TechNode: Why QR codes trump NFC in China

© Jonas Leupe/Unsplash.

Among the ten customers lining up inside a Starbucks store in Beijing, I seemed to be the only one who showed up at the cashier with an iPhone, ready to pay for my breakfast with Apple Pay. It was my turn: a grande-size latte, and a ham and double cheese bagel. “WeChat or Alipay?” asked the barista.

Apple Pay did not enter the Chinese market until 2016. The two homegrown Chinese payment services were released much earlier: Tencent’s WeChat Pay in 2014, and Alibaba’s Alipay in 2004. While WeChat Pay and Alipay rely on QR codes, the American tech giant opted for the solution that turns your phone into a virtual tap-and-go bank card with NFC, a technologically more secure alternative. When Apple signed a contract with China’s UnionPay – which owns the QuickPass contactless technology similar to Visa’s payWave – mobile payments had already been commonplace in China. Many had asked: Is Apple Pay able to compete with WeChat and Alipay on their home turf?

Today, Apple Pay holds 90% market share in the Chinese contactless payment sector, outshining its competitors in China including Samsung Pay, Huawei Pay, and Xiaomi’s Mi Pay. But the larger context is, the NFC payment sector only holds less than 10% of the entire Chinese mobile transaction market (in Chinese). Moreover, research from 2017 Q1points out that 67 percent of customers use WeChat Pay or Alipay to shop in a convenience store, while NFC-based payments remain in the zero-percent range; 47 percent of convenience store staff have no understanding of Apple Pay. The QR code model of WeChat and Alipay apparently takes the lead in the Middle Kingdom, and there are clear rationales behind that.

NFC chips are a luxury

Often overlooked, but important to remember: Shanghai isn’t a miniature of China. While it would not be a stretch to see hundreds of customers lining in front of Apple Stores trying to get the newest iPhone models at the earliest possible time, such high-end smartphones are not as popular in lower-tier cities around the rest of the country.

In fact, Apple is only the fifth most popular smartphone brand in China, following four indigenous manufacturers – Huawei, the Oppo-Vivo duo, and Xiaomi. To many Chinese users, cheaper smartphones from domestic brands priced below a thousand yuan – also known as qianyuanji (千元机) – are often more favorable options than high-end products that would cost fivefold.

Although many homegrown brands have released their own NFC-based payment features, they are often only available on upscale products. Among the smartphones with the highest sales volumes on JD.com, China’s leading e-commerce website, I have examined five smartphones that are below two thousand yuan from the aforementioned brands: Huawei Honor 9, Oppo A57, Xiaomi Redmi 5 Plus, Xiaomi Redmi Note 5A, and Vivo X9s. It turns out that none of them is shipped with NFC chips.

QR code payments, on the other hand, demand no such extra hardware requirement. It is for sure that NFC chips come with an additional cost, and that is a luxury for many Chinese customers who have little incentive for paying an extra price to opt for NFC-based payments.

POS terminals aren’t cheap

Many vendors, mostly local small businesses, are hesitant to support NFC contactless payments due to the underlying costs. While it is reasonable to expect McDonald’s to accept credit cards, a vendor at a local farmers’ market in a Chinese city is less likely to own a POS machine that supports contactless chip cards.

QR codes are seen as a more convenient alternative to costly POS terminals. If you are a small business owner, you would have to follow a much more sophisticated, and pricey procedure to obtain a POS terminal than printing a QR code to request funds on WeChat or Alipay.

The absence of credit cards

Consumers in many Western countries are incentivized by the benefits and promotions that credit card holders enjoy. Although credit cards are ubiquitous in major Chinese cities like Beijing and Shanghai, they are not at all commonplace in rural parts of the country or even lower tier cities.

There are also roadblocks for college students, freelancers, retired citizens, and stay-home parents to apply for credit cards. According to a 2017 report from The People’s Bank of China, the average number of credit cards owned by each person in China is 0.39. In the US, the number is 2.6.

While the majority of Chinese people don’t get cash back from credit card companies, they can from Alipay. As third-party services, both Alipay and WeChat Pay have frequently offered (link in Chinese) promotions, cashback rewards, and “red packets” to users, including those who have only added debit cards to their accounts.

Instead of waiting for traditional financial institutions to advance China’s credit system, Chinese internet titans have introduced their own credit rating systems – Sesame Credit from Alibaba and Tencent Credit – to reward citizens based on an assessment of their shopping behavior and financial credit history. Ant Check, a feature on Alipay, offers overdraft and personal credit line services to qualified users. While WeChat and Alipay have already established a new model of online financing, NFC-based payments still largely depend on banks and credit card companies.

