Chinese Version of Klarna?

About 3.5 years ago when I just started at Klarna, I was wondering if its business model could be replicated in China. The following is a little note that I had at the time about my naive perception of Chinese E-commerce in general and online payment in particular, and the reason why it might be hard.

The scale and rate of growth

In 2011 Q2, the transaction volume of the online payment is around 456.6 Billion RMB (roughly the same as SEK), increased 117.6% compared to the same period in 2010 and 25.1% on a quarterly basis. Among that, e-commerce related online payment volume accounted for around 179.2 Billion RMB, increased 76.7% compared to the same period last year and 10.6% on a quarterly basis. Online payment was especially booming in the Finance/Logistics/Manufacturing industries as well. [1]

BCG estimated that the transaction volume of the online shopping business is expected to grow four-fold by 2015 compared to 2010 (where the annual transaction back then was around 80 Billion USD) [2]

Main Players and their business compared to Klarna

Alipay is the dominant player in the online payment space in China, they claim to have 610M registered user (as of June, 2011), market share around 50% [1]. It is one of the subsidiaries of Alibaba group which happens to own China’s biggest B2C/C2C online shop Taobao as well. (similiar to the eBay-PayPal relationship). Initially Alipay was only intended to serve as a secure way of payment for Taobao itself, but later they also introduced a program called “Alipay Open Plan” [3], which allows the e-stores to integrate with Alipay to use its “Escrow” service [4], in which Alipay holds the money from the customer until the customer confirms (s)he is happy about the product before Alipay pays the e-store. Alipay also supports transferring money between Alipay account holders.

When there are disputes between customers and e-stores, Alipay will not get involved. Customers and the e-store have to contact each other and settle the dispute by themselves [5].

In some cities, users can use Alipay not only for online shopping, they can do things ranging from paying electricity bills, top up mobile phone, paying real-estate mortgages, flight/movie tickets, even lottery and traffic fines. It functions more like a real bank. (a snapshot).

Tenpay has around 21% of market share in the online payment industry in China, making it the 2nd largest player. It’s owned by Tencent, the biggiest internet company in China. The services from Tenpay are pretty much the same as Alipay. It supports “Escrow” service for e-stores and money transfer between Tencent account holders as well. In some cities, people can also use it as personal financial hub to pay basically all their bills.

Alipay and Tenpay also seem to put in a lot of effort into their “Enterprise” edition, (maybe like Klarna’s company purchase in Sweden) providing B2B payment solutions for many companies in industries like Logistics, Manufacturing, Travel/Flight, etc. Alipay and Tenpay also have “Group Pay” program which allows the integrated e-stores to support Group Buy. [7] [8]

Both of them even get physical by having their own card (partner with the real bank).

Other player includes China Unionpay’s online business, 99bill, etc.

AFAIK, there’s no company that provides the similar service as Klarna. Invoice based/Part-payment solution is almost non-existent (i don’t have the data, based on observation), I guess it has to do with the fact that a nation-wide credit system is not in place and the fraud and credit risks might be considerably bigger.

User Behavior

Most of the e-stores in China run on Taobao, Paipai or other e-bay similar sites whose parent companies happen to run popular online payment solutions like Alipay and Tenpay too. They don’t usually integrate with other third party payment solutions. That’s one of the reasons why together these two payment solution account for more than 70% of the market share. PayPal has very limited footprint in China partly because Ebay lost its battle pretty miserably to Taobao in the online shopping business in China.

A friend of mine who runs a popular “independent” e-store [10] that sales tea told me that around 80% of his customers chose to pay on delivery, which is consistent with the feedback from some of my other friends. This probably indicates that customers in China do really like the idea of paying after getting the products, so invoice based solution might be relatively easier for them to adopt. That friend of mine did integrate with Alipay but he said many of the customers complained its usability. Online part-payment might not be as popular as in western countries coz China (and East Asia at large) at this stage still has a more “saving” oriented culture, but this is gradually changing as well.

Government Regulations

Prior June, 2010. There’s no regulations in the space of online payment industry in China. In June, 2010, the central bank published a regulation named “the regulations for non-bank companies that operate in the online payment business” [11]. It lists some of the rules that the local companies have to comply with to be able the get the licence. It also states that “the business scope of the foreign online payment companies, the qualification of the foreign investors as well as its share of the joint-venture is subject to another regulation, and it has to be reported to the state council”. One year later, the “other” regulation is still not materialized yet. This forced some of the third payment companies to restructure their organization, including Alipay [12].

In May, 2011, central bank granted the license to 27 third party payment companies [13] and there’s no foreign companies in the list, not even PayPal.

Nation-wide information bureau system and debt collection

The information bureau infrastructure and the enforcement authority (including the related laws and regulations) are a lot less developed as countries like Sweden. The development of the nation-wide credit system is still in its very early stage. [14] In some cities or provinces, like Beijing, Shanghai, Guangzhou, Shenzhen, etc, there might be basic credit infrastructure in place but I am not really sure how good they are. (need more info digging)

Some thoughts

Regulation is the immediate problem if foreign 3rd party payment provider wants to enter China, but in the long run, the market should be more and more open. Whether there’s a way to get around this is an open question.
Nation-wide operation might not be feasible in the near future due to the lack of nation-wide credit lookup and enforcement infrastructure. Might be easier to enter the first-line, relatively developed cities/provinces. It is unwise to consider China as a single market.
It might help to start by targeting selected group of people, like civil servants, teachers etc, the risk of which should be significantly lower. Basically, switch the blacklist model in Sweden to a whitelist model.
If it is hard to grant customer credits due to the lack of related infrastructure, I believe there will be many e-stores who want to sell their stuff to the countries where Klarna has operations in (the friend that I mentioned in the previous paragraph being one of them). Maybe companies like Klarna can enter a country with similar situations by only offering e-store integration.

References:

Written on November 11, 2014