2022 Payment Industry Research Report

Chapter 1 Industry Overview

Third-party payment refers to an enterprise that establishes a neutral payment platform between e-commerce enterprises and banks to provide fund transfer channels and services for online shopping. In a transaction, after the buyer selects the goods, he uses the account provided by the third-party platform to pay for the goods. The third party notifies the seller that the payment has arrived and ships the goods. After the buyer inspects the goods, he can notify the seller to pay, and the third party will transfer the money to the seller's account.

As early as 1998-2005, third-party payment institutions such as Shouxinyi, Alipay, Lianlian Pay, 99bill, and Tenpay were established one after another and began to provide payment channels for online commercial activities.

In 2010, the People's Bank of China issued the "Administrative Measures for Payment Services of Non-financial Institutions" and issued payment business licenses to qualified institutions. These measures confirmed the legal status of non-financial institutions' payment services, regulated business operations by bringing them under supervision, and ensured the long-term orderly development of the industry. Since 2010, under the influence of different driving forces at different times, such as online shopping, social red envelopes, and offline QR code payment, the scale of third-party payment transactions has experienced rapid development. In 2020, the total scale of third-party mobile payments and third-party Internet payments reached 27.1 trillion yuan in payment transaction scale. With its convenient, efficient and secure payment experience, third-party payment has made China's payment market one of the leading payment markets in the world.

According to iResearch Consulting data, the scale of domestic third-party mobile payment transactions in the first quarter of 2021 was 74.0 trillion yuan, an increase of 2.8 trillion yuan from the previous quarter, of which personal applications, mobile finance and mobile consumption accounted for 54.7%/23.7%/20.1% respectively; the scale of offline QR code payment transactions in the first quarter was 10.6 trillion yuan, a decrease of 0.4 trillion yuan from the previous quarter; the scale of third-party Internet payments in the quarter was 5.9 trillion yuan, a decrease of 0.3 trillion yuan from the previous quarter.

Figure 2019Q1-2021Q2 China’s third-party mobile payment transaction scale

Source: Qianji Investment Bank, Asset Information Network, iResearch Consulting

The payment industry can be divided into two forms based on its functions:

Pure third-party payment, such as UnionPay electronic payment, NPS online payment, etc.;

Alipay, for example, has an e-wallet function that allows for depositing and withdrawing electronic cash and displaying consumption bills.

The payment industry can also be divided into two forms according to its independence:

Independent third-party payment: Remain neutral, do not directly participate in the sale of goods or services, and fairly and impartially safeguard the legitimate interests of all parties involved, such as UnionPay electronic payment, YeePay, etc.

Non-independent third-party payment: relying on e-commerce platforms, such as Alipay, Tenpay, etc., only exists as an accessory under its own portal website.

Chapter 2 Business Model and Technology Development

2.1 Industry Chain Analysis

my country's third-party payment industry chain is constantly improving, with commercial banks, clearing institutions, third-party payment institutions, merchants, users and payment service providers operating in a coordinated manner. The industry chain is increasingly cross-linked, and upstream and downstream cooperation is strengthened.

Figure 3rd Party Payment Industry Chain

Source: Qianji Investment Bank, Asset Information Network, iResearch, Dongxing Securities

Clearing Agency

The payment and clearing institutions designated by the central bank provide basic services such as transaction processing and fund clearing to commercial banks and payment institutions, including China UnionPay and China National Network Payment Corporation.

(1) China UnionPay: Through the UnionPay inter-bank transaction clearing system, we realize interconnection and resource sharing among commercial banking systems, and ensure the use of bank cards across banks, regions and borders.

(2) China National Payment System Union: It builds a transfer and clearing platform for non-bank third-party payment institutions such as Alipay and Tenpay, and connects them with the commercial banking system through China National Payment System Union.

Commercial Banks

Responsible for processing payment transactions for accounts owned by the institution. The development of the third-party payment industry has a significant impact on the intermediary business of commercial banks, directly squeezing out the traditional intermediary businesses of commercial banks such as payment, settlement, and collection and payment; at the same time, the third-party payment business relies on the settlement and clearing system of the bank, contributing to the corresponding bank's intermediary business income.

Third-party payment institutions

The middleman for payment and settlement between merchants and users. Among them, the account end mainly serves C-end users, with representative companies such as Alipay and WeChat Pay; the acceptance end serves B-end merchants, with representative companies such as UnionPay Business and Lakala. In the future, third-party payment industry giants will no longer be limited to the account end or the acceptance end, and the upstream and downstream cooperation of the industry chain will be further strengthened.

Payment institution service provider

Provide software and hardware support for payment institutions, mainly including communication operators, software and hardware technology suppliers, and channel service agencies. Communication operators provide communication channels for payment transaction information; software and hardware technology suppliers provide third-party payment platforms, third-party payment gateway construction, terminal equipment application development and other technical services; channel service agencies are mainly involved in the expansion and maintenance of merchants.

