Apple Pay’s China Debut – Stories Behind the Cross-Border Marriage

(Featured Image Source:

Apple Pay finally launches in China, a news much anticipated since the announcement last December. The marriage with China Unionpay, however, was never an easy one, as Apple could choose to partner up with a commercially more proven partner, such as Alipay (now part of Ant Financial) and Tenpay (Tencent’s payment platform). Why did Tim Cook make such a decision? Beyond this decision, what implications will this marriage have on China’s 3rd-party payment market?

Cook’s secret meeting with PBOC’s Governor Zhou

Tim Cook has been a frequent visitor of China since he took up the role as CEO of Apple. He traveled twice to China in 2015, in the name of environmental protection, as well as a public relations tour of Apple’s Henan factory and a rural school in China equipped with Ipads. Our industry sources told us that it was during these visits that Tim Cook had private meetings with PBOC governor Zhou Xiaochuan, whom he also met earlier in October 2014 during a Qinghua University Business School’s public event, hosted by former Premier Zhu Rongji. The main agenda of this informal meeting was straightforward, to accept Apple Pay’s entry into China. The result was positive, PBoC welcomed Apple’s entry with open-mindedness and support. The reason behind this, was more intricate than it seems.

(Cook obviously in a good mood when climbing up the Great Wall during his latest trip in China, October 2015, source:


China Unionpay is PBOC’s baby – inaugurated in 2002 and based in Shanghai, it has been the monopoly in bank card organization within China and the only interbank network allowed.  Quite recently, however, Unionpay’s good old days seem to have passed, facing strong competition in mobile payments from the likes of Alipay and Tenpay. In the past, Unionpay seemed to be fine with its dominance in the offline business (merchants using POS machines) and Alibaba’s control of the online business. The spread of QR code/barcode’s application in offline payments invaded Unionpay’s old turf. This is not a matter of profit anymore, it turns into a battle of existence. Though the PBoC drafted a rule in early 2014 to temporarily ban the payment application of barcode/QR code, it doesn’t stop the fire to burn its backyard.

(The popularity of QR code’s payment usage in China has threatened Unionpay’s original advantage in the offline space, source:


Unionpay’s current CEO, Mr. Ge used to serve as head of international department of PBoC and executive director of IMF representing China. Ge is not a typical bureaucrat who is just enjoying retirement – he is ambitious, global-minded and ready to revenge on recovering Unionpay’s original advantage in offline payments. Ge’s recent moves were well documented: He announced cooperation agreements with various partners globally, visiting Moscow, Milan and UNWTO, declaring that Unionpay is not only a Chinese brand, but will eventually become a global brand. Unionpay has also spent a huge amount of capex in upgrading its current offline systems, supporting NFC (near-field communications) which eventually forms the basis for Apple Pay’s setup.

(Unionpay’s CEO Ge is more global-minded and competitive than people think, source:


Dancing with the Dragons – What Apple Brings and Takes on the Table

Back in 2014, Cook visited Alibaba and Jack Ma also paid a courtesy visit to Apple’s HQ in Cupertino. They did have quite some exchanges on Alipay’s potential cooperation with Apple Pay, but the conversation seemed to have stalled on that level. Apple is not so sure about Alipay’s offline strategy, which is reliant upon QR code scanning; meanwhile, Unionpay’s offline networks were much more solid and they have better relationships with local governments apparently. PBoC is also willing to see the marriage of Apple and Unionpay go through – it doesn’t want to see an overly dominant Alipay in the realm of mobile payments, which could potentially weaken its administrative power and control on the industry. Introducing some competition could be helpful here, especially for the sake of its own baby.

Apple’s bargaining chip here is its rising market share in China, especially in the affluent middle class – in mid-2015 its market share was above 25% and is still growing, compared to 17% in 2014. It is also estimated that Iphone 6 (and plus) accounted for 10%, which is the only version available for Apple Pay. Apple’s dominance in more affluent cities, such as Beijing, Shanghai, Shenzhen, etc, can be seen as a weapon of commercialization due to high purchasing power.

