The surge of Chinese third-party electronic payments providers is encouraging online consumption and facilitating omni-channel retailing and the provision of new services and, as such, is a development which will ultimately impact various traditional sectors and practices in the economy, says Moody’s Investors Service in a new report.
"The rise in the usage of e-payments is positive for internet companies and most service and consumer-related companies, although it could also be negative for some companies in traditional retail channels," says Lillian Li, a Moody's Vice President and Senior Analyst.
"And while it will not have a near-term significant impact on the profitability of Chinese banks, it will increase competition and drive the banks to transform their business models in the payment business," adds Li.
The ”Fintech - China: Surging E-Payments Lift Consumption and New Services, Pose Limited Threat to Banks" report defines third-party e-payments as those electronic payment services provided by non-bank companies. In contrast, the banks' own electronic payment services include retail and wholesale payments at their electronic platforms through the internet, mobile, point of sale (POS), automatic teller machines (ATMs), and telephone.
Furthermore, the rise in e-payments and online consumption is in line with China's long-term goal of rebalancing the economy toward consumption and away from investment, a credit positive for the sovereign.
Moody's notes that the value of third-party e-payments in China has grown at an annual rate of more than 100% since 2015; contributing to growth in personal consumption online because it offers consumers an alternative to the payment channels of the banks at lower cost per transaction and with easier access through the internet and mobile phones.
The relatively short history of bank card usage in China also results in a greater willingness among Chinese consumers to accept this new payment technology.
As indicated, internet companies as well as service companies along the supply chain are benefitting from fast growth in third-party e-payments, and small businesses in the service sector could also benefit from easier access to credit from third-party platforms at reasonable costs.
Negative for some traditional retail channels
However, the rise of e-payments could be negative for some traditional retail channels that are lagging in the development of e-payment systems and are losing consumer traffic to online platforms.
At the same time, third-party e-payments pose little immediate threat to the profitability and revenue growth of Chinese banks because the retail payment business and interchange fee income represent only a small proportion of banks' revenue.
Nevertheless, they could be vulnerable to losses in market share in retail payments over the longer term, and expansion by third-party e-payment providers in the lending business could also have some impact on them in this area.
The fast development of third-party e-payments could also encourage the banks to more aggressively develop their own consumer banking and retail payments systems to compete for income from transaction fees.
In turn, improvements in e-payment systems at the banks, as well as the leveraging of new technology to deepen bank card usage and penetration caused by the competition could in turn assist the overall growth of e-commerce and consumption.
Finally, cooperation between the banks and third-party payment companies and a strengthening regulatory framework in China can mitigate potential credit risk in the financial sector.