2.2 Business Model Analysis

From the perspective of business types, mobile payment has gradually replaced bank card acquiring and become the mainstream third-party payment business type. Before 2015, bank card acquiring accounted for the highest proportion; with the maturity of the e-commerce market, the popularization of smart phones and 4G networks, online payment has accelerated its development, and the proportion of transaction scale has continued to increase. As of 2017, the proportion of mobile payment transaction scale has increased to 55%, becoming the current mainstream payment method. It is expected that the transaction scale of my country's mobile payment market will enter a stage of steady growth.

Figure 2013-2020 China’s third-party payment business structure

Source: Qianji Investment Bank, Asset Information Network, iResearch, Dongxing Securities

In the entire industry chain, from the user side, the competition landscape and profit sharing ratio of digital wallet payment institutions have been relatively stable. However, on the merchant side, due to the great differences in the regions and industries of merchants, they are highly decentralized, which allows the payment institutions and their service providers on the acquiring side to grab their own merchant resources with customized and localized merchant services, forming their own business barriers to obtain higher profit sharing levels. At the same time, the UnionPay platform has ushered in a new pricing cycle, tilting the rate discounts to small and medium-sized payment institutions, which is expected to further reduce the costs of payment institutions on the acquiring side.

Figure 3: Profit sharing ratio of all parties in the third-party payment industry chain

Source: Qianji Investment Bank, Asset Information Network, iResearch Consulting

2.3 Technological Development

Internet Technology

my country's Internet technology, especially mobile Internet technology, is at the world's leading level. The Internet infrastructure is constantly improving, which has promoted the birth of third-party payment. As of June 2019, the number of Internet users in my country reached 854 million, and the Internet penetration rate reached 61.2%, higher than the global average; the number of mobile Internet users reached 847 million.

Smartphone penetration

Third-party payment uses smartphones as network connection devices, freeing itself from the constraints of computers and making it easier to integrate into users' life scenarios. According to data from the Ministry of Industry and Information Technology, by the end of 2018, the total number of mobile phones in my country reached 1.57 billion, with a penetration rate of 112.2 per 100 people; among them, the total number of 4G users reached 1.17 billion, accounting for 74.5% of mobile phone users.

E-commerce and logistics

my country is a major online retail country, with the total e-commerce transaction volume growing from 3.14 trillion yuan in 2008 to 31.63 trillion yuan in 2018. E-commerce is inseparable from a developed logistics industry. By the end of 2018, China's total high-speed rail operating mileage was about 30,000 kilometers, and the total mileage of expressways had reached 143,000 kilometers, ranking first in the world, providing a good infrastructure for the development of the logistics industry.

Technology iteration

The payment industry is at the forefront of new technology applications. Technologies such as 5G , cloud computing, big data, artificial intelligence , LoT, and blockchain can all be applied in the payment industry to effectively respond to high-concurrency transaction scenarios, user precision marketing, and payment transaction risk control. At the payment method level, biometric technology will become an important development direction for payment methods.

2.4 Policy supervision

At present, the regulatory agencies of third-party payment in my country are the People's Bank of China and its branches, which supervise in accordance with the "territorial principle". The "Administrative Measures for Payment Services of Non-financial Institutions" is the core of the policy, with the People's Bank of China as the leader, and industry self-regulation and commercial bank supervision as the supplement.

Due to the rapid development of third-party payment, the central bank has issued relevant policies to regulate third-party payment since 2014, such as the "Administrative Measures for Internet Payment Business of Non-Bank Payment Institutions" issued in December 2015, which clearly stated that the third-party payment industry can only be a supplement to China's payment system. As a non-bank payment institution, small amounts and convenience are its essence, and it is necessary to ensure customer information security, capital security, and risk prevention.

The Internet finance rectification that began in 2016 included the third-party payment industry, and the central bank issued the "Administrative Measures for the Classification and Rating of Non-Bank Payment Institutions". From the tightening of payment licenses, to the implementation of the 96 fee reform, to the opening of QR code payment, the policies issued by the regulatory authorities are all aimed at rectifying the previous chaos in the industry, which has greatly promoted the healthy development of the industry.

Industry association self-discipline and enterprise self-inspection

(1) The central bank comprehensively regulates large-value cash transactions

In June 2020, the People's Bank of China issued a notice on launching a pilot program for large-value cash management. The notice pointed out that the pilot program will last for two years and will be first launched in Hebei Province and then extended to Zhejiang Province and Shenzhen. Currently, the starting point for the pilot program for public account management in Hebei Province, Zhejiang Province and Shenzhen City is set at 500,000 yuan, and the starting point for private account management is set at 100,000 yuan, 300,000 yuan and 200,000 yuan respectively.

