China's Super Platforms: The Impact Question
Super platforms are generating a lot of buzz in the financial inclusion community because of their potential to maximize scale and reach while embedding digital financial services into successful digital use cases. This is especially the case in China, where tech giants such as Alibaba and Tencent have integrated a range of financial services — from payments to micro-investments — into their product offerings. Yet for all the excitement around super platforms, not enough is known about the impact these platforms are having on low-income consumers’ lives.
To see their effects firsthand, we traveled to China with the Mastercard Foundation’s Partnership for Finance in a Digital Africa, which took 26 leaders from Africa’s digital finance industry around the country to learn and experience how technology and the internet are driving financial inclusion. While China is ahead of many markets in terms of making tech-based business models a reality, the impact question remains ambiguous. Here we try to surface the impact of super platforms at the individual and institutional levels, focusing on three types of digital services commonly offered across super platforms: digital payments, social networks and e-commerce.
In China, mass-market access to smartphones, the omnipresence of QR code-enabled mobile payments and low user fees have reduced the use of physical cash, leading to simpler and faster purchases. Merchants display a QR code sticker, customers scan the code, enter the purchase amount and show the merchant proof of payment before walking away. It’s that simple.
For businesses, QR code-enabled payments reduce the need to keep cash on hand, streamlining sales and insulating them from thieves and counterfeiters. It is hard to quantify these gains in efficiency and cost savings, but they are part of the reason why e-payments now account for 77 percent of all transactions in China, as we learned in our meeting with Tencent.
Digital transaction records generated by mobile payments can also benefit businesses in terms of easier access to credit and improved store management and sales. Providers such as Alibaba and JD Finance offer credit to small businesses using transaction data. Transaction data are also used by shop-management systems, such as Alibaba’s free retail management platform Ling Shou Tong (Retail Integrated), to access customer data to improve inventory management, merchandising and sales.
For customers, digital records of purchases can be used to qualify credit risk and enable access to a variety of loans. Additionally, electronic payments make it easier for people with low incomes to participate in the “sharing economy.” For example, someone who does not have enough money to buy a bike can pay a ride-share company to use one for a short time using a ride-sharing app, such as Ofo. Similarly, a person who owns a motorcycle can offer rides via a ride hailing app.
Social media and networking
Some super platforms have integrated payments into their social network platforms. For example, WeChat now enables users to hail taxis, split restaurant bills, play games or stream videos, all within the app. We see two direct ways in which this marriage of social networking and payments could advance financial inclusion.
First, it can make financial services more relevant to users by ensuring they fit into social customs. For example, during the Chinese New Year, families provide their loved ones with red envelopes containing cash. WeChat enables people who cannot physically meet during the holiday — including those living outside China — to send digital red envelopes. During the 2018 new year alone, WeChat users sent $115 million (Y 768 million) worth of digital red envelopes.
Second, social network companies can use the data their customers generate to further extend access to credit. Tencent, the parent company of WeChat, owns a 30 percent share in a bank called WeBank. WeBank uses data from WeChat’s social interactions and monetary exchanges to help manage a loan portfolio with very low default rates. The ability to mix social and financial data to create a robust credit score, even for clients who are traditionally classified as “thin-file” (meaning they have little to no credit history), is particularly relevant in the absence of credit bureaus in China.
E-commerce facilitates trade among parties who would struggle to conduct business if there were not an online mechanism connecting supply to demand over long distances.
For customers, not only does e-commerce enable increased access to a range of products, but it also results in time-savings that may lead to more time being spent on productive activities. In addition to connecting buyers and sellers, e-commerce platforms provide escrow accounts so that buyers have the confidence to purchase goods remotely before they can verify their quality.
For small businesses, e-commerce can help businesses grow by providing access to broader markets (increased sales) and diversifying sales channels. Sales data can also enable financing of working capital. The growth of businesses as a result of e-commerce could have a direct effect on job creation and income generation for local citizens. Alibaba’s rural-focused entity, Cuntao, indicated that their rural ecommerce solution had created more than 1.3 million new jobs nationwide and brought a RMB 180,000 benefit annually to each village. We spoke with suppliers and producers in one of these villages to understand how online marketplaces were influencing their businesses. One shoe factory owner said he dramatically expanded his business through annual advertising on Alibaba coupled with branding support provided by the platform. In just four years, he was employing 200 people and selling 1 million pairs of shoes annually.
The digital divide
As we saw on our visit to China, there are early indications that super platforms could demonstrate a positive impact on consumers and businesses, especially with respect to efficiency gains, transaction and social media data and access to capital. However, more research is needed to understand the impact these innovations are having on low-income consumers. There has been limited exploration of the impact of platforms “after access,” and this is where the financial inclusion community could allocate more resources. Perhaps the next step in the China discussion is to begin identifying the impact of super platforms on different user segments, including low-income women, youth and rural residents. What do super platforms mean in terms of job creation, self-employment and changes in income and expenditures? Or in terms of access to education, upward mobility and gender equality?
Emerging examples of impact stories can help us understand where to marshal our efforts when advancing digital financial inclusion. Actors such as CGAP and the Mastercard Foundation can contribute to building the evidence-base on the impact that digital financial services can have on low-income clients in emerging markets.