Alibaba and Tencent are beating Apple Pay to the punch in China

Apple announced it will introduce Apple Pay, an NFC-enabled mobile payment service for brick-and-mortar sales, in its upcoming iPhone 6 devices.

Apple followers predicted its arrival in the days leading up to Apple’s keynote, but its unveiling yesterday came years after folks first expected the Cupertino-based firm to start eyeing in-store payments. As far back as 2011, Bloomberg published a piece that cited analysts stating the company was working on NFC payment prototypes for small businesses. In the time before yesterday’s event, Google, Amazon, and upstarts like Square have each launched apps and services that aim to replace wallets with smartphones. Their slow uptake makes Apple bulls even more optimistic that the iPhone will take the technology mainstream.

In China, the uptake of in-store mobile payments is moving quicker. As of January 2014, e-commerce giant Alibaba had installed terminals designed to accept mobile payments from its popular Alipay Wallet app in over 30,000 storefronts nationwide. Its retail partners currently include convenience stores like 7-11, Family Mart, and even Burger King, according to a company spokeswoman.

Tencent, meanwhile, launched a US$814 million joint venture with Baidu and Wanda Group to help boost mobile payment adoption in China, likely through its popular WeChat messenger. It also lets users book taxi rides and buy movie tickets on WeChat. Neither firm has disclosed figures on transaction volumes for in-store mobile payments. But the users – 100 million registered for Alipay Wallet and 438 million monthly active for WeChat – are there, and the infrastructure is steadily expanding.

Apple Pay will likely not make its way to China for at least a year, especially when one considers the government’s complicated banking regulations and ambivalent stance on in-store mobile payments. Even so, it’s tempting to wonder – if Apple indeed leads the way for in-store mobile payments in the US (though it very well might not), and if Tencent and Alibaba lead the way in China, will the three firms clash? If so, how?

See: Wallet wars: a peek inside China’s PayPal

To a certain extent, the motives behind Alibaba, Tencent, and Apple’s commitment to in-store mobile payments remain identical. While it’s a settled matter that margins in the form of transaction or processing fees remain low, in-store mobile payments nevertheless remain an attractive vertical because of the potential to engage users. Consider how mobile messengers like Line and WeChat turned text messaging, likely the most commonly-used feature on smartphones, into cash cows through games and stickers. Much like how we send text messages several times a day, we buy things like coffee and toothpaste every day. From the moment we enter a 7-11 to the moment before we leave with a Coke in our hands, we remain perfectly susceptible to retailers or advertisers popping out from our smartphones and influencing our purchasing behavior. But market-wise, it’s still open season. As a result, big-name firms in a position to make a crack at leadership, like Alibaba or Apple Tencent or Google, will each give it their shot.

On the other hand, when it comes to businesses strategies, Apple couldn’t be more different than Tencent and Alibaba.

For one thing, Apple is and remains a hardware firm first, a software (or internet-enabled services) company second. Historically, as other writers have repeatedly pointed out, it has used software (iTunes and iTunes music store, for example), to differentiate and sell its hardware (the iPod) at healthy profit margins. Moreover, unlike most of its peers in hardware, it has never fixated on selling to all customers at all price points. Instead, it sets its sights solely on the high-end, where the money is, counting on its differentiation to keep customers interested and loyal.

Alibaba and Tencent, meanwhile, like most firms that live on the internet, fuel their growth by acquiring as many users as possible. Taobao monetizes by charging for advertising and other forms of visibility, while Tmall makes money with listing fees and sales commissions. Tencent monetized its free-to-use QQ desktop messenger with game-related purchases, and has applied an identical model to WeChat. Neither firm generates significant revenues through hardware sales, though Alibaba has partnered with manufacturers to sell set-top boxes and phones running on its homegrown Yun OS.

Alibaba and Tencent’s investments in mobile payments show how they chase users first, revenues second. Winning the race for retail partnerships is an end unto itself, not a bridge to boost hardware sales. Even if actual profits from these in-store payments ultimately remain elusive, more time on a Tencent app is a win for Tencent. The same goes for Alibaba. Given how Apple’s business model differs from that of Tencent and Alibaba, the former has less incentive to be as aggressive in payments as Tencent and Alibaba.

See: WeChat and Alipay ramp up ecommerce race with new features for offline merchants

Ironically, Apple’s tech wizardry may be its achilles heel in China. The technology Alibaba and Tencent use for in-store payments is decidedly lo-fi. Alibaba utilizes sound-wave transfers and barcodes, while Tencent requires vendors to scan QR codes. This easy technology helps reduce the barrier to adoption among consumers, regardless of what type of phone they carry. Apple’s reliance on NFC therefore means Chinese merchants must accept yet another form of payment processing. That might be too much of a hassle.

A more likely scenario involves Alibaba and Tencent rushing to get on the NFC bandwagon following Apple’s signal. Alipay Wallet and WeChat payments would add NFC functionality in their apps alongside the usual payment methods, and will continue to provide compatible processing equipment to retailers for little or no cost. This will help Apple catch up technology-wise as a latecomer. But smartphone manufacturers are likely to jump on the NFC bandwagon even more quickly than Alibaba or Tencent. More phones will feature NFC, and more phones will have Alipay Wallet and WeChat on them. Through those apps, Alibaba and Tencent can push more promotions and deals to their customers. With no ecommerce legacy and no cross-platform social app to fall back on, Tim Cook and his team have some stiff competition in China.

The Apple gravitational pull is real, for sure. But in the case of Apple Pay in China, it just might not pull towards Apple.

Editing by Terence Lee; top image via Apple

Alibaba and Tencent are beating Apple Pay to the punch in China