(2) The People’s Bank of China held the 2020 Internal Audit Work Meeting

On June 9, 2020, the People's Bank of China held a video and telephone conference on internal audit work in 2020. Chen Yulu, member of the Party Committee and Deputy Governor of the People's Bank of China, attended the meeting and delivered a speech. Relevant departments, branches, directly affiliated enterprises and institutions and related units of the People's Bank of China, the Internal Audit Department of the State Administration of Foreign Exchange, the Discipline Inspection and Supervision Group of the Central Commission for Discipline Inspection and the National Supervisory Commission stationed in the People's Bank of China, and relevant responsible persons from the First Financial Audit Bureau of the National Audit Office attended the meeting.

(3) Jiangsu Province established the first third-party payment business self-regulatory mechanism

On the afternoon of May 28, 2020, the first member meeting of the Suqian Third-Party Payment Business Self-Discipline Mechanism Joint Conference, initiated by UnionPay Business Suqian Branch, Ruixiang Business Suqian Branch, and Ruixiang Business Suqian Office, was successfully held at the Suqian Central Sub-branch of the People's Bank of China. The meeting unanimously voted to pass the "Suqian Third-Party Payment Business Self-Discipline Mechanism Joint Conference Charter" and "Suqian Third-Party Payment Business Self-Discipline Mechanism Convention", and elected 7 governing units. The main responsibilities of the Self-Discipline Mechanism Joint Conference include organizing and urging member units to implement industry regulatory laws, regulations and rules; conducting internal supervision of daily business and standardized development; fulfilling the self-discipline convention, coordinating and resolving problems in the third-party payment business of member units, and maintaining market order.

(4) Bank of Communications and the People's Bank of China Credit Information Center signed a strategic cooperation agreement

On June 5, 2020, as one of the first strategic cooperation banks, Bank of Communications and the People's Bank of China Credit Information Center held a signing ceremony for the strategic cooperation agreement on the China Credit Receivables Financing Service Platform in Beijing. This is also a practice of Bank of Communications to actively respond to the regulatory call, strengthen the docking and application of various government digital platforms, and stabilize enterprises, employment, and industrial chain stability through industrial chain finance collaboration.

Latest regulatory policies

(1) Strengthen comprehensive supervision and emphasize fair competition order in the market

On January 20, 2021, the central bank issued the "Regulations on Non-Bank Payment Institutions (Draft for Comments)" and solicited public opinions. From the perspective of the regulatory framework, the promulgation of the "Regulations" represents an improvement in the legal level of supervision of third-party payment institutions, integrating the requirements of multiple management methods issued in the past to ensure the professionalism, uniformity and pertinence of supervision.

In terms of specific content, the most market-focused content in the Regulations is its criteria for determining market dominance. However, from an operational perspective, the calculation of market share involves many variables. The introduction of relevant provisions is more to provide a basis for regulating and constraining fair competition behavior of non-bank payment institutions in the future, rather than immediately sanctioning a particular institution.

Therefore, for market participants, under the premise of ensuring healthy competition and having regulatory awareness, the leading advantages that already exist in the market are still valuable business moats. However, if the regulatory emphasis on the principles of safety, efficiency, integrity and fair competition is ignored, the "Regulations" also stipulate that the People's Bank of China and its branches shall perform their supervisory and management responsibilities for non-bank payment institutions in accordance with the law, and may recommend to the anti-monopoly law enforcement agency of the State Council to take measures such as stopping the abuse of market dominance, stopping concentration, and splitting non-bank payment institutions according to payment business types.

(2) It is clarified that the transfer of reserve funds between payment institutions must also go through the clearing institution

The People's Bank of China issued the "Regulations on the Deposit and Custody of Customer Reserve Funds of Non-Bank Payment Institutions", which clearly stated that the transfer of reserve funds generated by compliance cooperation between payment institutions should be handled by a clearing institution that complies with regulations. So far, the disconnection of direct connection and centralized custody of reserve funds have made all compliant fund transfers between institutions transparent and effectively prevented and controlled risks.

In terms of fund transfer, if both the payer and the payee use bank cards, a transaction will go through three clearing institutions, and each time a clearing payment institution passes through, a certain fee will be paid to the clearing institution. However, if both the payer and the payee pay and receive money through account balances, and there is no clearing between the payment institution and the bank, then the first and last clearings are no longer necessary.

Subsequently, when both the payee and the payee use account balances and the payment institution serves as both the payer's payment wallet and the payee's acquiring channel, the payment will not involve a clearing agency because it no longer involves fund transfers between different payment institutions or banks.

