The Chinese win the FinTech and Payment Battles

EVERYONE interested in the Blockchain and FinTech space must visit China annually!

  • I’ve recently returned from a brief trip where I presented at two conferences in China and successfully, with 2 week's suffering, recovered from my ailment begotten in the Beijing smog. Even though I was born and raised in China where I resided until merely three years ago, the recent three years in Australia made me used to a rather casual lifestyle and clean air. I was struck by surprise with what I witnessed in my visit.

As the title suggests, I advise anyone involved in the Blockchain and Payments spaces to visit China at least once a year. If it is beyond you, or that you have a sensitive lung like mine, at least subscribe to this blog. The developments that take place in payment, crowd funding and FinTech are happening at such fast pace that as new technology comes and goes, it gives birth to newer use cases, but it occupies so little time, that in people's memory it’s almost as if these things have never existed. What were introduced this year already feels like the way things have always been set out. If you’re visiting China at a two-year interval, you will miss the story-line.

I presented on Blockchain at two conferences in China last week - QCon, claimed to be the largest IT developers conference in China, an offshoot from QCon San Francisco; and AHA - a smaller elite conference, an offshoot from QCon itself. But I doubt if I have more to teach than what I have learned from my audience in the days I spent with them.

The Chinese win the Payment Battles

Payments1 In China people often fight to be the one who pays for friends. This year I lost every battle. Restaurants have unique QR codes printed on each table. My new buddies whom I met during the conference were able to scan the QR code and pay ahead of me. The QR code is constant; it is the bill it refers to that changes. I even lost the battles when I attempted to pay for parking when riding in their cars since the car number plates are recognized and a bill is sent directly to the associated mobile phone number's WeChat/Alipay account unless the owner defers the bill. Few people if any visit the pay stations anymore.

The streets are dotted with yellow bikes which has QR codes printed on them. Pay those QR codes and ride away. No registration.
Bike

Another phenomenon I noticed is that most transactions in convenience stores are done with mobile payments. Shopkeepers keep small amounts of cash. Over the dining table, I heard a story about a gang that robbed 3 convenience stores, captured and sentenced to years in prison, only for a feeble 200 USD worth of cash, the collective inventory of 3 stores.

Shops

By the end of that dinner, I noticed this restaurant didn't use per-table QR code, so I rushed to the counter to pay. My friend who was the host immediately noticed my move and also rushed over to the counter. Despite the fact that I was the first to hand over my credit card, the cashier suggested I pay using QR code, and I failed yet another payment attempt because my friend managed to pull out his mobile ahead of me. I asked why was there a preference for QR codes payment over credit card. The cashier explained that card payment introduces a transaction fee of about 1%, while the QR payments are free of charge, so they decided to give that back to customers as 1% discount when they use QR codes, hence my friend would pay less than I do. He also added that QR payments are settled very quickly, unlike credit card payments. It is worth noting that QR payments channels in China are facilitated by Internet conglomerates, unlike the QR payments in Australia that are maintained by the banks. For example, Bendigo Bank (based in Victoria, Australia) processes QR code payments with Samsung's POS device, through the same VISA/Mastercard payment system, where there is a VISA/Mastercard number in every transaction costing the same fee. The QR code in China, on the other hand, doesn't involve VISA or Mastercard, not even UnionPay - the Chinese version of VISA/Master with a lower transaction fee. Instead, the payments are settled by either WeChat (Tencent) or Alipay (Alibaba).

Why and how did China make such great strides in payment?

Some ascribe these developments to the lack of privacy protections in China. For example, parking management needs to know the phone number associated with each car's license plate which is easier to obtain in China. They also need to know if that phone number is associated with a WeChat or Tencent account - which is obviously a lot easier to obtain than acquiring their bank account details. I would personally disagree. With cryptography, the equal convenience can be achieved without breaking privacy and the western world knows cryptography better. Besides, transactions based on mobile numbers is a planned feature in Australia's New Payment Platform (NPP), so it is desirable even in the west - it just hasn't happened yet.

How does bitcoin compare to WeChat/Alipay QR Codes?

BTC

I'm inclined to take the shopkeeper's explanation, the Internet conglomerates provided 2 advantages over the banks: it settles quickly, and it charges less fees. The instrument to achieve that is QR code, light to deploy on any POS machine without the credit card scanner banks would usually provide and charge for.

But bitcoin used to provide both advantages with QR code, only until recently when the blocks became too full, and it has never taken off. A few years ago in Sydney CBD, there were two or three bars that accept bitcoin payments with QR code, fast forward to now and the number of venues remains almost the same.

Going with this narrative suggests we compare Tencent or WeChat QR code with that of bitcoin in detail. Since bitcoin is not nearly as successful, we tend to think there is something inherently wrong in this comparison. Let us look at what is inferior in bitcoin:

First, in order to even use it requires you to own bitcoin. This argument is not really true. Service providers like coinbase, or the Australian-born CoinJar, allow you to pay bitcoin in QR by instantly converting your fiat currency. Customers don't need to worry about price volatility. But this conversion may have killed the low or no fee advantage.

Second, it takes too long - a 0-confirmation transaction takes 6 seconds, compared to the 2-3 seconds of VISA and almost 0-seconds of AmericanExpress. There are ways to remedy the speed problem (not the security). However, lacking the arbitraging 3rd party, the community seems to care more about security. Surely, sending a conflicting transaction with higher fee after 0-confirmations should attract unscrupulous miners to cook their books. The fact that such practice wasn’t being widely observed may just indicate that the size of the network is too small. If a method will fail to scale, it's perhaps better not to increase its speed.

We come to the point that bitcoin is perhaps not as good as the QR code provided by WeChat/Alipay as a retail payment method, even before the blocks got full. But if we make something just like WeChat or Alipay, will it be successful in the west? If Facebook or Paypal roll out QR code payment systems that work at POS, will it be successful? I don't have an answer. The trip to China surely got me thinking.