China’s state-backed bank card association China UnionPay announced (in Chinese) on Monday that it will start using QR codes to process payments. This seems to be the latest signal that government is relaxing control on the technology, long in use by other sectors. In addition, it is expected that this will create a more competitive environment in China’s mobile payment sector. Alipay and WeChat Wallet have been the main players dominating the sector.
Actually, it was only in the last few months that QR codes were legally approved for financial transactions. Since March 2014, all QR code transactions were supposed to be suspended after China’s central bank announced security concerns.
However, the ban has not hindered the rapid application of QR code payment over the last two years. Domestic internet companies led by Alibaba and Tencent have continually pushed the use of this technology.
Chinese Internet companies have a tricky relationship with the country’s regulators. In the rush to increase financial offerings, they have developed an “ask for forgiveness, not permission” approach. Something similar happened with the ride-sharing industry: the legal status of drivers on leading platforms like Didi Chuxing and Dingding Yueche is still being questioned
The efforts of domestic third-party payment companies have been very productive. Data from Internet consultancy Analysys International shows the total transactions by third-party mobile payment tools exceeded 7.5 trillion RMB (1.08 trillion USD) in the second quarter of this year. It is clear that China’s state-backed institutions cannot afford to ignore this trend.
UnionPay faces stiff competition from Alipay (55.4% of market share) and Tencent (32.1% market share). UnionPay seems to be betting that it’s better late than never to enter this market.
Even before mobile payments, QR codes were a regular phenomenon, especially in first- and second-tier cities. The ride-sharing subsidy war between Alibaba-backed Kuadi and Tencent-backed Didi brought millions of users into the mobile payment ecosystem. Afterward, educating them on QR code-based transactions was simple, something that UnionPay does not have to think about.
However, there are still many challenges. Both Alipay and WeChat Wallet are so ubiquitous that changing user habits in favor of another service may prove difficult. Other large challenges include lowering marketing costs and making bankcard payment options available for small offline retailers.
Despite all these, the recent move by UnionPay marks a shift in focus from traditional financial institutions towards financial technology (fintech) solutions. In July of this year, the Industrial and Commercial Bank of China, a UnionPay member, released a QR code payment function. Several other UnionPay members include China Construction Bank, China Merchants Bank, China CITIC Bank, Minsheng Bank, SPD Bank all followed suit to release similar mobile payment features this year.
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