Northeast Asia: Microcosm of the World’s Mobile Payment Industry

Damion Jeong

The 2010s signified a global shift towards a cash-less, card-less, and wallet-less economies thanks to the rise of mobile payments. In 2018, the mobile payments market reached a size of $897.68 billion, assisted by technological advancement in mobile devices.[1] Consumers across the globe choose to make convenient, instant payments with phones. While a number of countries have endorsed this development, others have moved onto addressing challenges entailed by the growth of mobile payment.

Asia-Pacific is the greatest driver of the growth of mobile payments, and the three Northeast Asian economies of China, Japan, and South Korea have noteworthy stakes in this.[2] Not only are they Asia’s 1st, 2nd, and 4th biggest economies in terms of GDP, respectively, serving as an appealing market for mobile payments, but they have also made significant contributions to the development of the industry.[3] For example, Japan was the first country to implement mobile payment services, whereas China is the current leader in the industry.[4] South Korean firm Samsung also launched Samsung Pay, a mobile payment service, which is attracting customers globally.

In spite of such contributions, regulations and usage rates of mobile payments greatly differ in the three economies. An in-depth comparison of the status quo of mobile payment in the three biggest economies of Northeast Asia will render useful insight in understanding trends and future prospects in the market.

The Current Picture

The premise for the spread of mobile payments is that of smartphones: widespread smartphone usage can support the growth of mobile payments. Thanks to their leading technology levels, these countries have the necessary foundations. They are home to the world’s leading electronics manufacturers such as Sony, Samsung, LG, Xiaomi, or ZTE, and smartphones have penetrated deep into these societies. Currently, approximately 63.3% of mobile phone users use smartphones in China, and growth has been notable especially in rural areas.[5] Last year, South Korea ranked number 1 worldwide in smartphone ownership. Japan also has a smartphone penetration rate of 57.2%, comparable to that of its neighbors.[6] Overall, all the countries have the basic infrastructure to support the development of mobile payment.

Of the three countries, China has the most extensive mobile payment network. Cash payments are almost unheard of in China. In 2017, nearly 75% of Chinese citizens were using mobile payments, and the impetus behind this growth is rural China, with approximately 50% of offline transactions happening through mobile payment.[7] Even homeless people and street performers are receiving money through mobile payment by displaying their QR codes. China’s massive mobile payment market is largely dichotomized by WeChat Pay and Alipay, occupying 94% of China’s mobile payment industry.[8] The expansion of such firms allowed China to leapfrog in the industry.

As aforementioned, Japan was the first country to introduce mobile payment systems, which was developed jointly by Sony and NTT DoCoMo. Japanese tech-leaders such as Softbank, Yahoo! Japan, Line Japan, or Rakuten are involved in the business. Nonetheless, mobile payment usage is not so substantive. Many Japanese consumers prefer physical cash over mobile payments and credit cards.[9] Statistics show that almost 80% of monetary transactions in Japan are done by cash.[10] Despite this low usage, many firms see Japan’s potentials. Numerous mobile payment services such as PayPay, LINE Pay, Rakuten Pay, and Apple Pay are vying for market leadership in Japan.[11]

South Korea is a latecomer in the industry. Though it possesses the necessary infrastructure, the country’s transactions are largely dominated by credit and debit cards: nearly 76% of the nation’s transactions are executed through credit or debit cards.[12] Due to this, payment processing firms such as Mastercard or Visa has a strong foothold, hindering the development of mobile payment.[13] More importantly, the use of outdated systems in online payments also pose an impediment.[14] Only recently did major tech and credit card firms such as Kakao Pay, Shinsegae, or Naver start introducing mobile payment systems.

Policies and Regulations

The three economies are at different stages in terms of mobile payments. Government regulations and policies on mobile payment in the three countries thus differ. China is addressing post-development problems, Japan is amid the process of developing, and South Korea is attempting to take off.

