Wandering the streets of Shanghai to admire the architecture, the head of one of the largest U.S. consumer banks recently found himself surrounded by a gaggle of teenagers.
Entranced by their phones, they hardly made way for the banker. The teens were messaging, shopping and sending money back and forth, all without cash. Instead, they were using Alipay and WeChat.
The scary thing for the American: Banks never got a cut.
The future of consumer payments may not be designed in New York or London but in China. There, money flows mainly through a pair of digital ecosystems that blend social media, commerce and banking—all run by two of the world’s most valuable companies. That contrasts with the U.S., where numerous firms feast on fees from handling and processing payments. Western bankers and credit-card executives who travel to China keep returning with the same anxiety: Payments can happen cheaply and easily without them.
Chinese vs. U.S. Payment Systems
Americans more typically involve banks and cards when paying with apps
China
Paycheck is deposited into employee’s bank account
Consumer transfers money into their wallet at Alibaba’s Alipay or Tencent’s WeChat Pay app in order to...
U.S.
Paycheck is deposited into employee’s bank account
Consumer uses debit card to shop, or...
Consumer uses credit card to shop, or...
Send money to peers with Zelle
Consumer uses bank account, debit or credit card to fund their wallet at PayPal,Apple, Google, Samsung, etc. in order to...
Pay friends or family with Venmo
Shop online at stores accepting wallet
Shop at brick & mortar stores accepting wallet
Some retailers like Starbucks have their own wallet
Shop online at many Chinese e-tailers
Send money to friends or family
Shop at brick & mortar stores
Transfer money abroad or make purchases on vacation
Source: Bloomberg reporting
Alibaba Group Holding Ltd. created Alipay in 2004 to let millions of potential customers who lacked credit and debit cards shop on its vast online marketplace. Tencent Holdings Ltd., similarly, debuted its payments function in 2005 in a bid to keep users inside its messaging system longer.
Alipay and WeChat have since swelled in popularity, boasting 520 million and 1 billion monthly active users, respectively. Consumers sent more than $2.9 trillion inside the two systems in 2016, equivalent to about half of all consumer goods sold in China, according to the payments consultancy Aite Group.
In contrast, U.S. consumers still rely on banks for most non-cash payments—whether it’s by check, debit, credit or a growing number of other payment systems tied to their bank accounts. Connected to that is a universe of wallets and payments systems operated by the likes of PayPal Holdings Inc., Apple Inc. and Alphabet Inc.’s Google. From the perspective of merchants, too much of the U.S. system siphons off enormous amounts of money.
Transaction Breakdown
In a typical $100 credit card purchase...
$97.25
Goes to the merchant
$2.20
Issuing bank
23¢
Payment processor
19¢
Acquiring bank
13¢
Card network
How That $100 Credit Card Purchase Is Processed
Established players face potential disruption
owns
Consumer
Mobile devices
New payment companies
(Square, PayPal)
①
Makes a $100credit card purchase
⑨
Authorizes transaction
threaten
threaten
Provides point-of-sale
Merchant
Payment processor
(Verifone, NCR)
Independent Sales Organizations (ISOs)
Set up businesses to accept credit cards
②
Requests authorization for $100
⑩
Bills cardholder $100
⑧
Authorizes transaction, keeps 19¢ in acquiring fees and pays merchant $97.25
⑦
Paid remainder of merchant fee 23¢
Acquiring bank
(Chase, Bank of America, First Data, Vantiv)
③
Requests authorization
for $100
⑥
Keeps 13¢ in network fees
Fees add up to about $90 billiona year in the U.S.
Supplies consumers with credit cards to make purchases
Card network
(Visa, Mastercard)
⑤
Approves transaction and transfers money, keeps $2.20 in interchange fees
④
Requests authorization
for $100
Issuing Bank
(Capital One, etc.)
Sources: Glenbrook Partners, Plaid, BI Intelligence
For now, no company in the U.S. commands the kind of clout that Alipay and WeChat wield back home. Instead, everyone is trying to replicate their success.
“This is going to be the battle of all time—like who dominates all those services—and it’s still not known,” Jamie Dimon, chief executive officer of JPMorgan Chase & Co., told his company’s investors in February. “Everyone wants to be the place that is the one place you go to do that.”
The nightmare for the U.S. financial industry is that a technology company—whether from China or a homegrown juggernaut such as Amazon.com Inc. or Facebook Inc.—replicates the success of Alipay and WeChat in America. The stakes are enormous, potentially carving away billions of dollars in annual revenue from major banks and other firms. What follows is a breakdown of what that could look like—theoretically—using the explosive growth as China’s apps as a rough guide.
