The 2017 Global Findex shows that China made considerable progress toward financial inclusion in recent years. Today, 80 percent of adults in the country have a financial account. Though a modest increase of 1 percent since the last Findex was released in 2014, this number compares favorably to the 71 percent average for the East Asia and Pacific region. A more dramatic change can be seen in the percentage of adults who have used digital payments, which skyrocketed from 45 to 68 percent over the same period. Findex also shows that the percentage of people in rural areas who have used digital payments in the past year (64 percent) has almost caught up. However, some perspective here is important. The Findex data do not capture the far greater frequency with which urban-dwellers are using digital payments. Making digital payments a way of life in rural areas, as it is in Beijing or Shanghai, will likely require China’s tech giants to recalibrate their approaches to offering financial services.
The integration of digital payments into everyday life in China is largely thanks to the popularity of Alipay and WeChat Pay, the country’s largest mobile payments services. Owned by tech giants Alibaba and Tencent, respectively, these mobile wallets emerged in 2008 and 2013. By some estimates, together they facilitate 92 percent of China’s mobile payment volume of 81 trillion yuan ($12.77 trillion), as of October 2017. China’s high rates of financial account ownership and smartphone penetration created the conditions for Alipay and WeChat Pay to take off. But as we argued in an earlier blog post, “What Can Mobile Money Make Possible? China Has Many Answers,” Alibaba’s and Tencent’s success in the financial sector is largely attributable to their ability to create use cases that genuinely resonate with people. Both have an uncanny knack for linking mobile wallets to an ever-growing array of online services that customers find useful in their everyday lives.
These use cases — from taxi hailing to booking wedding venues — have mainly attracted users in cities, where internet connectivity is better, and young working people have a greater need for such applications than most people in remote locations. Yet 43 percent of the Chinese population still lives in rural areas despite urban migration. A 2016 study conducted by Visa in rural northeast China showed that 92 percent of respondents had mobile phones, half of which were smartphones. The region’s relatively high smartphone penetration has not translated into widespread use of mobile financial services, however, with only 11 percent of respondents claiming to have tried them. Data like these suggest that neither Alipay nor WeChat Pay has hit on a proposition for converting rural users, who are typically older than the people drawn to cities for work. It is increasingly clear that digital financial services providers will have to adapt their successful urban approaches to expand into more remote places.
However, rural China presents an unmissable opportunity to providers, practically on their doorstep. The nearly 700 million people who live outside of urban areas have similar levels of bank account penetration as their urban counterparts — a key driver of mobile payment adoption. Alibaba, in particular, is eager to attract consumers and producers for its e-commerce business in rural areas, and it has been building out its non-urban distribution infrastructure. The company’s co-founder and executive chairman, Jack Ma, has made no secret of his determination to expand his business beyond China’s cities. However, WeChat’s hold over online life in China, rural or otherwise, means it will always have a seat at the table. Expect rural China to increasingly become a battleground over the coming years as these two titans shift their attention away from the rapidly saturating cities.
By adjusting their approaches, mobile financial services providers have a great deal of potential to expand their reach to these and other groups in China — and beyond. Chinese companies have already begun to move into other Asian markets, bringing with them the business models they honed on home ground coupled with their ambition to reach a large scale. Regional expansion is ramping up with investments in India, Bangladesh and Pakistan happening in quick succession. It looks increasingly likely that the next decade could be significantly influenced by China’s experience.
Still, there is no guarantee that platforms like Alipay and WeChat Pay will continue their untrammeled growth. One of the biggest uncertainties facing China’s mobile financial services providers is the regulatory environment. To date, providers have benefitted from a regulatory regime that permits innovation and experimentation. But the government is showing signs that it is increasingly concerned about privacy issues, over-indebtedness, the concentration of power in mega-companies and cryptocurrencies. A growing number of pyramid schemes, frauds and shoddy operators is adding urgency to regulatory concerns. As discussed in another blog post, starting June 2018, all online payments (including all AliPay and WeChat Pay payments) are to be routed through a People’s Bank of China-monitored central clearing house called Wanglian. It’s possible that yesterday’s permissiveness is giving way to a desire for tighter control. It is also an open question whether foreign authorities will be keen for Chinese behemoths to capture the online lives of their citizens.
It’s impossible to say how mobile financial services will play out, but the latest Findex makes clear that there has been impressive progress for digital payments. Whether this is translating into actual financial inclusion is a question that requires closer inspection. One thing is certain: If the past three years are anything to go by, the next three will be eventful, to say the least.