Why didn’t Apple Pay replicate Alipay’s success?

By the end of 2019, only 9% of US consumers had adopted Apple Pay while 81% of Chinese consumers were using AliPay. What explains the huge gap between the adoption of these mobile payment services in the two countries? The authors argue that it is largely a matter of approach. Based on their experience in the financial services industry and their work with platform companies, the authors identified two key strategic factors for successful platform adoption: 1) creating value for all parties, not just the consumer, and 2) monetize the ecosystem, not just the product.

Even before Covid-19, mobile payment platforms were booming in the United States and China. Apple Pay (US) and Alipay (China) have radically changed the way people transact, providing secure, contactless payment options through mobile phones. Although both platforms are growing, Alipay outperforms its US counterpart: Since the end of 2019, Bain & Company found that only 9% of US consumers have adopted Apple Pay while 81% of Chinese consumers use Alipay. Given the size difference between the two countries, the difference between the number of Alipay users in China and Apple Pay users in the United States is incredibly large. What are some of the factors behind this stark contrast?

Based on our extensive experience in the financial services industry and our work with platform companies, we have identified two key strategic drivers for successful platform adoption: 1) Create value for all parties and 2 ) Monetize the ecosystem, not just the product. So far, Apple Pay has only marginally accomplished the former while Alipay has mastered both. Other platform leaders can learn from their examples.

Apple Pay focused on the consumer.

Steve Jobs’ culture of relentlessly focusing on the customer experience was central to Apple’s development of Apple Pay, which launched in 2014. The premise was simple: Apple Pay relied on encrypted near-field communication (NFC) signals from point-of-sale devices that would allow users to pay with their iPhone instead of a credit card. Apple Pay seemed to offer a truly futuristic, secure, seamless and fast consumer experience: NFC technology is extremely fast and consumers can use their fingerprint to authenticate the transaction, which significantly reduces fraud. But for the average US consumer, paying with Apple Pay only saved seconds when doing in-store transactions and was therefore only marginally more convenient than paying with a debit or credit card.

Apple was less focused on mutually beneficial partnerships with banks and merchants. Assuming customers would quickly adopt their platform, Apple tried to monetize it early on and charged banks and issuers around 0.15% per transaction for Apple Pay — in addition to regular credit card processing costswhich vary from 1.15% + $0.05 to 3.15% + $0.10 per transaction. This meant that there was little incentive to adopt the new technology – especially given the costs of implementing new NFC-equipped point-of-sale terminals, which could cost between $1,000 and $2,000 when accounting for necessary software and employee training. At the time of Apple Pay’s launch, only around 10% of all point-of-sale terminals were NFC-enabled, and the cost challenge for merchants and limited benefits for consumers hampered adoption.

In 2019, five years after its launch, Apple Pay’s domestic growth remained slow: only around 6% of people who could use Apple Pay at a physical point of sale did so, despite the fact that almost all point-of-sale terminals shipping in North America today are NFC-enabled. There’s good reason to believe that user numbers have increased dramatically during the pandemic, but it would take years of exponential growth in adoption to even begin to match Alipay’s dominance in China.

Alipay has been focused on creating value for all parties, not just consumers.

Alipay, which spun off from Alibaba in 2011 and became Ant Financial (now Ant Group) in 2014, was born out of a consumer need for a trusted, verified way to pay for goods purchased on parent company Alibaba’s massive e-commerce sites. Alipay was the solution, but the underlying strategy went beyond payments.

Alipay charges merchants about 0.6% transaction fees to process a transaction, which is about half of local credit card processing fees. Although the fees were more expensive than allowing customers to use cash, merchants could often expect increased sales by accepting Alipay. Additionally, for merchants, the implementation cost to accept Alipay in stores is extremely low, as Alipay does not rely on NFC or a specialized point-of-sale system, but relies on QR codes. , which require little more than a camera and an internet connection to make a purchase.

Alipay has taken a different approach than Apple Pay to creating value and monetizing the platform. It has shared many types of consumer information with merchants, so that they can offer new services to customers and launch specific promotions for free. Ant Group has worked with merchants and consumers who have used Alipay to improve security protection and reduce losses, helping traders make more money and reduce their risk. Small and medium businesses have flocked to Alipay to win new business with minimal investment. From 2014 to 2018, the number of merchants who accepted Alipay grew from around 1 million to 30 million, meaning around 70% of all merchants in China accepted the platform.

As Alipay grew, Ant Group was also able to use the data to establish new partnerships and offer new services, which they monetized. Trillions of dollars of transactions go through Alipay against billions on Pay Apple. Based on the payment data received by Ant Group, the company can offer a multitude of high-margin products to consumers and merchants. For young and lower-class consumers, Ant Group offers credit cards and wealth management services. For small and medium traders, Ant offers small, short-term loans. These products are traditionally not available for these segments and are extremely valuable. The success of these products boosted Ant Group’s valuation by $75 billion in 2016 only $200 billion four years later.

What aspiring platform leaders can learn.

Admittedly, there are caveats to the story. First, there are significant differences between the US and Chinese mobile payment space. Among them, China is shifting from cash to mobile payments while the United States is shifting from credit cards to contactless payments, which include mobile payments and “tap to pay” credit and debit cards. Mobile internet has also evolved much faster in China than in the United States, and mobile payments were an integral part of this evolution. Additionally, the Chinese economy has grown very rapidly, giving Chinese payments players – including Alipay’s main competitor, WeChat Pay – strong tailwinds.

Consumer preferences are also changing. Before Covid-19, many American consumers and merchants were concerned about speed, convenience and security when transacting. Now those same parties are focusing on health and security and embrace contactless payments in larger numbers. In this context, Apple Pay emerged as a solution to a different problem than the one it was originally intended to solve.

This shift in preferences, already clearly underway, may require payment companies to think about value differently than before. The lesson for platform leaders therefore has two parts. First, leaders must deliver value to all parties on the platform by addressing high-priority pain points, which may change over time. Second, platform leaders need to monetize the ecosystem and not just the product, making sure they don’t overburden customers on one side of the platform and hinder overall adoption in the process. By learning from mobile payments and considering the strategic drivers of adoption, platform leaders in other industries can ensure they are viewed as more Alipay than Apple Pay.

Editor’s Note: We’ve updated the authors who contributed to this article.

Aurora J. William