Perhaps the clearest opportunity lies in siphoning off some of the fees that U.S. merchants pay to accept cards and mobile payments—about $90 billion a year, according to the Nilson Report, an industry newsletter. That money gets parceled out to card networks such as Visa Inc. and Mastercard Inc., payment processors and banks, which pocket the largest share.
In China, analysts expect third-party payment providers to earn about 40 percent of such fees by 2020. If apps were to start grabbing market share in the U.S. at roughly the same rate they did in China, it would take a $43 billion revenue bite out of a business banks count as among their most profitable.
Merchant Fees
Financial firms would lose billions if the U.S. embraces third-party apps at a rate like China’s
Fees collected by banks
Fees lost to third parties
China
U.S.
Projected
Projected
$150
B
$43B
in merchant fees could be lost to third-party payment companies by 2020
150
100
75
50
25
0
2010
2012
2014
2016
2018
2020
2010
2012
2014
2016
2018
2020
Note: No estimates are available for Chinese third-party fees for 2017–2019
Sources: Kapronasia, Nilson Report
But that’s just one way that U.S. banks impose fees. They also generate revenue by dispensing cash. If payments apps were to replace paper money—as they have in many situations in China—another form of income could take a big hit.
Easy Money
Checking accounts generate about $3 billion in bank fees, which would dwindle if consumers embrace apps
$1.8B in overdraft fees
$412.0M
Bank of America
410.0
Wells Fargo
333.0
JPMorgan Chase
126.9
U.S. Bancorp
102.2
PNC
89.2
Regions
75.6
SunTrust
139.5
TD Bank
41.9
Woodforest
National Bank
28.0
Citigroup
76.0
BB&T
$783.3M in maintenance fees
282.0
Bank of America
162.0
Wells Fargo
118.0
JPMorgan Chase
53.5
TD Bank
38.0
Citigroup
21.0
BB&T
15.3
Regions
31.8
PNC
40.6
U.S. Bancorp
12.4
SunTrust
8.7
WNB
$341.4M in ATM fees
69.0
JPMorgan Chase
85.0
Wells Fargo
13.6
U.S.
Bancorp
12.0
BB&T
23.2
TD Bank
83.0
Bank of America
11.4
Regions
9.2
SunTrust
15.9
PNC
9.1
WNB
10.0
Citigroup
Source: S&P Global Market Intelligence
Soon, U.S. bank executives won’t have to travel far to see China’s systems up close. Alipay, owned by Jack Ma’s Ant Financial, has spent the better part of the past year inking deals with payment processors that will allow it to bring its technology to America. Already, many New York taxis offer it as a payment option to customers.
So far, Alipay has said the expansion is meant to help Chinese tourists, and that it’s focusing on cities they tend to visit. But few in the payments industry believe it will stop there.
Meanwhile, Chinese consumers are starting to park more of their savings with the apps. In 2013, Alipay began offering money-market accounts. By last year, it had built that business into the world’s largest money-market fund with about $243 billion. For banks, that’s yet another bite. They traditionally hold customer deposits and use that money to fund loans—generating significant profits. If U.S. consumers were to start storing their extra cash with apps, banks would have to find an alternate—probably more expensive—source of funding.
Deposits
Even a relatively small bite to deposits would be a lot of money
Deposits collected by banks
Deposits lost to third parties
China
U.S.
$242.9B
in deposits lost to Alipay (1.6% of total)
$15T
$188.3B
in potential lost deposits if the U.S. followed this pattern
10
5
0
2011
2012
2013
2014
2015
2016
2017
2011
2012
2013
2014
2015
2016
2017
Sources: Bloomberg Intelligence, Kapronasia
To be sure, U.S. banks have formidable advantages on their home turf. They have longstanding relationships with their customers, many of whom still like ‘visiting their money’ at a local branch. Consumers love credit card rewards programs and other perks, which have gotten sweeter in recent years, as well as the ability to charge back purchases that don’t go well. And U.S. bank deposits are backed by the Federal Deposit Insurance Corp.
Still, banks and payment networks have a lot to lose if technology firms succeed in grabbing market share—and there are signs that Alipay and WeChat aren’t the only firms that may flex their muscles. Amazon is said to be interested in offering its own product to mimic checking accounts while offering to lower costs for retailers who use its online payments service.
“What happened in China was not an even playing field,” Al Kelly, Visa’s chief executive officer, said at an investor conference in March. “What I hope happens around the rest of the world as they migrate is that at least it’s an even playing field.”
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