A couple of years ago, one of the most commonly cited obstacles to e-commerce penetration in China was the lack of effective methods of payment, especially considering the very limited credit card use at that time. Trying to deal with these issues and in an effort to win consumer confidence, Taobao introduced its Alipay escrow accounts system whereby customer payments are held in escrow until shoppers receive their orders. By contrast, PayPal, Alipay’s Western counterpart, transfers the payment to the merchant automatically when the buyer places the order and merchants do not send out orders until payment is received. Alibaba created Alipay in 2004 to let millions of potential customers who lacked credit and debit cards shop on its vast online marketplace. Similarly, Tencent debuted its payments function in 2005 in a bid to keep users inside its messaging system longer. Alipay and WeChat have since become very popular, boasting one billion and 520 million monthly active users, respectively. Consumers sent more than three trillion U.S. dollars inside the two systems in 2017, equivalent to about half of all consumer goods sold in China during that year.
Key Payment Methods
China is a cash-oriented country. In everyday life, cash is by far the preferred way of payment because smaller companies and local shops do not always accept cards. New payment solutions have emerged in recent years as a result of booming e-commerce activities. The growth of e-commerce inspired the creation of new payment methods, such as Union Pay, which is the Chinese version of MasterCard or Visa, and Alipay, which is a third-party payment system that has been aforementioned. The explosive growth of e-commerce is largely due to the wide distribution and use of credit and debit cards in recent years, as well as the growth of third-party payment systems, such as Alipay and Tenpay, which have enabled consumers to feel more secure while carrying out online transactions. Online customers choose a variety of payment methods that are different from their counterparts in other countries. They prefer cash on delivery, wire transfers, online banking, and third-party online payment methods when shopping online. With regard to PayPal, although it is in theory permitted as a way of payment, it is still practically impossible to use a Chinese bank account for PayPal payments because Chinese banks are incompatible with this service. Another stumbling stone comes from the Chinese government’s policy that consists in keeping a stable national currency by restricting cross-border transactions.
Cash on delivery (COD) remains a very popular payment method in China, especially in face-to-face transactions. However, while in 2012, almost 50 percent of the online consumers chose COD, this number decreased to 33 percent in 2013, then to 20 percent in 2018, at least when it comes to online shopping. Roughly, 75 percent of Chinese e-shoppers preferred online banking in 2017 as a way of payment for their online purchases, using both credit and debit card options. As for third-party online payment, it represents roughly 32 percent.
Online Banking Systems
The Bank of China was the first to introduce online payment gateway services in 1998 and was quickly followed by other major commercial banks. In fact, online banking systems were the main payment method in the initial stages of Chinese e-commerce. At that time, the lack of widely accepted standards offered banks the freedom to develop their own B2C e-banking services. They started offering online payment gateway services that allowed sellers to accept payments from customers’ bank accounts. In the case that your company opts for this solution, it is important to know that, in order to set up the bank’s payment system on their website, merchants need to download and install an application to establish communication with the issuer’s gateway and also to identify themselves to the issuer. To settle payments, sellers need to open a settlement account with the issuing bank. This will require them to go to the bank and apply for the relevant online payment service. If your company wants to use several bank gateways to receive payments, the process will be time-consuming. The good news is that, with the expansion of Alipay and WeChat Pay, this method is becoming less and less popular.
Third-Party Payment Service Providers
Third-party platforms offer several practical advantages to foreign SMEs, mainly because they combine gateways of several Chinese and international banks. They function as middlemen between the seller and buyer, ensuring that customers will be satisfied with their purchases before any payment is remitted to the merchant. These platforms overcame one of the major drawbacks of e-commerce: consumer trust. Third-party payment is currently the most popular payment method in China. Third-party platforms offer a wide selection of card brands buyers can choose from before submitting their bank account number along with a password on the issuer’s webpage.
An additional advantage of third-party payment methods is that they are easier to apply for and install on the company’s Taobao or Tmall storefront. For instance, in the case of Alipay, installation is carried out by downloading and installing the required Alipay applications on the company’s website. Alipay is by far the largest and most trusted third-party payment provider, and it is no surprise that China’s e-tail industry really took off when Alipay introduced its services to the Chinese market.
Practically, it is a two-step settlement process: an interbank credit transfer takes place from the consumer’s account to the provider’s account, followed by a credit transfer from the provider’s account to the seller’s account. Typically, payments are settled periodically and not on a trade-by-trade basis. Alipay also launched a mobile wallet application, allowing users to make O2O payments.
Alipay charges fees based on the company’s total annual transaction amount. Their sliding scale fees policy means that the larger the volume of your company’s transactions, the lower the fee you pay.
Statista, Maverick China Research, company websites, 2017.
Cash or Payment on Delivery
Cash or POD is still among the most popular payment methods in China. Despite the growth of online banking, a large number of Chinese consumers still do not trust online payment systems enough to complete their transactions there. This group of shoppers prefer to pay cash, or simply swipe their card in the deliverer’s point of sales machine once the goods have reached them.