My Phone Is My Wallet

(Bloomberg) -- The future of money is in your pocket — the one you keep your phone in, not your wallet. A growing portion of the world’s population is making phone-assisted transactions. They’re using a variety of technologies, from the text-message system popular in Kenya to the seamless credit card-and-app arrangements that move money for every Lyft and Uber ride. It’s a revolution that’s lagged in the U.S., despite offerings from Apple Inc. and a range of big retailers. In addition to providing convenience and sometimes lower fees than credit cards, these mobile-payment systems are connecting millions of previously unbanked people: In China, some beggars hold out bar codes instead of tin cups. In places such as Sweden where the apps are especially popular, cash is starting to disappear. And beyond the cash register, it’s clear that a good chunk of the traditional consumer-banking business stands to be upended.

The Situation

The Chinese have adopted mobile payments perhaps faster than anyone else. The shift has been driven by services owned by two of China’s internet giants: WeChat Pay, offered by Tencent Holding Ltd.’s messaging service, and Alipay, part of Zhejiang Ant Small & Micro Financial Group, which is an affiliate of online retailer Alibaba Group Holding Ltd. Alipay, which claims 850 million users globally, handled 256,000 transactions per second on its busiest day in 2017 — more than 10 times the capacity of Visa Inc.’s network. Both services rely on those square variations of traditional bar codes known as QR codes. Apple’s mobile-payment system, Apple Pay, uses a technology called near-field communication that allows buyers to wave a smartphone near a credit card terminal. With the U.S. market slow to develop, Apple Pay has gone live in 24 markets worldwide. Most major U.S. retailers and banks have launched their own mobile wallets, hoping to replicate the success of apps of early movers Starbucks Corp. and Uber Technologies Inc. PayPal Holdings Inc. has seen strong growth in its peer-to-peer app, Venmo, which lets consumers split rent payments or dinner bills. Europeans as a whole have been even slower to adopt mobile payments. But in Sweden, which has a population of 10 million, Swish, a service backed by local banks, already has 6.5 million users.

The Background

The first mobile payment systems date back more than a decade, to FeliCa Networks, a 2004 joint venture in Japan between Sony Corp. and NTT DoCoMo Inc. that allowed for contactless payments. Kenya’s popular bank-by-text M-Pesa was adapted in 2007 from a system developed to distribute small loans to people too poor to have a bank account. It caught on as a safe and convenient way for urban workers to send money to relatives in the countryside. In 2004, Alibaba’s founder, Jack Ma, started Alipay as an online payment system to encourage shopping on his Taobao site during an outbreak of the SARS virus that kept many people home. Alipay added its mobile service in 2009. In early 2014, Tencent ran a successful promotion during the Lunar New Year holiday called Red Packet, which allowed WeChat users to send small financial gifts — a Chinese custom — to friends and relatives using their smartphones. India saw a brief spurt in digital payments in 2016 when the government recalled most of the nation’s existing bank notes; now, a bewildering array of digital payment businesses including Google Pay and Facebook Inc.’s WhatsApp are in a slugfest to catch up to local leader Paytm.

The Argument

If you don’t have access to a bank, being able to make or receive payments through your phone is an obvious advantage. That’s a big reason why China, home to the world’s largest unbanked population, has turned enthusiastically to mobile-payment apps. In more-developed countries, companies are trying to boost consumers’ interest by providing greater convenience. The Starbucks app, which lets customers have their coffee waiting, accounts for 13 percent of the company’s U.S. transactions. (By contrast, mobile payments accounted for 57 percent of KFC’s orders in China at the end of fiscal 2017.) The multitude of competing services in the U.S. and Europe means a plethora of perks through loyalty programs, paid for with savings from credit card transaction-processing fees the companies can sidestep. But if a user has to turn to one app to shop at Walmart, another to hail an Uber and a third — say, Venmo — to split rent with roommates, much of the convenience goes out the window. There are downsides to the dominance of Alipay and WeChat Pay, however: Chinese regulators say that incentives the two give merchants to use their services have led some to refuse to take cash or alternative forms of payment.

The Reference Shelf

• A Bloomberg News graphic on the threat China’s mobile-payment apps pose to U.S. banks. 
• A Bloomberg News video on China’s increasingly cashless society. 
• A Bloomberg Businessweek reporter paid for a trip around Kenyain 2014 entirely with his phone.

To contact the editor responsible for this QuickTake: John O'Neil at joneil18@bloomberg.net

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