Therefore, in addition to regulatory measures on specific business processes, institutional regulatory measures for the overall business of payment institutions are of great significance. In the future, it is also possible that regulators will introduce more targeted management measures for such transaction models.

(3) Strictly control the expansion of non-bank payment accounts into the corporate sector and improve transaction transparency

Recently, the financial management department has put forward rectification requirements for the common problems in the current financial business of online platform companies. The second requirement is to "return to the original purpose of payment, disconnect the improper connection between payment tools and other financial products, strictly control the expansion of non-bank payment accounts to the public sector, improve transaction transparency, and correct unfair competition behaviors." The "strict control of the expansion of non-bank payment accounts to the public sector" involved focuses on controlling the opening of public non-bank payment accounts, rather than restricting non-bank industry payment services for the B-side.

As mentioned above, although the opening of a payment account can provide users with more convenient service content, when both parties use the payment account of the same institution, the clearing institution cannot directly obtain relevant transaction information. When non-bank payment institutions provide payment services for enterprises, the transaction amount is much higher than the transaction between C-end users, and the requirements for improving transaction transparency and ensuring payment security are correspondingly increased. In this case, both parties of the enterprise use bank accounts, which can make the transaction pass through the clearing institution network, thereby improving transaction transparency.

Figure 2013-2021 Summary of relevant policies of China's third-party payment industry

Source: Qianji Investment Bank, Asset Information Network, People's Bank of China, iResearch

Chapter 3 License Plate Analysis

3.1 License application mechanism

1. Types of payment services that can be applied for

1. Internet Payment

2. Mobile phone payment (remote payment)

(III) Mobile phone payment (near field payment)

(IV) Fixed-line telephone payment

5. Digital TV Payment

(VI) Issuance and Acceptance of Prepaid Cards

(VII) Bank Card Acquiring

The truly valuable license types are Internet payment, bank card acquiring, and mobile phone payment. Other payment types have less commercial value.

II. Approval Basis

Article 3 of the Measures for the Administration of Payment Services of Non-financial Institutions (Order No. 2 of the People's Bank of China [2010]) stipulates: "Non-financial institutions that provide payment services shall obtain a Payment Business License in accordance with the provisions of these Measures and become payment institutions: Without the approval of the People's Bank of China, no non-financial institution or individual may engage in payment business or engage in disguised form."

III. Acceptance Agency

Payment and Settlement Department of the People’s Bank of China branches at or above the sub-provincial level.

IV. Auditing Agency

The payment and settlement department of the People's Bank of China's sub-provincial city central sub-branch and above shall conduct the initial review, and the Payment and Settlement Department of the People's Bank of China shall conduct the review.

V. Decision-making Body

People's Bank of China

6. Application conditions

1. Applicant Requirements

1. A limited liability company or a joint stock limited company established in accordance with the law within the territory of the People's Republic of China and a non-financial institution legal person;

2. Have a minimum registered capital that complies with the provisions of the Administrative Measures for Payment Services of Non-financial Institutions;

3. There are investors who meet the requirements of the “Administrative Measures for Payment Services of Non-financial Institutions”;

4. Have more than 5 senior managers who are familiar with payment services;

5. Have anti-money laundering measures that meet the requirements;

6. Have payment service facilities that meet the requirements;

7. Have a sound organizational structure, internal control system and risk management measures;

8. Having business premises and safety measures that meet the requirements;

9. The applicant and its senior management have not used payment services in the past three years.

Having been punished for carrying out illegal or criminal activities or handling payment services for illegal or criminal activities.

(II) Approval shall be granted if the following conditions are met:

1. The applicant meets the requirements of the Administrative Measures for Payment Services of Non-financial Institutions (Order No. 2 of the People's Bank of China [2010]) and the Implementation Rules of the Administrative Measures for Payment Services of Non-financial Institutions (Announcement No. 17 of the People's Bank of China [2010]), and the application materials submitted are complete and in compliance with the legal form.

2. Comply with the development status and trend of the payment industry.

3. Comply with national policy orientation.

(III) The application will not be approved if any of the following circumstances exists:

1. The application materials submitted by the applicant are incomplete, do not conform to the legal form, contain obvious errors, or are of poor credibility;

2. The application does not meet the statutory conditions and standards;

3. Not in line with the development status and trend of the payment industry, or not in line with national policy orientation.

VII. Application Materials

(1) A written application stating the name, address, registered capital, organizational structure, and intended payment business of the applicant, and attached with the Payment Business License Application Information Form.

(2) A copy of the company's business license.

(3) Articles of Association of the Company.

(IV) Materials on the company’s capital situation.

(V) Financial accounting reports audited by an accounting firm.

(VI) Feasibility study report on payment business.

(VII) Anti-money laundering measures acceptance materials.

(VIII) Technical safety testing materials.

(IX) Resume materials of senior management personnel.

