As of late 2019, only 9% of American consumers had adopted Apple Pay while 81% of Chinese consumers used AliPay. What explains the huge gap between adoption of these mobile payment services in the two countries? The authors argue that it’s largely a question of approach. Based on our their experience in the financial services industry and work with platform companies, the authors identified two key strategic drivers for successful platform adoption: 1) Create value for all parties, not just the consumer, and 2) Monetize the ecosystem, not just the product.
Even before Covid-19, mobile payment platforms were experiencing a boom in the U.S. and China. Apple Pay (U.S.) and AliPay (China) have radically changed the way people transact, offering secure, contactless payment options through mobile phones. Though both platforms are growing, AliPay is outperforming its U.S. peer: As of late 2019, Bain & Company found that only 9% of American consumers had adopted Apple Pay while 81% of Chinese consumers used AliPay. Given the size difference between the two countries, the difference between the number of AliPay users in China and Apple Pay users in the U.S. is staggeringly large. What are some of the factors driving this stark contrast?
Based on our extensive financial services industry experience and work with platform companies, we found two key strategic drivers for successful platform adoption: 1) Create value for all parties and 2) Monetize the ecosystem, not just the product. So far, Apple Pay has only marginally accomplished the first while AliPay has mastered both. Other platform leaders can learn from their examples.
Apple Pay focused on the consumer.
The Steve Jobs-driven culture of focusing relentlessly on customer experience was core to Apple’s development of Apple Pay, which launched in 2014. The premise was simple: Apple Pay relied on encrypted near-field communication (NFC) signals from point of sale devices that would allow users to pay with their iPhones instead of a credit card. Apple Pay seemed to offer a genuinely futuristic consumer experience that was secure, seamless, and fast: NFC technology is extremely quick, and consumers can use their fingerprint to authenticate the transaction, significantly reducing fraud. But for the average U.S. consumer, paying with Apple Pay only saved a few seconds during in-store transactions and thus was only marginally more convenient than paying with a debit or credit card.
Apple was less focused on mutually beneficial partnerships with banks and merchants. Assuming customers would adopt their platform quickly, Apple attempted to monetize it from the very beginning and charged banks and issuers around 0.15% per transaction for Apple Pay — on top of regular credit card processing fees, which range from 1.15% + $0.05 to 3.15% + $0.10 per transaction. This meant that there was little incentive to adopt the new technology — especially given implementation costs for new NFC-equipped point of sale terminals, which could cost between $1,000 and $2,000 when accounting for necessary software and training for employees. Around the time of Apple Pay’s launch, only around 10% of all point of sale terminals were NFC enabled, and the cost challenge to merchants and limited benefit to consumers hampered adoption.
In 2019, five years after its launch, Apple Pay’s domestic growth remained slow: Only around 6% of people who could use Apple Pay at a physical point of sale were doing so, despite the fact that almost all point-of-sale terminals that are shipped in North America today are NFC enabled. There’s good reason to believe the number of users has grown significantly during the pandemic, but it would require years of exponential growth in adoption to even begin to match AliPay’s dominance in China.
AliPay focused on creating value for all parties, not just for consumers.
AliPay, which was spun off from Alibaba in 2011 and became Ant Financial in 2014, grew from a consumer need for a trusted, verified way to pay for goods purchased from parent company Alibaba’s massive e-commerce sites. AliPay was the solution, but the strategy behind it went beyond payments.
AliPay charges around a 0.6% transaction fee to merchants to process a transaction, roughly half of the fee for processing local credit cards. While the fee is more expensive than allowing customers to use cash, merchants could often expect a lift in sales that came from accepting AliPay. Further, for merchants, the implementation cost to accept AliPay in stores is extremely low, as AliPay doesn’t rely on NFC or any specialized point-of-sale system, but relies on QR codes, which require little more than a camera and an internet connection to make a purchase.
AliPay took a different approach to creating value and monetizing the platform than Apple Pay. It shared many types of consumer data with merchants, so they could offer new services to clients and launch accurate promotions for free. Ant Financial worked with merchants and consumers who used AliPay to improve security protection and reduce losses, helping merchants make more money and decrease their risk. Small to medium-sized businesses flocked to AliPay to capture new business with minimal investment. From 2014 to 2018, the number of merchants that accepted AliPay went from approximately 1 million to 30 million, meaning roughly 70% of all merchants in China accepted the platform.
As AliPay grew, Ant Financial was also able to use the data to build new partnerships and offer new services, which they monetized. Trillions of dollars of transactions flow through AliPay versus billions on Apple Pay. Based on the payment data that Ant Financial receives, the company can offer a host of high-margin products to both consumers and merchants. For young and lower-class consumers, Ant Financial offers credit cards and wealth management services. For small to medium-sized merchants, Ant offers small, short-term loans. These products are not traditionally available to these segments and are hugely valuable. The success of these products has prompted Ant Financial’s valuation to go from $75 billion in 2016 to $200 billion just four years later.
What aspiring platform leaders can learn.
To be sure, there are caveats to the story. First, there are important differences between the U.S. and Chinese mobile payments space. Among them, China is jumping from cash to mobile payments while the U.S. is transitioning from credit cards to contactless payments, which include mobile payments and “tap to pay” credit and debit cards. The mobile internet also evolved much more rapidly in China than the U.S., and mobile payments were a logical part of that evolution. Additionally, the Chinese economy has grown very rapidly, giving Chinese payments players — including AliPay’s main competitor, WeChat Pay — strong tailwinds.
Consumer preferences are also changing. Prior to Covid-19, many U.S. consumers and merchants were concerned with speed, convenience and security when transacting. Now, these same parties are focused on health and safety and are adopting contactless payments in greater numbers. In this context, Apple Pay has emerged as a solution to a different problem than the one it originally meant to solve.
This shift in preferences, already clearly underway, may require that payment companies think about value differently than before. The lesson for platform leaders, therefore, has two parts. First, leaders must provide value for all parties on the platform by addressing high-priority pain points, which may change over time. Second, platform leaders must monetize the ecosystem and not just the product, ensuring that they do not burden customers on one side of platform and hamper overall adoption in the process. By learning from mobile payments and considering the strategic drivers of adoption, platform leaders in other industries can ensure they are thought of as more AliPay than Apple Pay.