Apple’s another strategy is its willingness to yield certain benefits to Unionpay. For China’s offline 3rd-party payment, the profit distribution is quite straight forward, often known as the “7-2-1” scheme. 70% of the profit will still go to the banks, 20% will go to the payment platform (officially known as “receipt platform”) and 10% to card organization, which is Unionpay, essentially. Though the profit distribution theme is not publicized and is obviously a top commercial secret between Apple and Unionpay, it is widely expected that Apple has probably yielded certain percentage of profits to Unionpay as a form of “entrance fee” to China. But sources also told us that this profit yield is not excessive, as Unionpay is aiming to recover its market share, rather than earning profits. Also, Apple is expecting Unionpay’s country-wide network to pay dividends here.

Competition dynamics – Is Alipay under seige now? 

During Chinese New year, Alipay successfully outbid Tencent as the official “red packet sponsor” in the CCTV evening gala of the Spring Festival, but seemed to have received quite muted feedback. The reason for this is multi-faceted – Tencent’s wechat is still believed to be the dominant social networking tool and despite Alibaba’s effort to increase networking elements in its Alipay app, the application is much less used in non-Taobao/Tmall environment. While Tencent might be a silent follower in the payment space, waiting Alipay to make mistakes, Unionpay and Apple’s alliance is more of an intrusion or a direct attack on Alipay. Since its inception, Unionpay and Apple have used the right strategy, to temporarily avoid Alibaba’s strong base in SMEs but to focus on large chains, such as  KFC, McDonald’s, 7-11 convenience stores and Pacific Coffee, etc. It is also rumored that Starbucks have accepted Apple Pay’s domestic application, which is another huge commercial success.

(Apple Pay’s focus in China has been on retail chains, a smart strategy to avoid direct competition with Alipay)


But an imminent clash with Alipay is inevitable – Alipay’s advantage among SMEs is evident and is very tough for Apple Pay to compete, unless it will use more lucrative offers on both merchants and customers. Industry experts commented that Apple and Unionpay will both subsidize heavily on its inception to acquire more users, which is likely to prompt Alipay using more aggressive incentives as well. As Ant Financial is widely believed to be launching an IPO process in 2017, it is more than likely that Alipay will be more than aggressive in counteracting Apple’s effort to expand in China. Also, the execution team of Apple-Unionpay Alliance is under a lot of scrutiny, as there hasn’t been any evidence of success in the past for these two firms to have an efficient and slick local team to manage a successful piece of offline business. Execution remains to be a key testing point for the marriage to be successful. Though Alipay is under certain pressure, it is far from being threatened by the mere existence of the alliance.

What else is left for the non-giants? Little…

Apart from Apple, Alipay and Tecent, there are more than 200 companies engaged in 3rd party payments in China that have appropriate licenses issued by the PBoC. A lot of them were early market participants that have either been out-competed or have remained very local in terms of business scope. One of the larger ones in this pool, Lakala (拉卡拉), also known as China’s “Square”, has recently received financing from a listed company called Tibet Travel, valuing the entire piece at 11 billion RMB. Previously financed by Lenovo, the company is still surviving but has limited future prospects due to the prevalent usage of Alipay and Tenpay in the SME landscape. It is also believed that Lakala’s main usage now for customers is for credit card’s cash outdraw, which is very limited in terms of market potential. The eventual backdoor listing is only providing a method for previous rounds of investors to exit.


Another potential breaking ground for smaller firms is to sell its license to hardware companies, like Xiaomi and Huawei, as mobile phone brands were also looking for grounds to promote payment as part of its ecosystem. But only a few lucky ones can be acquired, so what about the rest? Apart from some vertical-specific payment providers, there is little room to breath in this industry, especially given the huge rounds of subsidies expected for the war among Alipay, Tencent and Apple.

Unionpay’s another challenge – no longer a monopoly 

It seems that the marriage with Apple is a “win-win” situation, but it’s not a free lunch for Unionpay. In July 2015, the PBOC drafted a new regulation on card payment industry, which essentially could end Unionpay’s monopoly status. The entry barrier is certainly high, but is widely believed that candidates such as ICBC, Alipay  and even Visa/Masters are filing their application. This is also a move for more market competition in the field, another concern for China Unionpay in the long run. That said, the regulation is still not completed and there is considerable amount of time for Unionpay to adjust its strategy. In a foresseable future though, Unionpay, Alipay and Tencent will become the three kingdoms on the chessboard of payment space, where few others can even access. The game of payments seems to have just started, but is not open for public.




Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s