By: Kevin Kogler, President of MicroBiz POS
I recently returned from a trip to China to drop my daughter off at her new university – NYU Shanghai. China is an amazing country, undergoing rapid and dramatic growth. You can feel the excitement and energy all around you, and the innovation cycle in China is measured in months vs. years in more established parts of the world.
Being in the point of sale software industry, I was fascinated with how retail transactions are managed differently in China vs the US. While its been widely publicized that people in China use their mobile phones to make the vast majority of payments, it was interesting to see how Chinese payments companies are already moving beyond the phone to offer quicker, less expensive and more secure payments.
Here are some of my observations from my trip:
Sorry, Your Credit Cards Are Not Accepted Here
We were surprised by how few stores accepted Western credit cards (MC, Visa Amex). After being rejected or the 10th straight time, no longer tried to pay with credit cards and resigned ourselves to carrying enough cash to pay for things. The only places that we found to accept Western credit cards in China were the expensive restaurants and luxury hotels catering to Westerners. The typical merchant in China no longer accepts credit cards.
Cash is on Its Way Out
Although this did not impact us (thankfully), I was told that some establishments in China no longer accept cash, with number of cashless stores rising. Part of this is the ease of paying with mobile phones, but China also has experienced many issues with counterfeit bills. At virtually every retail establishment, the clerk ran the bills that I handed over through a special machine that checked for counterfeit currency. At one restaurant, the employee made small tears in each bill and closely examined the paper fibers. Given all the issues with paper currency, I can see cash being phased out of China over time. No doubt the government of China would welcome this, as a cashless society makes it much harder for businesses to avoid paying taxes to the government or to operate illegal businesses – not to mention counterfeiting. Given the myriad of payment methods available, the younger generation of Chinese do not feel the need to carry cash. With advances in printing technology, I would expect that the US will also need to address losses from counterfeiting in the US at some point.
QR Codes Make Paying Easy with Your Phone
The use of QR codes makes paying for things faster and easier than credit cards. Chinese consumers just open their Alipay or WePay app and allow the retailer to scan the app’s QR code. After a fraction of a second, the device beeps – signaling that the customer’s bank account has been authenticated and that transaction amount has been deducted from the customer’s account. A text message is simultaneously sent to the user’s phone with the transaction confirmation. No interchange fees or waiting for authorization codes or funds to settle. I suspect that transaction fees are also lower for the retailer.
I was impressed with how this payment method can be used for a variety of consumer purchases. Many vending machines in China do not take cash (just scan a code next to a picture of a can of Coke and the can drops out of the vending machine). There are also lots of venues for taking micropayments. For example, we went to a large art gallery complex where the various galleries charged small entrance fees (some as low as 25 cents). Instead of having an employee managing a POS terminal, the gallery just posted a sign at the entrance with the entry fee and a QR code. Visitors paid the entrance fees by simply scanning the QR code with their phone. The gallery did not need a payment system to collect entrance fees, just a piece of paper with a QR code. I can see this being very attractive to retailers and consumers in developing countries.
Mobile Phone are Locked Down in China by the Government
When we went to buy a SIM card to enable our iPhones to work in China, we were surprised that a passport was required. Only stores with a special machine linked with a government database can issue SIM cards. When we bought our SIM cards, this machine scanned our faces, and then used facial recognition technology to match our facial scan with a scanned photo of our passports – effectively linking the new SIM card with our passport. As a result, the government knows the identity of the owner of every mobile phone in China. This is important given all the payment functions that use phones, and no doubt helps reduce payment fraud in China.
Facial Recognition Technology Has Been Widely Adopted in China
Facial recognition technology is already widely used in China in the fields of government affairs, finance and retail. Public security departments throughout China are applying facial recognition technology to crack down on illegal activities. When we were walking the streets in Beijing and Shanghai, we saw security cameras everywhere – in trees, door entrances, street intersections and public transportation stations. We learned that these cameras constantly capture facial images and compare against the lists of wanted criminals. For example, we learned that hundreds of fugitives have been caught by the police in China through the scanning of faces at Chinese pop stars’ concerts. It’s also being used to capture the pictures of pedestrians or drivers who run red lights. The upside is that China feels very safe, as the presence of camera acts as a deterrent to crime. (I will not comment on the negative implications of these cameras – but if I suddenly disappear it’s because I jumped a subway turnstile in Xi’an, China).
