Cybersecurity and the China Mobile Payment Market: The Risk to Chinese Consumers Is Great

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Cybersecurity and the China Mobile Payment Market: The Risk to Chinese Consumers Is Great Deborah Weinswig Managing Director, FGRT deborahweinswig@fung1937.com US: 646.839.7017 HK: 852.6119.

1 Cybersecurity and the China Mobile Payment Market: The Risk to Chinese Consumers Is Great Deborah Weinswig Managing Director, FGRT US: HK: CN: China is the largest mobile payments market in the world, and a very dynamic one, too. Mobile cybersecurity has become a significant issue for Chinese consumers, and the hacking of personal data and Internet scams have resulted in significant financial losses. In this report, we show: 1) How mobile payments have become ubiquitous in the daily lives of Chinese urban consumers. It provides an update using the most recent figures on the size of the mobile payment market in China as well as the competitive environment. 2) How the mobile payment market in China dominated by two platforms, Alipay and TenPay has grown at doubledigit figures and is almost 50 times larger than that of the US. 3) The financial impact of mobile cybersecurity threats in China and how significant it can be. In 2016, the average loss per victim incurred from online fraud by users reporting cybercrimes to the Beijing Public Security Bureau was 9,471 ($1,426). 1

2 Mobile payments have become ubiquitous in the daily lives of Chinese urban consumers. Introduction Mobile payments have become ubiquitous in the daily lives of Chinese urban consumers. Shoppers pay for everyday small expenditures by scanning QR codes at point-of-sale terminals with their smartphones buying anything from breakfast at the local coffee shop or tickets for their metro commute, to access to a bike-sharing scheme or food delivery for dinner. Even street vendors selling everything from dumplings to mobile phone covers use QR codes to receive payment. However, the popularity of mobile payments enables the proliferation of cybersecurity threats, as the hacking of personal data has become very appealing for cybercriminals looking at getting their hands on users financial details. This report provides a brief update on the mobile payment market in China, with the latest data available from specialist market research firms Analysys and iresearch. We first examined China s mobile payment market in our report in November last year Mobile Payments in China, and since then, the market has continued to grow significantly. We also consider the implications of mobile cybersecurity, which has become a significant concern in China, given the widespread use of mobile phones to navigate the Internet and as a payment tool for everyday transactions. Defining Mobile Payments and E-Wallets We define mobile payments in this report and in our previous report Mobile Payments in China as payment processes performed via mobile devices that eliminate the need for a physical credit card payment infrastructure. The two most commonly used mobile payment technologies in China are: nearfield communication (NFC) and QR codes. Mobile payments: Popular payment services that rely on NFC technology include PayPal, Apple Pay, Huawei Pay and Samsung Pay. QR-based payment services include WeChat Pay, Alipay and Baidu Wallet. To pay for an item that has a QR code, the customer scans a bar code that contains information such as a webpage with product or order information provided by the vendor1` and is then redirected to a payment page in the phone s browser to complete the transaction. E-wallets: E-wallets (also known as mobile wallets or digital wallets) are used to initiate mobile payments, and may be supported by either NFC or QR technology. An e-wallet enables users to store their credit card information, such as number, and expiration date, in a mobile app instead of having to use a plastic card with a chip or magnetic stripe. Users can then make purchases through the app. E-wallets are considered more convenient, as they provide a better user interface and can store coupons and loyalty card information. 2

Source: istockphoto China is a large and dynamic market for mobile payments. China, the World s Leading Mobile Payment Market China is a large and dynamic market for mobile payments.

3 Source: istockphoto China is a large and dynamic market for mobile payments. China, the World s Leading Mobile Payment Market China is a large and dynamic market for mobile payments. In its 3Q 2016 (latest) Quarterly Monitoring Report on China s Mobile Payment Market, market research firm Analysys shows that third-party mobile payments payments between a buyer and a seller processed through a third party that acts as an intermediary, such as Alipay or Tenpay in China grew by 106% year on year to reach 90.4 trillion ($13.6 trillion). Figure 1 shows the size of the mobile payment market in China in 3Q 2016 versus 3Q Figure 1. Transaction Size in Third Party Mobile Payment Market ( Trillion) Q Q 2016 Source: Analysys.cn China is the world s largest market for mobile payments. In fact, China is the largest market in the world for mobile payments, according to market research firm iresearch. Its data show that the mobile payment market in China reached $5.5 trillion in 2016, an increase of more than 175% year over year, and it expects the market to reach $8.0 trillion in By comparison, market research firm Forrester Research estimates 3

