Mobile Electronic Payment
The Digital Wallet Is Here
Soon Taiwanese consumers will be able to pay for a wide array of goods and services with nothing but a mobile phone. Traditional banks and new nonbanking enterprises are all scrambling to become Taiwan's PayPal or Alipay.
The Digital Wallet Is HereBy Yi-Shan Chen, Hsiang-Yi Chang
From CommonWealth Magazine (vol. 548 )
On May 12, Taiwan's Financial Supervisory Commission (FSC) finally passed the Payment Processing Institutions Act, popularly known as the third-party payment law, and sent it to the Executive Yuan for review. If lawmakers work fast once the Executive Yuan has given its nod, the act could be passed as early as September when the next parliamentary session begins.
The law will allow banks, electronic ticketing operators such as EasyCard and icash, as well as Chunghwa Post to conduct electronic payment business, and store and transfer value. More importantly, it will become possible to use value stored online to pay for goods and services in a brick-and-mortar store. However, e-investments in money market funds and insurance premiums as offered by Yu'e Bao, an affiliate of China's leading electronic payment platform Alipay, will remain off limits.
"Payments are the last mile in everyday life," says Frank Hsu, senior vice president of Taiwan Cards and Payment Group at CTBC Bank. "The foremost significance of this special law is that it enables non-financial institutions in different market niches to compete with banks for participation in this last mile."
PChome Online chairman Jan Hung-tze, who has fought a number of battles with government regulators over the years, admits, "This is the one time that we got a good ending."
Old and New Players Gear Up for Battle
The Taiwanese market is already crowded with big players. Taiwan's largest online retailer PChome is offering PChome Pay, and Yahoo Taiwan has created Yahoo Billing. EasyCard and I Pass Card are stored value cards that started out as e-ticketing systems for public transport. President Chain Store Corporation's icash can be used to pay at stores or for home deliveries. Several banks and two gaming companies have launched third-party payment services such as Pockii by CTCB Bank, Smart Pay by E. Sun Bank, and Fun Cashier by Bank SinoPac. Traditional commercial banks and nonbank financial companies are lining up at the starting line or have already begun to run.
"Over the past two years, the entire payment system has seen dramatic changes," remarks Hsu.
Almost every industry insider points out that crowded, urban Taiwan – where an automatic teller machine can be found on every corner, consumers can conveniently pay for goods ordered online when picking them up at local convenience stores or upon delivery to their doorstep, and credit cards are in such wide use that card slaves (people who have maxed out several credit cards by overspending) have become a social phenomenon – is a completely different story from China, where the banking system and the credit card business are not yet mature.
NT$300 Billion Battleground
In Taiwan, where money can so easily be withdrawn round the clock through a dense network of cash points, the initial main battleground for electronic payment systems is C2C business on the internet, such as auctions and classifieds, where customers or consumers trade with each other. Their typical targets include online auction platforms such as www.ruten.com.tw, a joint venture between PChome Online and eBay; Yahoo Taiwan Auctions; as well as social shopping websites.
Survey data on the development of electronic commerce by the Institute for Information Industry (III) show that the C2C online market was worth NT$320 billion last year. Based on a 2 percent transaction fee and assuming that all deals are paid electronically, overall profits in this business segment stand at just NT$6 billion, an amount that does not seem like a lot. Up to now, customers have paid for C2C deals via ATM transfer or in cash during face-to-face handover, store pick up or home delivery. In the future, they will be able to use nonbank payment service providers to conduct their retail payments securely.
"If you ask me, this is a blue ocean market," says Hsu. "In the past, I wouldn't have been able to grab a piece of this pie. But now that payment instruments have become more diverse, we're looking at customers that belong to even younger age groups."
The new customers that banks are targeting with their electronic payment platforms are small businesses that are not able to offer payment via credit card, and customers who are too young to apply for one. Aside from its own Pockii service, CTCB also provides the virtual buyer and seller accounts used by Yahoo Billing.