Notwithstanding that NFC-based payments are still taking the lead in many Western countries, I look forward to seeing the QR code model to be exported to developing regions like Southeast Asia, where it would allow people with a $99 smartphone to benefit from mobile payments – or online financing in general – in a convenient, economical and secure fashion. Moving forward, we should continue to expect a growing presence of QR codes in more scenarios of cashless transactions not only in China but also worldwide.

This article was originally published on TechNode, one of the largest English-language outlets covering tech in China.

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Shenzhen, China 2017

Huaqiangbei Building

As the final stop of my South China field trip1, I visited Shenzhen for the second time (in addition to several flight transfers) in June. To be honest, this Chinese city did not give me a very positive impression during my previous sojourns. There wasn’t as many skyscrapers two years ago, and cafés and shopping malls weren’t fancy at all by Shanghai or Hong Kong standards. Yet my recent visit somehow altered my perception, and frankly speaking, I even felt like moving there at some point of my life.

Following the thriving stories of the Shenzhen Special Economic Zone, there’s been a zillion myths about Shenzhen from the perspective of a Western tech pundit. Especially after the success of DJI, the world’s leading consumer drone manufacturer, the western impression of Shenzhen gradually shifted from “the hub of shanzhai (copycats)” to “the Asian center of innovations.” Narrated by Andrew “bunnie” Huang, WIRED even made a documentary about the city, Shenzhen: The Silicon Valley of Hardware. While the film portrayed Shenzhen as a fantasy, the depiction was, to some extent, a hype. Jason Li did an analysis on it, and I think it’s a good read if you’ve ever watched the original video.

I myself also had perplexing feelings about Shenzhen. On one hand, I simply felt the shanzhai culture was distasteful, and copy-and-paste business models shouldn’t be justified; be that as it may, the originalities in Shenzhen I had seen so far were quite impressive (a lot of noteworthy Kickstarter projects were from Shenzhen-based startups). As a side note, the name of Shenzhen seems to be quite baffling to many folks, since most of my friends back in the USA would simply refer to Shenzhen as the Chinese industrial city next to Hong Kong.

If you’ve never been to Shenzhen, and curious what this mysterious Huaqiangbei looks like, here’s a snap of what you’d expect to see there:

Huaqiangbei Building
Inside Huaqiangbei Building

Basically, you can get all kinds of hardware parts, from the CPUs to cables to aluminum outer cases to label printers — almost everything you would need to manufacture a tech gadget.

A vendor selling tech hardware parts
A Huaqiangbei vendor selling electronic parts
A stall vending label printers

The WIRED documentary interpreted shanzhai culture as some sort of open source spirit, and I could hardly agree with that construal. Open source means you create something that can be reused by others under a certain agreement, not selling something by stealing a copyrighted design or technology and putting your own label on it.

Fake DJI drones spotted near Huaqiangbei

Be that as it may, Shenzhen’s shaizhai culture did help foster an innovation-friendly atmosphere. With all these resources at Huaqiangbei (originally made for shaizhai products) and factories all over the city’s outskirt, it takes a considerably short amount of time to build up a hardware product. Let’s say if you come up with the idea of designing the world’s first fidget spinner. In Silicon Valley it would probably take weeks to order the parts, and you might need to replace them if the colors are not satisfying enough, in Shenzhen all you need is to spend an afternoon at Huaqiangbei and your product is ready to go!

All kinds of fidget spinners for 25 RMB (3.7 USD) each. Could have bargained ; (

At the end of the day, the “miracles” of Shenzhen are more or less exaggerated. But when you come to Shenzhen, it wouldn’t be a stretch to actually feel what’s going on here, as well as the “Shenzhen speed”.

If you want to explore Huaqiangbei and other tech-related locations in Shenzhen, the Shenzhen Map for Makers by Seeed Studio is a good resource for reference.

On a personal note, the reason I really like Shenzhen is that the people here are mostly migrants. Beijing makes it really hard for non-locals to settle down, and migrants without hukou are subject to discriminatory policies and regulations (can’t purchase apartments, cars, etc.). In Shenzhen that’s not really a thing, and it employs a rather ideal approach of meritocracy and you hear all kinds of dialects here. It takes only about an hour to pass the border and travel to Hong Kong from Shenzhen, so pretty much you are able to enjoy the benefits of both systems (and fly from HKIA!).

Skyscrapers emerging in Nanshan District, Shenzhen
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