Jun 192014

WechatI just returned from China and was elated by everyone’s use of WeChat’s mobile closed, personal contact-focused network: part messaging service, part social network. WeChat provides instantaneous multimedia communication with text messaging, hold-to-talk voice messaging, broadcast (one-to-many) messaging, photo/video sharing, location sharing, and contact information exchange. It supports social networking via shared streaming content feeds and location-based social plug-ins to chat with and connect with local and International users in over a dozen languages.

WeChat was launched by Tencent in 2011. As of February, 2014 CNN reported that WeChat had nearly 300 million users, out of Tencent’s base of 800 million users. WeChat users call for taxis and pay for rides by swiping their bar codes. 21 million taxi rides have already been booked by WeChat. This is far ahead of any U.S. mobile platform and I have it installed WeChat’s App on my U.S. iPhone, and am encouraging my U.S. friends to do the same. My friends in China were eagerly anticipating WeChat’s forthcoming virtual credit card service and online shopping features with TenPay’s financial transaction program.

Virtual credit cards for ecommerce have just started their trial run in China on Tabao and other eShoping platforms. According to the WSJ, Lai Zhiming, the manager of Tencent’s third-party payment platform TenPay, said that the company would add payment services to WeChat. TenPay, like eBay Inc.’s PayPal in the U.S., will allow users to swiping barcode-like QR symbols, which can be used for buying everything from cinema tickets to beer. TenPay will process online payments directly from shopper’s personal accounts. This will give WeChat a revenue flow from online and in-store purchases and eventually encourage retailers, restaurants and other stores to advertise on the platform.

WeChat is competing with Alibaba’s Tabao for a massive thrust into online marketing. What cheered me about Chinese enthusiasm for WeChat, as well as for Allibaba’s Tabao online shopping program, was the power of mobile smart phones to expand Chinese consumption and meet government goals for a growing consumer economy to offset a declining export economy.

To my dismay, I learned from the Financial Times on March 15 that “China has ordered a halt to mobile phone payment systems and virtual credit cards, in a move that will slow the rapid development of online finance in the country.”The People’s Bank of China (Central Bank) suspended mobile phone payments for the purported reason of ng consumer protection. The announcement was for temporary suspension, but who knows how long this will last. The most powerful agent of consumption growth has been halted by vested interests.

Changing China’s slack consumer business model based on debit cards to turbo charged mobile consumerism is no easy matter. The banks are seeing an outflow of deposits to fund these virtual cards, which are paying a higher interest rate than the banks. UnionPay, the State-owned credit and debit card service is losing debit card transaction fees. State-owned financial institutions, long protected from competition by a cocoon of government regulation, have been shaken up over the past year by increasingly aggressive internet companies.

Alibaba and Tencent have led the charge with online savings funds that in effect function like bank accounts and with mobile payment systems that have started to displace debit cards. Chinese officials have so far permitted this incursion on the banks’ turf, but now the Central Bank has put the brakes on virtual credit cards before they have had a chance to do major damage to established interests.

This is a good instance of how private sector disruptive technology threatens State-owned sector practices; and how established government interests fight the stop new private sector technology that adversely impacts State-owned enterprises. If UnionPay were a competitive private sector company, it may have gotten ahead of the curve and partnered with Alibaba and Tencent.

The government suspension of virtual credit cards, hopefully only temporary, will have major consequences on consumption growth. According to Bloomberg, Chinese shoppers in 2013 spent 1.3 trillion Yuan ($213 billion) online, just slightly less than the $225 billion tally in the U.S. The Chinese online retailing market has grown at a scorching 71 percent compound annual growth rate since 2009, about five times as fast as its American counterpart, according to a report by Bain & Co. If this trend holds, China will become the world’s No. 1 ecommerce market. By 2015, Bain sees the Chinese market reaching $541 billion.

The suspension of mobile payment has a heightened impact on the rate on online retail growth. Mobile payment is the dynamic force of online shopping growth. Mobile ecommerce is far outpacing desk top growth in online shopping. The current norm of mobile shopping is 15% of total online retail. Growing from virtually zero in 2011, it is likely that mobile shopping will reach 50% of online sales in a few years.

The major reason for mobile ecommerce growth is that China is already the largest smart phone market in the world. Mobile subscribers in China are now using 330 million smart phones—which is a 150% increase over 2011. According to CNNMoney, China’s active smart phone market in 2013 now exceeds the total number of all 321 million mobile phone active in the U.S. Kai-fu Lee, the former lead China researcher at Microsoft (MSFT) and then Google (GOOG), predicts that China will have 500 million smart phone in use by the end of 2013.

Enough of data! Let’s get to the point of China’s domestic consumption growth policy. Housing has been the conventional marketing driver of consumption over the past two decades, as families shopped in stores for appliances and accessories to outfit their new homes. But housing sales are flagging, in spite of the government urbanization policy. Furnishing new condos by in-store purchase or even desktop online purchase will not do the trick. The future of China’s consumption does not only lie with home furnishing and accessories. It lies with the discretionary personal life style purchases of high income young people and adult professionals who have the wealth to spend on life style experience, – consumer electronics, apparel, dinning, personal care products and service, travel, books, games and a host of experience products and services, instead of just furnishing an apartment.

Mobile media is the new platform for life style information, desire and purchase. Unless the Government understands this fundamental change in the demographic and marketing landscape and the pivotal role of smart phones and virtual credit cards, it will miss the boat of consumer growth through “Mcommerce.”

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