Industry insiders believe that PChome Pay is most likely to develop into the Taiwan version of Alipay. Jan Hung-tze already has some ideas how PChome Pay and online shopping websites could complement each other to grow their businesses.
"Last year, the transaction volume of PChome Pay did not exceed NT$1 billion, but this year we will integrate some transactions so that we will top NT$10 billion by year-end," Jan confidently predicted in an interview with CommonWealth Magazine.
Expanding the Online Payment Market
Jan reveals that PChome Pay account holders will be able to pay utility bills online starting in September. Parent company PChome has gathered various sales data from its sellers, which enables the company to stay on top of money flows. At the end of this year, PChome will invest in the launch of a leasing company to provide small loans.
Why is the figure of NT$10 billion in transactions such an important indicator? According to Jan, a transaction volume of NT$10 billion demonstrates that a payment service has enough users. Once that threshold has been reached, PChome will have enough influence to negotiate with counterparts abroad so that users will be able to use PChome Pay to pay for purchases made outside Taiwan.
Aside from that, auction site Ruten was not able to allow foreign sellers to offer their goods on the platform because the problem of payment fraud remained unresolved. Nevertheless, from June this year foreign sellers will be able to sell on the auction site provided they collect all payments through PChome Pay. Presently, the auction website offers 56 million items. Jan expects that figure to rise above 100 million items by year-end. "Money is an important control tool. When a deal is problematic, I can hold on to these sums of money to protect my customers," Jan points out.
Jan is optimistic that, with the help of technology from abroad, PChome Pay will be able to handle offline payments before the end of the year as well. He is convinced that Taiwan will eventually see our virtual and real-world lives merge into one.
Not everyone views mobile e-cash as a major improvement. "Given that there is an ATM at every corner here in Taiwan, would paying by mobile phone really feel so much more gratifying?" one high-ranking electronic finance manager at a Taiwanese bank asks doubtfully. In China, Alipay last year introduced the AliPay Wallet mobile app that allows consumers to purchase goods and services in shops using their smartphones. Funds can be transferred electronically via the Internet through QR code or bar code recognition, but for most consumers the payment procedures remain somewhat confusing.
Industry insiders, who are familiar with the offline payment system in Taiwan, predict that even Internet giants like Alipay will have problems carving out a niche in Taiwan's real-world business, as long as credible security standards for mobile payments have not emerged and are not widely used.
Offline Payment Providers Target Online Services
With some 60 million stored value cards circulating in Taiwan, electronic ticketing system operators are much more likely to capitalize on their offline market dominance to also penetrate the mobile payment segment through online to offline (O2O) payments. The FSC has already given the green light to e-ticketing operators for running electronic payment platforms.
President Chain Store Corporation controls Taiwan's most comprehensive offline retail empire: nearly 5,000 convenience stores, more than 100 Starbucks coffee stores, department stores and a huge home delivery fleet. At the beginning of the year, the retail giant transferred its 11.8 million icash cards including their stored value to its subsidiary icash Corp.
Industry insiders agree that EasyCard Corporation, which runs the leading IC ticketing system in northern Taiwan called EasyCard, has the best prospects to emerge as the winner in the hotly contested O2O commerce.
"In the future, cooperation among electronic payment instruments will be very important," predicts EasyCard Corp. president Aaron Cheng in outlining his strategy. Cheng believes the best solution for Taiwan, where various payment instruments have already matured, would be a close cooperation along the payment processing chain between banks, online shopping sites, third-party payment providers and EasyCard, with each participant playing a specific role: "We don't want this just for the sake of having it," declares Cheng.
Marrying Online and Offline Worlds
EasyCard's biggest competitive advantage is the 45 million cards in circulation with a stored value of NT$4 billion. Cheng explains that upon gaining a license for conducting electronic payment business, the first step will be allowing EasyCard users to spend these NT$4 billion online. "As quickly as possible, we need to achieve an integration of virtual and real worlds, online and offline."