(10) A letter of commitment stating that the applicant and his/her senior management have no criminal record.

(XI) Relevant materials of major investors (see Appendix 2 for details).

(XII) Declaration of authenticity of application materials.

(XIII) Other materials that require special explanation (if any)

8. Basic Process

Figure Basic Process

Source: Qianji Investment Bank, Asset Information Network, Zhihu

IX. Application Methods

1. Receiving application materials

1. The payment and settlement department of the People's Bank of China branch receives the application materials and the "Application Information Form for Payment Business License" submitted by the applicant and counts the number of materials.

2. If the inventory is correct, the payment and settlement department of the People's Bank of China branch will issue a receipt of application materials to the applicant.

(II) Issuing acceptance opinions

1. The People's Bank of China branch conducts a preliminary review of the application materials and issues an application acceptance opinion based on the following circumstances:

2. If the application materials are incomplete or do not conform to the legal form, a notice of administrative license correction shall be delivered to the applicant, informing the applicant of all the materials that need to be corrected and the correction period.

3. If the application materials are complete and in compliance with the statutory form, or the applicant submits all supplementary application materials as required, the administrative licensing acceptance notice shall be served to the applicant, and the applicant shall be notified to make an announcement in a timely manner in accordance with the regulations.

4. If the application does not fall within the scope of the People's Bank of China's authority according to law, or the supplementary materials provided by the applicant are incomplete or do not conform to the legal form, the People's Bank of China shall promptly make a decision not to accept the application and serve the applicant with a decision on non-acceptance of administrative licensing. The notice of acceptance, non-acceptance or request for supplementary application materials shall be served to the party concerned within 5 working days from the date of issuance of the relevant document.

(III) Preliminary review by branches of the People's Bank of China

The People's Bank of China branch shall review the application materials, organize on-site verification of the applicant, and inform the applicant of the relevant verification matters in advance. The on-site verification shall be carried out by questioning the staff, reviewing the archives, and conducting on-site investigation and confirmation. The People's Bank of China branch shall formulate the preliminary review opinion of the payment business license based on the material review, on-site verification and public feedback information and submit it to the People's Bank of China.

(IV) Review by the People's Bank of China

The People's Bank of China organizes a review of the application materials and forms the final approval result based on the preliminary review opinions of the People's Bank of China branches and public feedback.

(V) Issuing administrative licensing decisions

Based on the approval results, the People's Bank of China will prepare the corresponding administrative licensing decision document in accordance with the law and deliver it to the applicant in a timely manner.

3.2 License plate market price

Public data shows that since March 2015, the central bank has tightened the approval of new third-party payment licenses, and companies have almost no choice but to acquire the legal qualifications for payment business. From the license transaction cases, the market price of a license with an Internet payment business scope is about 500 million yuan, the Internet payment + mobile payment business license is more than 600 million yuan, and the Internet payment + mobile payment + bank card acquisition business license is worth more than 1 billion yuan. However, as the top Internet platforms have basically been equipped with payment licenses, it is becoming increasingly difficult to realize licenses worth hundreds of millions of yuan, and third-party payment licenses are in a state of oversupply. It is expected that prices will continue to decline in the future.

Chapter 4 Industry Development and Market Competition

4.1 Industry Financial Analysis

Figure Industry Comprehensive Financial Indicators

Source: Asset Information Network Qianji Investment Bank Wind

Figure Industry Historical Valuation

Source: Asset Information Network Qianji Investment Bank Wind

The valuation methods include price-to-earnings ratio valuation method, PEG valuation method, price-to-book ratio valuation method, price-to-cash flow ratio, P/S price-to-sales ratio valuation method, EV/Sales price-to-sales ratio valuation method, RNAV revalued net asset valuation method, EV/EBITDA valuation method, DDM valuation method, DCF discounted cash flow valuation method, NAV net asset value valuation method, etc.

Figure Valuation Analysis of Listed Companies

Source: Asset Information Network Qianji Investment Bank Wind

Chart Index Market Performance

Source: Asset Information Network Qianji Investment Bank Wind

Graph Index Valuation Analysis

Source: Asset Information Network Qianji Investment Bank Wind

Turakala's business income composition

Source: Asset Information Network Qianji Investment Bank Wind

Business income composition of Turendong Holdings

Source: Asset Information Network Qianji Investment Bank Wind

4.2 Risk Factors

Industry policy risks

The company's main business involves multiple business qualifications such as third-party payment and cross-border payment. Due to the particularity and professionalism of the industry, the competent industry department has formulated relatively strict industry supervision policies. With the development of business and changes in regulatory policies, if the company fails to obtain relevant business operation qualifications, it will have an adverse impact on the company's operations.