…. And is Changing the Payments Landscape in China
In 2017, “paying with your face” was named one of the top 10 breakthrough technologies in the world by the MIT Technology Review. Two years later, ‘Pay by Face’ is already in use in China.
I witnessed this in action myself. I saw a supermarket station equipped with cameras supporting the Alipay face-scanning payment. At checkout, the consumer simply stood in front of the camera and had their face scanned. The terminal then matched the facial scan to the customer’s account by comparing the facial scan with a government supported database of facial images taken from national ID cards. While I was told that this was 99.9% accurate even in a country the size of China, as a second authentication method a keypad appeared on the customer facing check out screen. The customer then enters the last 4 digits of their mobile number to further authenticate the transaction. Once the phone digits were confirmed, the transaction was treated the same as a pay by phone transaction (i.e. direct debit from customer linked bank account)
Another example of how this works is transportation. In April 2019, passengers in the city of Jinan switched from using tickets or swiping their smartphones to gain access to subway stations to simply smiling at a screen of a facial recognition system to unlock the electric subway entrance gates. The scanned faces of subway riders are compared against the database of face pictures maintained by the city’s transportation authority and managed though the authority’s “Jinan Metro” mobile app. The facial recognition system enables 33 people to pass the entrance gate every minute, while previous methods only allowed only up to 20 people to pass through each minute.
It’s amazing to think about the opportunities that this presents in developing parts the world. Imagine if you could pay for things without worrying about carrying cash, credit cards or a mobile phone.
And ‘Pay by Voice’ is Coming Soon
Payment companies in China are already working on ‘Pay by Voice’ systems, which are expected to be commercially available in 2020. I spoke to one POS system vendor that is in final testing of a pay-by-voice system. It would work like ‘pay-by-face’ except that you would need to speak a phrase (such as your name) into a microphone instead of having your face scanned. Because the government does not maintain a voice database for everyone in China, it’s expected that payment providers would need to maintain their own voice database used to authenticate transactions.
Much Fewer Concerns About Security and Privacy in China
When I returned to the US and spoke to friends about the use of facial recognition technology in China, the reactions were generally that this was ‘creepy’, ‘scary’ or a ‘violation of privacy’. That is certainly not the way it is viewed in China. As people in China grew up with the government closely tracking their identity through various means, having their face scanned to pay for something is generally not viewed as intrusive. The people that I spoke with found it exciting and liberating to be able to buy things without the need to carry a wallet or worry about their phone running out of batteries. They did not seem concerned at all about having their face scanned.
Chinese Payment Companies have Advantages vs Western Companies
It was surprising that the Western card brands (Visa, Mastercard, Amex) look to be frozen out of the Chinese market and it’s 1 billion+ consumers. While the Western card brands and associated banks have historically held a virtual monopoly through interbank and interchange agreements outside of Asia, the Chinese payment companies are bypassing this infrastructure by offering benefits for both retailers (lower fees, quicker payments, lower fraud) and consumers (easier payment methods). These payment companies work closely with the Chinese government. The Chinese government is very focused on China being the predominant technology leader of the world and I suspect is much more interested in Alipay and WePay controlling their market than to allow Western companies to do this.
As a result, I am sure it was much easier for Alibaba to roll out these new services in China in cooperation with their government than it will be for Western companies to roll out similar services outside of China. The US payment market is burdened by privacy laws, legacy infrastructure and powerful (and profitable) business that are much more interested in maintaining the status quo than to embrace new services putting their financial models at risk. As a result, we may find that payment services from Chinese companies are accepted all over the world before similar technology is adopted in the US.
Facebook Fighting to be the Alipay in the US
After returning home, I have a greater appreciation of Facebooks efforts to make its Libra pay system the ‘Alipay of the US’. It must be very concerning to Facebook to see the adoption of Alipay and WePay explode in China while they are mired in regulatory approval processes and burdened by fighting powerful lobbyists. I will be watching closely to see if Libra starts to make progress getting regulatory approval and commercial acceptance in the US.