By Vinnie Lauria for Forbes
Electronic payment apps like Venmo win customers and make headlines for their ease of use, transparent costs, and widespread adoption, creating the illusion that money is flying through the air without the slightest friction. In truth, the global electronic payment market is far thornier than its products would make it seem.
On the global scale, the electronic payments industry is about as fragmented as the mobile messaging industry for platforms such as WeChat (China), Line (Japan), Viber (Philippines), and so on and so forth. In North America, Paypal and its subsidiaries Venmo and Braintree dominate the electronic payments market. In Africa, Kenya’s M-PESA is the major player, serving both as a medium of economic exchange for those without bank accounts and as a mobile savings platform for millions of people without access to the traditional banking system. Alibaba’s Alipay and Tencent’s WeChat Wallet have essentially split the Chinese market.
Although there is plenty of startup activity in the Americas, Europe and Africa, we haven’t yet seen a company that poses a significant threat to these regional leaders, and neither startups nor incumbents position themselves as feasible contenders for dominance on a global scale. Plus, country-specific dominance isn’t the only thing that separates these companies. Some, like Venmo and Paypal, typically require users to have bank accounts, which means that the 2.5 billion people worldwide who don’t have a formal bank account can’t use their services. (Paypal’s prepaid cash card is designed to attract the unbanked, but it’s been criticized for, among other things, an overly narrow focus on, well, using Paypal.) Others, like M-PESA, can be used without a bank account, which makes their scope potentially more far-reaching—though so far, none have expanded beyond regional dominance.
Why is this so is puzzling. For instance, with accelerating digital adoption and a burgeoning e-commerce space, Southeast Asia seems like a perfect target for expansion by one of these large, established payment services. Yet the space remains highly fragmented, packed with local players that are quicker, more nimble, and more locally adapted than the large regional incumbents. These include newer startups, spinoffs of more established startups like Lazada’s helloPay or Go-Jek’s Go-Pay, and some scattered offerings from banks and telcos.
Much like the mobile messaging space, the electronic payments industry is immature and changing rapidly. For all but the most entrenched players in the most stable markets, leadership in electronic payments is up for grabs around the world. Although the current market landscape is regionally fragmented, on a global scale the total addressable market is huge. In other words, it’s a big pond with enough room for many big fish. At least for now, it’s difficult to envision a scenario where there is one clear winner in the global payments industry.
Thick Lines Separate Thin Borders
In general, the market for payments is primarily local. Globally, less than 20% of the payments made by both consumers and businesses in 2014 crossed international borders according to McKinsey’s 2015 payments report. Asia accounted for nearly 40% of the $1.8 trillion in overall payment industry revenue in 2014 and forecasts suggest the region will garner almost 45% of the revenue—some $1 trillion—generated by the global payments industry by 2019.
Although these statistics suggest that the Asian payments market is somewhat unified, this is far from the truth. At a regional level, the electronic payments market is defined by disparities in technological adoption and intensity of regulatory oversight.
In Asia, there are countries at the bleeding edge of payment technology adoption located within a few hundred miles of places where, up until quite recently, large transactions were settled by literally delivering a truckload of cash from one place to another. Singapore, Japan and South Korea are early adopters of mobile and other electronic payments technologies, whereas in an emerging market like Myanmar real-time electronic payments and bank transactions weren’t really possible until this year. Even in China, which has experienced a real boom in fintech innovation, it’s still commonplace for people to purchase big ticket items like cars in cash because the automotive finance industry has been slow to take off. In one case, a gas station owner purchased a car with over 660,000 coins, a payload weighing over four tons, because “there [were] very few banks” in his small suburb of Shenyang. He felt it made more sense to store over 8,000 pounds of money himself rather than keeping it in a bank.
Payment companies seeking dominance in the Asia-Pacific and Southeast Asia regions face an additional hurdle in the form of regulation. China, the main economic power in the region, has a highly regulated currency and strict banking laws. China places many restrictions on cross-border transactions, which acts as a double-edged sword. While these regulations serve to protect Chinese electronic payments providers from foreign competition to a certain extent, they also hinder expansion of major Chinese payments platforms to markets outside of China.
Dominant Players Stumble Over Red Tape When They Expand Across Borders
Just as some electronic payments companies from North America have experienced difficulties with expanding their services to other regions, the same is true for most payments services in Asia as well.
In peer-to-peer payments alone, Chinese messaging giant WeChat, which provides services for the unbanked as well as bank account holders, isexpected to facilitate over $556 billion in transaction volume this year. That is nearly twice the overall volume processed by PayPal, and that doesn’t even take into account payments for taxis, restaurant bills, social media add-ons, and other transactions WeChat users can make through the app. However, as of 2016, the vast majority of these transactions take place in China. Though international payments are allowed through the app—mostly for the convenience of Chinese tourists abroad—WeChat has only rolled out its full e-wallet services to one other country so far: itannounced its expansion into South Africa in 2015.
Alibaba’s Alipay is even more of a behemoth, controlling some 69.9% of the mobile payments market in China as of early 2016. Despite its dominance in China, Alipay has encountered many of the same hurdles as other payment services providers in attempting to expand abroad. In May of this year, China’s central bank ruled that Alipay users who didn’t have a mainland China bank account would be unable to store funds on the platform after July 1, 2016, effectively hamstringing any momentum Alipay may have developed in its push for overseas expansion.
Why have these giants, which expand so aggressively elsewhere, struggled to establish a toehold outside of China in the payments space? It could be that smaller startups are simply more nimble and better able to deal with complex webs of local regulation. However, problems overseas haven’t stopped Alipay and its competitors from growing robust businesses at home, and it hasn’t stopped entrepreneurs from entering the payments space.
Wanted: A More Seamless Payments Experience
The question is, what is the major driver of innovation in the payments industry in Asia today? In one word: seamlessness. The goal of most payments companies is to make the process of sending money and paying for things as frictionless as possible, to create that illusion of money flying through the air.
First appeared at Forbes