Market competition risk

The third-party payment industry is in a period of rapid development and industry integration. Factors such as the gradual improvement of industry regulatory policies, the continuous emergence of new technologies, and the increase in similar products or services in the market are driving changes in the industry's competitive environment. If the company cannot accurately grasp market and industry development opportunities, continue to upgrade technology and innovate business models, and enhance merchant service capabilities in the future, there may be market competition risks such as a decline in operating performance.

Merchant expansion and illegal operation risks

The industry has developed special merchants through direct promotion and merchant development service agencies, built a relatively mature customer risk monitoring system, established transaction monitoring rules and risk control models based on the payment industry format, monitored and analyzed customer transactions, and promptly checked suspicious large amounts of funds and took corresponding control measures. However, it cannot be ruled out that as the scale of merchants continues to expand, some merchant development service agencies and contracted merchants may engage in illegal business operations. In the future, if the company's merchant management, merchant development service agency management, and risk transaction monitoring are not in place, suspicious transactions cannot be promptly checked, resulting in regulatory penalties and other risks that affect the company's daily operations, which will have an adverse impact on the company's daily operations.

Payment fraud risk

Each company has established transaction monitoring rules, risk control models and relatively complete business risk management systems according to the industry format, continuously improved and enhanced customer identification methods and means, conducted dynamic and continuous monitoring of payment fraud risks such as account theft, counterfeit cards, telecommunications network fraud, money laundering, etc., and regularly or irregularly identified and controlled the company's business risks and operational risks. It is not ruled out that as the company's business scale expands in the future, if the company fails to monitor risk transactions or handle risk events in place, risk events may occur, and it may face customer complaints or lawsuits, or even the risk of regulatory penalties.

Technology and information security risks

Technical and information security risks mainly refer to risks in data confidentiality, system and data integrity, customer identity authentication, data tampering and other risks related to computer systems, databases, network security, etc. caused by problems in computer hardware systems, application systems, security technologies or network operations during the payment process. They mainly involve the stability, reliability and security of the bank's online banking system, third-party payment platforms and merchants' business processing systems.

Most companies have established stable and secure business operation systems, but they may still face situations where Trojan virus intrusions may lead to leakage of customer payment information, transaction failures, etc. due to the inability of related technologies and backend systems to operate stably and securely.

Risk of brain drain

The market competition in the third-party payment industry is increasingly reflected in the competition among high-quality talents. The company continues to maintain its market competitive advantage, mainly relying on the core management team, the core technology formed in the long-term development process and the accumulated operational management experience. With the fierce competition in the industry in the future, if the company's core backbone personnel are lost and new outstanding talents cannot be attracted, it will have an adverse impact on the company's operations.

4.3 Market Development Status

Figure 2016-2025 China's third-party mobile payment and third-party Internet payment transaction scale

Source: Qianji Investment Bank, Asset Information Network, iResearch Consulting

Looking back at the growth path of third-party mobile payments in my country, it originated from e-commerce, achieved explosive growth due to social red envelope transfers, and entered a new track driven by offline QR code payments. With the rapid growth of scale, the penetration rate of third-party mobile payments has gradually increased, and the growth rate of the industry scale has stabilized. Even in the special year of 2020, offline QR code payments were only impacted to a certain extent in the first two quarters, and the industry as a whole can still maintain a stable growth trend. The certainty of the industry's future growth lies in the continued sinking of third-party mobile payments in regions and populations, and the possibility of another explosive growth relies on the birth of new phenomenal products.

The current third-party mobile payment transaction scale mainly comes from payment transactions related to C-end users, while the penetration rate of third-party mobile payment between B-end enterprises still has a high room for growth. However, whether further innovation in payment services can bring dividends to enterprises beyond traditional payment forms is the key to testing the significance of innovation and whether the industry scale can usher in the next explosive growth.

Figure 2013-2025 China's third-party mobile payment transaction scale

Source: Qianji Investment Bank, Asset Information Network, iResearch Consulting

From the perspective of changes in the structure of mobile payments, the emergence of offline QR code payments has changed the form of offline mobile payments, resulting in a steady increase in the proportion of consumer transactions. In the financial and personal application transaction sectors, apart from early social red envelopes and baby money fund products, there has been no leap in product form since 2016. The growth of the business scale of these two sectors mainly comes from the increase in the penetration rate of mobile payments themselves, the improvement of user stickiness, and the development of Internet financial management and consumer finance businesses.

Compared with the structure of bank card transactions, the proportion of consumer transactions has also increased, but in 2020, the proportion of bank card transfer transactions was as high as 85.5%, and the combined proportion of personal applications and mobile finance of third-party mobile payments was even lower. Therefore, in large-value financial services, personal application transfer services, and B-side transfer services, third-party mobile payment companies still have room for development and have growth potential.