Because China adapted early to mobile payments, its government has moved on to addressing security issues rather than promoting its usage. When mobile payment first emerged, Beijing expressed practically no intention of intervention.[15] But as a result of its rapid and sudden expansion, relevant problems were detected. For example, QR code systems are generally vulnerable to security issues than other methods as the payer or payee’s information is easily exposed, and because Chinese mobile payment systems are based on QR codes, frauds and scams surged.[16] In 2017, $13 million was stolen in Guangdong due to QR code scams.[17]

To combat these problems, the Chinese government implemented regulations to monitor mobile payments. Last June, Beijing ruled that all mobile payments be cleared via the People’s Bank of China (PBOC).[18] Prior to this, the PBOC also imposed a payment limit on mobile payments.[19] While such regulations can curb security issues, they also incurred concerns. Due to this, major mobile payment firms no longer have access to their customers’ transaction data, inhibiting them from developing strategies that can satisfy consumers. In a broader sense, because China’s mobile payment market grew in an environment void of government intervention, whether the Chinese mobile payment market can continue leapfrogging in the presence of regulations is questionable.

As to Japan, the government is willing to promote mobile payments based on the country’s high-tech framework. Last year, the Japanese Ministry of Economy, Trade, and Industry released an ambitious plan to raise non-cash transactions to 40% by 2025.[20] In response, various tech firms recently joined the Japanese mobile payment industry. Businesses are accordingly incentivizing customers to use the service. PayPay, one of Japan’s most dominant mobile payment services established by Softbank and Yahoo!, announced a 10 billion-yen cash prize to attract consumers.[21]

The Japanese government has set a favorable environment to these businesses. Generally, there are almost no regulations for FinTech firms in Japan as long as they obtain relevant licenses and uphold basic laws.[22] Tokyo’s encouragement of mobile payment can be understood in the context of Japan’s desire for an economic breakthrough. The country faces a variety of economic challenges, such as the Galapagos syndrome, its rivalry with China, the US-China Trade War, and stagnation. The Tokyo government’s promotion of new forms of payment can be seen as the government’s attempt to leverage the country’s high-tech industry and wealth to solve Japan’s economic isolation and stagnation.

South Korea is currently shedding out-of-date financial systems that impeded the thriving of mobile payment. Until recently, South Korea was one of the few countries that utilized ActiveX plug-ins, developed in 1996.[23] This made payments in non-Windows software and internet browsers – even for relatively trivial payments like online shopping. The government thus identified ActiveX as a key obstacle limiting growth of online banking and is aiming to abolish the plug-in by 2020.[24] Such trends delayed the growth of mobile payment in South Korea, making the country become a latecomer.

Along with the abolishment of ActiveX, South Korea introduced policies to facilitate the development of FinTech. The government relaxed investment regulations for FinTech firms.[25] The city government of Seoul created its own mobile payment service, Zero Pay. Such policies weakened the foothold of payment processing firms in South Korea, establishing a favorable environment for FinTech. In consequence, mobile payment usage in South Korea increased by 180.1% in 2017.[26] Nevertheless, a multitude of uncertainties are laid in front of South Korea’s mobile payment market, and consumers’ responsiveness to such policies are also an issue. Whether South Korea’s journey will be successful is yet to be determined.

Conclusion

Albeit their geographic adjacency, the mobile payment industry greatly differs in China, Japan, and South Korea. They are set in disparate environments and face varying challenges. Relevant regulations and policies reflect this. In sum, they are a microcosm of global developments in mobile payment.

Already-developed China has shifted from a non-regulation environment to one of tightening regulations due to security issues. The challenge is to find a balance between effective regulation and sustaining this development. Currently in the process of developing, Japan is aggressively stimulating the growth of mobile payment. Tokyo will utilize this market as part of an opportunity for a breakthrough. Beginning to develop, South Korea is removing old-fashioned systems and laying foundations for growth. Such foundations have to be effective for future growth in mobile payment.

The varied stages of development the three Northeastern economies of Asia can be seen in a broader context, suggesting future prospects for mobile payment in other economies and the world.

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References:

[1] Mobile Payments Market: Growth, Trends, and Forecast (2019 - 2024). (n.d.). Retrieved November 5, 2019, from https://www.mordorintelligence.com/industry-reports/mobile-payment-market.

[2] ibid.

[3] GDP (current US$). (n.d.). Retrieved November 5, 2019, from https://data.worldbank.org/indicator/NY.GDP.MKTP.CD.

[4] Olga, K., & Lulu, C. Y. (2018, October 18). My Phone Is My Wallet. Retrieved November 5, 2019, from https://www.bloomberg.com/quicktake/mobile-payments.