Consumers spend an average NT$72 on single transactions with their EasyCards, which can hold a disposable value of up to NT$10,000. Similarly, small purchases will be the focus of online transactions, such as sticker images for the Line mobile messaging app.
In the latter half of 2013, EasyCard Corp. began to approach banks and third-party payment providers in Taiwan and abroad, hoping to link EasyCard to their user accounts. In the future, user accounts with Alipay, PayPal, PChome Pay and even Suica Card from Japan and Octopus Card from Hong Kong could be tied to a personalized EasyCard capable of storing the identity of its owner. Then consumers could use their EasyCard to pay public transportation fares in Taiwan and shop in 16,000 retail outlets across the island.
"The problem with O2O is how to use it offline, how to expand the network of outlets where people spend small amounts. These are basic steps. We need to sign up stores one point of sale at a time," explains Cheng.
EasyCard has already become the card most closely connected to the economy of ordinary people. EasyCard Corp. now aims to increase the number of stores that accept EasyCard as a payment instrument in concert with domestic bank branches. Once the laws lower the threshold for EasyCard use, Cheng hopes to sign up some 100,000 stores.
"As I see it, neither third-party payment providers nor banks or credit card companies are our competitors. Our biggest competitor is cash," Cheng admits, pointing to the NT$1.3 trillion worth of cash transactions per year that are generated by small purchases of less than NT$1,000.
Banks Must Not Lose Direct Customer Contact
While an e-investment craze similar to the Yu'e Bao boom in China is rather unlikely in Taiwan's business environment, Taiwanese banks are nonetheless plunging into the C2C online market. Banking industry insiders admit they are not eyeing the electronic payment business with a view to the present, but in preparation for the future. Their motivation is not offensive, but defensive.
"Payment is where most contacts with the customer begin," notes Ting Chen, head of Electronic Banking Division and Integrated Marketing Division at Bank SinoPac. "Payment is like 7-Eleven's City Café. It's what brings people into the store every day."
Having participated in the establishment of the Ruten auction site, Chen counts among the handful of high-ranking bank managers with experience in an online company. Following two years of in-house development, Bank SinoPac launched its Fun Cashier, the first electronic payment platform within the domestic banking system, in October last year. Since transactions of less than NT$50,000 per month remain free of charge, Fun Cashier has been praised as the island's most C2C-oriented electronic payment service provider.
Just as smartphones quickly gained popularity when they hit the market, Chen predicts that five years down the road Taiwan will see dramatic changes in payment and retail behavior when the first generation that was born into the world of mobile phones comes of age. She points to online banking as an example. Presently consumers visit an ATM machine an average of 30 times per year, but they use online banking an average of 100 times per year.
"If a person dares to use online banking, they will dare to trust in O2O," she concludes. The key for security controls in online banking and O2O e-commerce is not whether data are intercepted during the transaction process, but rather how at the back end abnormal transactions indicating account abuse and fraud can be detected, how such abuse can be proven, and how it can be prevented. For banks, their experience dealing with such account issues is an asset. The success of PayPal, for instance, can be attributed to the fact that they poached the management team from American Express.
"In the future, the payment methods are certain to change. We will participate in any new technology that is related to changes in payment," says CTBC's Hsu.
One financial industry player warns that the biggest difference between Taiwan and China, aside from the competitive environment, is a vocal public. As soon as something goes wrong, Taiwanese society and political circles clamor for strengthened oversight, which leads to stricter policies that can roll back developments by as much as a decade.
Quoting the headline of a Wired magazine article, "The future of money: it's flexible, frictionless and almost free," Jan extolls the advantages and bright future of the new ways of moving money. In real-world Taiwan, genuine friction must not be allowed to undermine consumers' faith in electronic payment. It takes vision, tolerance and caution on the part of industry players and regulators alike to back up this confidence and prevent another form of hostile competition.
Translated from the Chinese by Susanne Ganz