Figure 2016Q1-2020Q4 China’s third-party mobile payment transaction scale structure

Source: Qianji Investment Bank, Asset Information Network, iResearch Consulting

4.4 Competition Landscape

The third-party payment industry has a high degree of concentration. According to Analysys’ data on the transaction share of China’s third-party payment institutions’ comprehensive payment market in the third quarter of 2019, Alipay, Tenpay, and UnionPay Business ranked the top three with market shares of 47.05%, 33.77%, and 7.96%, respectively. The combined market share of the three reached 88.78%.

Figure Transaction share of China's third-party payment comprehensive payment market in the third quarter of 2019

Source: Qianji Investment Bank, Asset Information Network, Analysys Data, Dongxing Securities

Mobile payment: Alipay and Tenpay have formed a "duopoly"

Tenpay and Alipay have formed a "duopoly" pattern by relying on social networking, red envelopes, e-commerce and financial ecology; they occupy the vast majority of C-end customer resources with strong customer stickiness. According to the latest data from Analysys, in the first three quarters of 2019, Alipay and Tenpay accounted for 53.58% and 39.53% of the third-party mobile payment transaction volume respectively; the market share of One Wallet launched by Ping An Pay under China Ping An was only 1.28%; the market share of other third-party payment institutions was less than 1%.

Figure Transaction share of China's third-party mobile payment market in the third quarter of 2019

Source: Qianji Investment Bank, Asset Information Network, Analysys Data, Dongxing Securities

Internet payment: Alipay, UnionPay Business and Fortune Link ranked the top three

According to Analysys data, Alipay, UnionPay Business and Tencent Finance ranked the top three in terms of Internet payment transaction share in the first quarter of 2019, accounting for 23.62%, 23.49% and 9.72% respectively. Payment institutions such as 99Bill are committed to creating "payment +" value-added services and expanding specific scenarios such as education and Internet cars, and also occupy a certain market share.

Figure Transaction share of China's third-party Internet payment market in the third quarter of 2019

Source: Qianji Investment Bank, Asset Information Network, Analysys Data, Dongxing Securities

Bank card acquiring: The leading institutions are mainly UnionPay Business and Lakala

According to Nielsen's "2018 Asia Pacific Acquirer Rankings", UnionPay Business ranked first in the Asia Pacific acquirer list with 7.77 billion acquired transactions, and has ranked first in the domestic third-party payment market in terms of acquisition scale in recent years. Lakala's third-party acquiring market share is about 4%, and other large third-party acquiring institutions include Tonglian Payment and UBS.

4.5 Chinese competitors

The main competitors in China include Alipay, Lakala, Rendong Holdings, Tenpay, UnionPay Business, Yeepay, One Wallet, and 99Bill.

(1) Alipay: Founded in 2004, it has continuously expanded its payment business based on the huge online e-commerce scene. In 2012, Alipay obtained a third-party payment license for funds and began to move into the financial business field. In 2014, Ant Financial was officially established and MyBank was approved. In recent years, Ant Financial has used payment as an entry point to build a financial service ecosystem platform, and has formed three major development strategies headed by inclusive finance, technology, and globalization, and six major business segments mainly focusing on payment, wealth management, micro-loans, insurance, credit reporting, and technology output.

(2) Tenpay: Tencent launched the WeChat payment function in March 2014. Taking advantage of the high-frequency scenarios of WeChat social relationship chain, it has achieved rapid development through Spring Festival red envelopes, friend transfers, etc., and the transaction scale has remained at a high level. With a large number of users and high usage rate, it has penetrated into life scenarios and successfully achieved offline payment counterattack. WeChat payment is embedded in WeChat and has covered most netizens; it has more advantages in covering the sinking market and middle-aged and elderly users. As of the end of 2019, the number of monthly active users of WeChat reached 1.151 billion. In the short term, the growth rate of WeChat users and mobile payment market share will still be higher than that of Alipay.

(3) UnionPay Business: Founded in 2002, China UnionPay holds a majority stake in the company and has significant advantages in acquiring services. According to a Nielsen report, UnionPay Business ranked first in the ranking of acquiring institutions in the Asia-Pacific region in 2018, with a total acquiring transaction volume of US$2.3 trillion (approximately RMB 14.9 trillion), accounting for 65.9% of the total transaction volume of the top ten acquiring institutions in the Asia-Pacific region. UnionPay Business covers all cities above the prefecture level in China and more than 8 million merchants, creating a comprehensive payment service system around "payment +". It has built an "open mobile pan-African acceptance network" covering the whole country, accepting traditional bank card payments, Cloud QuickPass, QR code payment and UnionPay mobile QuickPass. At the same time, it continues to upgrade the payment acceptance network and explore emerging mobile payment methods such as face payment, vein payment and voice payment.

