. Euromonitor International’s global market research database, Passport, provides statistics, analysis, reports, surveys and breaking news on industries, countries and consumers worldwide.