4 the US market for mobile payments was $112 billion in 2016, a mere 2% of China s market. In our report last November Mobile Payments in China, we identified the main drivers of mobile payment adoption in the Chinese market: Ubiquity of mobile Internet: Fully 95% of Chinese Internet users accessed the Internet via their mobile phones in 2016, according to the China Internet Network Information Centre (CNNIC), the administrative agency responsible for Internet affairs under the Ministry of Information Industry of the People s Republic of China. Consumer preferences: E-wallets are very popular among Chinese consumers in urban areas with a strong omnichannel retail presence. At the same time, China has a weak credit card culture that favors the adoption of alternative electronic payment solutions (such as mobile payments), which are considered safer and more convenient. Infrastructure: The mobile-phone industry and NFC terminals the technology used most to process mobile payments are relatively sophisticated in China, resulting in a mobile payment infrastructure that is more advanced compared to other countries. Merchant adoption: Most retailers in China offer mobile payment options, from large international chains such as Starbucks to small independents, such as street vendors. Retailers adoption of mobile payment, which is in response to consumers preference for this type of electronic payment solution, fuels a virtuous circle that contributes to the further penetration of mobile payment. Mobile payment penetration has moved beyond retailing. For example, Union Pay is working with Guangzhou Metro to enable public transport users in the city to pay fares with QuickPass, a UnionPay mobile payment app. UnionPay is one of the many players within the mobile payment industry in China, which remains dominated by Alibaba s Alipay and Tencent s Tenpay. Alipay and Tenpay make up 88.5% of the Chinese mobile payment market. Alipay benefits from its first-mover advantage it was the app that pioneered mobile payments in China when it was introduced in 2004 as a service to facilitate transactions on Alibaba s online marketplace Taobao. Tencent, on the other hand, capitalizes on the widespread use among Chinese consumers of WeChat the Tencent-owned messaging app that embeds Tenpay the country s dominant messaging app. Combined, Alipay and Tenpay make up 88.5% of the Chinese mobile payment market, as of 3Q 2016 (latest), according to Analysys. Figure 2 summarizes the competitive environment of China s mobile payment market. 4

5 Figure 2. Mobile Payment Market in China, Market Share in 3Q 2016 Alipay 50.4% TenPay 38.1% Lakala Lianlianpay Ping An Pay Union Mobile Pay UnionPay Others 3.3% 1.2% 1.2% 1.2% 1.1% 3.4% Source: Analysys.cn/FGRT The popularity of smartphones in China has encouraged developers of cybersecurity threats to focus on malware programs that attack mobile devices. The financial impact of cybersecurity threats on Internet users in China can be significant. Smartphones the Main Target of Cybersecurity Threats The popularity of smartphones in China has encouraged developers of cybersecurity threats to focus on malware programs that attack mobile devices. With so many people using electronic wallets on their smartphones for everyday payments, mobile devices have become a leading target for hackers seeking to get data such as payment transfer details and passwords, according to the Cybersecurity Association of China. Payment traps and user-privacy violations were the top cybersecurity threat in 2016, with 88.3% and 76.0%, respectively, of mobile Internet users affected during the year, according to the Internet Society of China. Android users are more exposed to mobile security treats since they turn to third-party providers to download apps. In 2016, more than 2 million malware programs targeting mobile devices were detected, according to the Internet Society of China. Of these, 99.9% targeted Android devices. Smartphone users in China are, therefore, largely exposed to cybersecurity threats, considering that 87% of Chinese consumers in 1Q 2017 (latest) use Android smartphones, according to market research firm Kantar Worldpanel. The financial impact of cybersecurity threats on Internet users in China can be significant. An idea of the potential financial loss that could be incurred by the victims of cyberthreats is given in a report published by the Beijing Public Security Bureau, a department of the Beijing municipal government responsible for public security. According to the report, there were 20,623 reports of online fraud on the department s cybersecurity platform in 2016, with a total loss of 195 million ($29.3 million) and an average loss per victim from online fraud of 9,471 ($1,426). In response to the rise of mobile cybersecurity threats, the Chinese government adopted the Cybersecurity Law in November 2016, which went into effect on June 1, The legislation contains cybersecurity 5

6 requirements such as measures aimed at the protection of personal data and individual privacy that organizations handling data must comply with. Mobile-phone manufacturers and consumers must also play their part in reducing the risk of cybersecurity, according to the Cybersecurity Association of China. Smartphone producers need to improve the defenses on their devices, while individual users should take care not to leave too much personal information online and should be cautious when selecting the third-party providers they download their apps from. China is the largest mobile payment market globally and a very dynamic one. Mobile cybersecurity has become a significant issue. Key Takeaways China is the largest mobile payment market in the world and a very dynamic one. Mobile cybersecurity, which has become a significant issue for Chinese consumers, has the potential to result in significant financial losses, due to the hacking of personal data and Internet scams: Third-party mobile payments in China grew by 106% year on year to reach 90.4 trillion ($13.6 trillion) in 3Q 2016 (latest), according to Analysys. The Chinese mobile payment market reached $5.5 trillion in 2016, according to iresearch. That is almost 50 times larger than the mobile payment market in the US. Combined, Alipay and Tenpay make up 88.5% of China s mobile payment market in 3Q 2016 (latest), according to Analysys. In 2016, 88% and 76% of mobile Internet users were victims of payment traps and user privacy violations, respectively, according to the Internet Society of China. The average loss per victim incurred from online fraud by users reporting cybercrimes to the Beijing Public Security Bureau was 9,471 ($1,426) in As other countries follow China in adopting mobile payments, legislators, businesses and consumers will need to be aware of the security risks. 6

7 Deborah Weinswig, CPA Managing Director FGRT New York: Hong Kong: China: Filippo Battaini Research Associate Hong Kong: 2nd Floor, Hong Kong Spinners Industrial Building Phase 1&2 800 Cheung Sha Wan Road, Kowloon Hong Kong Tel: London: Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0) New York: 1359 Broadway, 18th Floor New York, NY Tel: FungGlobalRetailTech.com 7

DEEP DIVE: MOBILE PAYMENTS IN CHINA DEBORAH WEINSWIG NOVEMBER 19, 2016

DEEP DIVE: MOBILE PAYMENTS IN CHINA 1) Chinese mobile payment market has increased rapid and will reach 12.2 trillion (US$1.83 trillion) in 2016, up from 0.2 trillion (US$31.7 million) in 2012, according