The disappointment which greeted Tencent’s second-quarter earnings detracted from the technology company’s apparent success in facilitating consumer payments. Investors appeared not to care about the latter: the company’s US securities fell as much as 10 per cent after the earnings release, even though it reported a 40 per cent year-on-year increase in transaction volumes and a 280 per cent rise in offline transactions. 

These growth rates show the extent to which the payment services bundled up in Tencent’s ubiquitous WeChat communications app have become a fixture of China’s consumer economy. WeChat’s 1bn-plus users represent a giant network of consumers transacting between themselves and with online and offline businesses, buying everything from an egg pancake from a street vendor to popular investment products. Together with cloud services, third party payments account for 24 per cent of Tencent’s revenues.

Nearing saturation

But our latest survey of 1,000 urban consumers suggests the era of rapid growth of third-party payments moving online is coming to an end, forcing the dominant players in China’s Rmb154.9tn ($22.5tn) payments market to nurture new revenue streams at home and abroad.

Opportunity still exists in smaller cities — a market of 550m consumers — where 49.2 per cent said they still regularly used cash versus 35 per cent of those in first-tier cities. But Alibaba’s payments platform Alipay, which was cited as China’s most frequently used payment method for a third year running, saw its nationwide penetration rate increase just 0.4 percentage points to 83.1 per cent.

WeChat Pay was an outlier, jumping to 79.3 per cent of responses from 64.3 per cent in last year’s survey (QQ Wallet, another Tencent payments service, rose to 4.7 per cent of responses from 4.4 per cent). However, the growth of what Tencent calls “high frequency low value” payments — egg pancakes and the like — does not mean gains in market share as measured by renminbi transactions. Estimates from Analysys International show that Tencent’s payment services and Alipay have held remarkably steady market shares since the second half of 2016. 

That was when WeChat Pay began charging users for making transfers to their bank accounts. This resulted in them deciding to keep small amounts of funds in their WeChat accounts, essentially making the app the coin purse of choice in China’s online payments system. Even if WeChat Pay penetration exceeds that of Alipay in our survey, which may happen over the next year, it will continue to lag behind in terms of actual spending. 

This is because if WeChat Pay is the coin purse then Alipay is the bank. WeChat Pay may have more users than Alipay’s 870m, but Alipay is the favoured payments platform among consumers. 

They cited better security and Alipay’s acceptance of a larger number of online and offline merchants. WeChat Pay wins for ease of use because it is bundled into the messaging app. 

But WeChat does not offer the array of financial services provided by Alipay. About 40 per cent of goods bought during the most recent Single’s Day shopping extravaganza were reportedly purchased using Alipay’s Huabei credit service. Alipay also offers Yu’e Bao, the Rmb1.86tn pool of account funds which are managed in the money market to provide deposit-rate beating returns, but which also offer same-day settlement for purchases. 

A shorter leash 

WeChat and Alipay are in the same regulatory boat, however. The government is scrambling to write rules to govern online payments and contain financial risk. Tencent highlighted one of these efforts in its earnings release, warning that a central bank requirement that payment platforms keep more — and eventually all — customer deposits on reserve is shrinking interest income and margins. 

A saturating market combined with greater regulatory scrutiny is forcing the development of new business. A key plank of Alipay’s diversification strategy is overseas expansion — the hefty $14bn raised in its most recent funding round is mainly intended to take the company global. Alipay has partnered with payments services throughout south and east Asia, replicating its China strategy by burning billions to build market share. So far, India’s Paytm is the only Alipay partner to lead in the markets where it has expanded. 

Tencent is slowly integrating WeChat Pay and its QQ Wallet payments service into its various content segments, including games and music. The company reported 154m paid-for content accounts in the second quarter, marking a 30 per cent year-on-year increase. Our survey showed a jump in WeChat’s popularity among Chinese millennials, known as the post-90s generation, reflecting progress in this strategy. 

Tencent hopes that more fully integrating WeChat and QQ payment services into online gaming and other content offerings will make it easier for consumers to spend, helping to drive revenue growth. However, the flaw in this plan was exposed during last week’s earnings release. Tencent’s gaming division has been hit by bureaucratic infighting, which is holding up approvals for new games.  

— Frank Zhang, Senior Consumer Researcher, FT Confidential Research

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.