Does Alibaba’s Record-Setting IPO Introduce a New Payments Competitor?
On September 19th, 2014, the Chinese e-commerce giant Alibaba Group debuted on the NYSE as the largest IPO in history ($25 billion). Yet despite its recent headlines, most people in the U.S. are not yet familiar with Alibaba, a collection of multiple B2B websites and Chinese retail entities, including a C2C retail site (called TaoBao) that is often compared to the U.S. auction site eBay (Figure 1). One Alibaba-affiliated company that is of particular interest to the payments industry is the online and mobile payment platform called Alipay, which was spun off from Alibaba four years ago but is still controlled by Alibaba’s chairman and former CEO, Jack Ma.
Figure 1: Alibaba Marketplaces and Affiliates
Alipay is a third-party escrow service that is commonly compared to the U.S. firm PayPal, which gained popularity in China by facilitating payments for items purchased on one of Alibaba’s retail marketplaces. Unlike U.S. based companies that advertise instant payments, Alipay delays payment for most merchants until the buyer confirms satisfactory delivery of the goods, which has helped build confidence in e-commerce in China and spurred much of Alibaba’s growth. Building on this e-commerce tradition, Alipay built a dominant position in the Chinese market by placing an emphasis on mobile integration, and its mobile app is now also commonly used outside of Alibaba, including ordering tickets, making person-to-person payments, and managing bill payments. Estimates of Alipay’s market share in China vary widely depending on the source, but Chinese internet research firm iResearch reports that Alipay handles close to 80% of all Chinese mobile payments, mostly via remote mobile transactions in apps and online.1 In comparison, the U.S. mobile payments market remains much more fragmented with many established and developing players trying to gain traction with consumers.
It is important to note that even though Alibaba Group chose the U.S. market for its IPO, Alipay services are currently not generally available for U.S. consumers, and its largest near-term impact will be limited to facilitating the sale of goods and services to Chinese consumers. Several e-commerce payment processors, including Cybersource and newcomer Stripe, currently offer Alipay as a payment option for U.S. merchant websites as part of Alipay’s cross-border payments services (Figure 2). Online shopping network ShopRunner also recently announced support for the payment service for an unnamed number of its brand partners.
However, the sheer size of volume (Alipay processed almost three times more total annual payments volume than PayPal in 2013 and almost six times more mobile annual payments volume in the same year (Figure 3)) and its dominant position in a large and growing market warrants attention.
Figure 3: 2013 Payment Activity Metrics
Similar to eBay and PayPal, Alipay’s association with the broader Alibaba platform has had tremendous advantages for both entities. Accordingly, Alipay’s position as an independent service provider positions the company to take advantage of new opportunities outside of its core marketplace business. As a large and mobile-savvy company, Alipay represents a competitive force that could play a disruptive role all across the market, but especially for other online-only payments firms like PayPal. Jack Ma, speaking about a potential partnership with Apple, stated recently at the WSJD Liveglobal technology conference, “I hope we can do something together,” Mr. Ma said, though he cautioned that it should be a “marriage” that both sides want. Also, speaking more directly about eCommerce, Ma stated, “Amazon, eBay. You need more.”
Following this IPO, it appears that the industry should be paying closer attention to this leading Chinese firm. It has the technical competency and investment capacity to be a major player in any market in which it chooses to compete. While perhaps not an immediate threat to U.S. financial institutions, Alipay certainly warrants monitoring in the near term.
For more information, please contact Jeff Crawford, Manager, email@example.com; or Stephen Kiene, Consultant, firstname.lastname@example.org, members of the Deposit Access Practice, specializing in Debit and Prepaid.
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