Mobile payments: China at the inflection point

Joe Chen/Dan Ewing/McKinsey & Company
25 Jun 2012

China is at an inflection point: with a protracted battle over contactless payments standards apparently settled, smartphone penetration hitting critical mass and online payments leaders shifting to mobile payments, a major breakthrough seems imminent.

The power struggle between the three mobile payments forces will ultimately determine the standards for one of the world's largest markets. China UnionPay (CUP) and the banks, the mobile carriers and online third-party providers are all seeking to lead a rapidly growing market. Whoever wins in China has the potential to become a global leader in mobile payments.

China is already the largest mobile phone market in the world with over 900 million subscribers and also the largest smartphone market in the world with 24 million units sold in the third quarter of 2011. Smartphone penetration is still relatively low, but it is growing rapidly and is expected to hit 24% by 2014. Total mobile internet users exceed 350 million.

This fast-growing mobile market combined with a large and growing consumer economy mean that China is poised to become a global force in mobile payments. Indeed, although still a small fraction of total consumer payments, the gross transaction value of mobile payments, now at $2.5 billion, is forecasted to grow to $40 billion by 2014, with tickets and digital purchases (e.g., ebooks, music) showing the greatest growth (see chart on next page).

Payment enablers

Compared to other markets, China has several major factors that should support the emergence of a robust mobile payments ecosystem. First, there are incumbents capable of driving large-scale adoption and each of the three competing forces has a power base. China UnionPay is the sole domestic payments network and is collectively owned by the banks; China Mobile has a 600 million-strong subscriber base; and Alipay controls online payments with more than 600 million registered accounts.

Second, China has a rapidly evolving payments and mobile infrastructure capable of leap-frogging onto new platforms that have yet to gain traction in more developed markets. The rapid spread of 3G mobile networks and the growth of e-payments acceptance in China's tier-2 and tier-3 markets mean that there is significant market potential for mobile payments.

Third, a diverse set of players is innovating across the mobile ecosystem, driving new consumer behavior and creating synergies for mobile payments.

Finally, all three forces have a strategic imperative to succeed. Mobile carriers are looking to drive new revenue streams, China's banks want to deepen customer relationships and increase engagement, and online payments players see an opportunity to expand into bricks-and-mortar retail markets.

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