4.6 International Competitors

Major international competitors include PayPal [PYPL], Worldpay [WP], First Data [FDC old], Mastercard [MA], Kakao Pay (377300), etc.

(1) PayPal: The originator of third-party payment (founded in 1998), it has gradually developed from a payment tool to a world-leading technology platform and digital payment company, providing payment tools and payment solutions for individuals and businesses. As of the end of 2019, PayPal has covered 305 million active accounts in more than 200 countries and regions, including 281 million personal accounts and 24 million corporate accounts. The domestic business and international business have developed in a balanced manner.

(2) Worldpay: The world's largest acquisition agency (founded in 1997), covering 146 countries and 126 currencies. In July 2019, FIS, a US financial technology service provider, completed the acquisition of Worldpay, becoming a world's leading technology and service provider, accelerating the development of global payments, banking and investment methods.

(3) First Data: a world-leading payment company, serving customers from more than 100 countries, more than 6 million business locations and more than 3,700 financial institutions. In January 2019, Fiserv, a veteran US technology service provider, acquired First Data. The merger will support a series of payment and financial services, including account processing and digital banking solutions, card issuer transaction processing and network services, e-commerce, comprehensive payment solutions, etc.

Chapter 5 Future Outlook

5.1 New tools: Promotion and application of central bank digital currency

The central bank's digital currency replaces M0, which belongs to cash currency. According to the idea that digital currency is positioned as cash currency, review the provisions in the "Regulations on the Deposit of Customer Reserve Funds of Non-Bank Payment Institutions" released this year: "If a non-bank payment institution handles redemption of reserve funds for customers through cash in the form of regulations, it shall first pass through the registered own funds account, and then transfer the corresponding amount of customer reserve funds from the reserve fund centralized deposit account through the reserve fund main supervision agency."

It can be seen that the newly released reserve fund deposit custody method has actually laid the policy preparation for the circulation of digital currency through third-party payment exchanges. The corresponding business scenario for this regulation is that users exchange the current third-party digital wallet account balance for digital currency applications. The digital wallet service and merchant-side collection service of third-party payment institutions are still one of the important carriers of their circulation. The promotion of digital currency and the application of third-party payment are complementary rather than mutually substitutable.

At the same time, clearing institutions, as important infrastructure in the payment chain, will still play a clearing role in the digital currency era. In the downstream of the payment chain, in order to enable digital currency to have a wider payment scenario, they need to upgrade and transform the original equipment and systems. This certainty will bring special growth momentum to the business income of downstream enterprises.

5.2 New business format: further integration of online and offline scenarios

The emergence of offline QR code scanning payment is the first contact between many offline merchants and digitalization. With the sweeping wave of digitalization and the upgrading of payment-related services, scanning code orders and merchant mini programs have become the entrances for further digitalization of merchant business.

With the promotion of application of scanning codes and mini-program takeout and orders, it not only means saving operating costs for merchants, but also accompanied by digital upgrades in the pre-payment link, making merchant operation information more complete, which is conducive to further analysis, improving their own operating efficiency and obtaining external financial support. For payment companies, the online and offline scenario distinction will be broken. Merchants' services still focus on offline attributes, but the services provided to them will not be limited to offline payment, which puts higher requirements on the comprehensive technical capabilities of service providers.

How to embrace the transformation of diversified merchant SaaS services has become a question that many top collection outsourcing technology service providers have considered. Success in transformation means opening up a broader enterprise service market, while failure in transformation may very likely mean that it is difficult for enterprises to stand at the forefront of the digital wave.

In terms of implementation, mergers and acquisitions or participation in SaaS service providers with certain technical accumulation is an effective way to integrate industry understanding and technological advantages; in terms of business order, enterprise services that can allow merchants to see more intuitively the cost reduction and efficiency effects brought by digital upgrades are more suitable for early stages of markets where merchants are weak in payment intentions.

5.3 New pattern: an open and vibrant payment ecosystem

In the next few years, the account side of third-party payment institutions will face the challenge of entering the new Internet giants and the external side will face the re-entry of the bank-side digital wallet with the help of digital currency; in addition to the competition for the original B2C acquisition business, the enterprise service side will also expand the competition to a broader inter-enterprise payment market and enterprise digital upgrade service market, and outsourcing service institutions will begin to complete further market concentration after completing the filing and compliance procedures; even for the two clearing organizations, they are secretly competing in the competition for rate standards in different liquidation positions and the development of new scenarios.

At the same time, all parties in the industrial chain from card issuing banks to leading payment institutions and then to clearing organizations are also building open service platforms to achieve win-win cooperation in the industrial chain. Through the cooperation of open platforms, diversified service capabilities are embedded, so that resources and information in the ecosystem enter a virtuous cycle.

From: Asset Information Network