Here is an exciting story at Seeking Alpha this morning.
Just as QR codes have made it inexpensive and easy for micro-merchants to enter the world of payment acceptance, the QR code may cause a shift away from both Tencent and Ant Financial. The regulatory thrust behind codifying QR codes might contend with the two firms moving more towards biometrics to protect their market.
- We believe that the emerging regulations on the unified QR-code standard and the gradual transition toward NetsUnion are intensifying the regulatory pressure on the payment incumbents (specifically the wallet owners) at both the front end and the back end of the payment value chain that could potentially disrupt the existing duopoly of Tencent (OTCPK:TCEHY) and Ant Financial (BABA) and further pressure the unit economics.
- In addition, the evolving regulations will likely force the incumbents into a new investment cycle on both user and merchant adoption in an effort to circumvent the growing regulatory pressure, therefore margin upside is likely to be limited due to the increase in subsidy.
- Finally, we continue to believe that biometric payment will be an important component of the incumbents’ strategy to given that biometric essentially circumvents the emerging regulation on QR code and to counter the potential new wallet entrants in the wake of this regulation.
A very wordy explanation of the current state but consider this:
- For any long-time China watcher, it’s well-understood that whatever the government says they will do.
- The Chinese regulators specifically pointed out the introduction of a unified payment QR code in an effort to further lower the payment friction for the consumers. While such plan is beneficial for the users as the unified QR code allows interoperability between merchants and users (ie. Wallet owners), it also disrupts the existing duopoly of the Tencent and Ant Financial by allowing subscale payment players such as UnionPay’s (private) QuickPass and other potential brands such as Huawei, Oppo, JD Finance and Suning Finance to roll out their own mobile wallets.
To break down the impact, the article points to Singapore, which recently codified its QR code structure.
- Singapore recently rolled out its unified QR code to simply offline payment and this system is being adopted by 27 payment schemes on the island nation, including PayNow, Nets, GrabPay, Liquid Pay and Singtel Dash.
- Following the six-month rollout, users will be able to quickly check if their preferred QR option is on the label and then pick it and scan the code to conduct the transaction.
And, then in India…
- To get a sense of where a unified payment network could become even more disruptive to eWallet players, look no further than India.
- India’s Unified Payment Interface (UPI) is partially responsible for the proliferation of mobile wallets in the country since it was established in 2016.
- UPI is a direct bank-to-bank transaction platform that’s based on the IMPS (Immediate Payment Service), which allows a user to transfer money from a bank account to another bank account instantly. On the contrary, an e-wallet allows you to make payments for various services or transfer funds without using Internet banking, but the wallet itself needs to be loaded first through Internet banking.
The difference in India is that India uses its domestic Unified Payment Interface, which allows for bank-to-bank transfers, which settle outside the wallet structure. In China, payments stay within the mobile wallet and outside the banking system.
But, do not forget the economics:
- In terms of subsidy to both merchants and users, Tencent also is at a disadvantage because the payment business is inherently a low-margin business in China with the transaction guideline to be at 0.6% compared with the US that’s between 2% to 3% of what a credit card issuer charges.
- Payment accounts for more than 90% of Tencent’s fintech revenue while around 40% for Ant.
Which leads us to a strategic question. Will Asian companies move towards biometrics to protect their market?
- The introduction of QR code will accelerate the investment in facial recognition by the incumbents, therefore, pressuring their profitability.
If so, QR codes may be a passing fancy. That will be a tough row to hoe, as I see it. The momentum shifted to QR codes because they are cheap, readily available, and relatively secure.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group