[5] China smartphone user penetration rate 2013-2019. (n.d.). Retrieved November 5, 2019, from https://www.statista.com/statistics/257045/smartphone-user-penetration-in-china/; Lulu, C. Y. (2017, November 20). Alibaba. Retrieved November 5, 2019, from https://www.bloomberg.com/quicktake/alibaba.

[6] Top Countries/Markets by Smartphone Penetration & Users. (n.d.). Retrieved November 5, 2019, from https://newzoo.com/insights/rankings/top-countries-by-smartphone-penetration-and-users/.

[7] Morris, H. (2019, April 8). China's march to be the world's first cashless society: China Daily contributor. Retrieved November 5, 2019, from https://www.straitstimes.com/asia/east-asia/chinas-march-to-be-the-worlds-first-cashless-society-china-daily-contributor; Z, X. (Ed.). (2018, May 1). Mobile payment increasingly popular in rural China. Retrieved November 6, 2019, from http://www.xinhuanet.com/english/2018-05/01/c_137149373.htm.

[8] Liu, A. (2019, March 5). An Analysis of the PBOC's New Mobile Payment Regulation. Retrieved November 6, 2019, from https://www.cato.org/cato-journal/winter-2019/analysis-pbocs-new-mobile-payment-regulation.

[9] Beade, A. (2019, August 21). In high-tech Japan, cash remains king, defying mobile payments. Retrieved November 6, 2019, from https://www.japantimes.co.jp/news/2019/08/21/business/cash-king-aging-japan/#.XcLzQUX7TUp.

[10] Morlan, W. (2019, September 26). Mobile Payments in Japan 2019. Retrieved November 6, 2019, from https://blog.btrax.com/mobile-payment-in-japan/.

[11] ibid.

[12] The 4th Industrial Revolution: Disappearing Cash, Now is the Era of Mobile Payments. (2018, July 18). Retrieved November 6, 2019, from https://blog.naver.com/kpostbank/221321314100.

[13] Lee, M. (2016, July 8). Visa Comments on a "Korean NFC" Developed by 8 Card Firms. Retrieved November 6, 2019, from http://biz.chosun.com/site/data/html_dir/2016/07/08/2016070800933.html.

[14] Ramirez, E. (2016, December 2). South Korea's Online Banking System Is Stuck In 1996. Retrieved November 6, 2019, from https://www.forbes.com/sites/elaineramirez/2016/11/30/south-koreas-online-banking-system-is-stuck-in-1996/#368c7040527c.

[15] Liu, A, op. cit., (no 8)

[16] 警惕！移动支付最常见安全问题是个人信息泄露. (2018, December 26). Retrieved November 6, 2019, from https://baijiahao.baidu.com/s?id=1620896159063289857&wfr=spider&for=pc.

[17] Li, T. (2017, September 1). Chinese QR code scams shine spotlight on consumer security. Retrieved November 6, 2019, from https://www.scmp.com/business/china-business/article/2080841/rise-qr-code-scams-china-puts-online-payment-security.

[18] Liu, A, op. cit., (no 8)

[19] Wang, Y. (2018, January 5). China Tightens Regulation Over Mobile Payment Apps -- What's Next For Tencent and Ant Financial? Retrieved November 6, 2019, from https://www.forbes.com/sites/ywang/2018/01/03/china-tightens-regulation-over-mobile-payment-apps-whats-next-for-tencent-and-ant-financial/#76904a2d7f1d.

[20] キャッシュレス. (2019, November 1). Retrieved November 6, 2019, from https://www.meti.go.jp/policy/mono_info_service/cashless/index.html.

[21] Morlan, W, op. cit., (no 10)

[22] Kawai, K., & Sasaki, K. (2019, May 10). Fintech 2019: Laws and Regulations: Japan: ICLG. Retrieved November 6, 2019, from https://iclg.com/practice-areas/fintech-laws-and-regulations/japan.

[23] Sohn, J.-Y. (2017, July 17). Can Korea successfully ditch ActiveX once and for all? Retrieved November 6, 2019, from https://www.nationthailand.com/Startup_and_IT/30321025.

[24] Lee, S. (2018, February 1). 2020년까지 공공기관 액티브X 퇴출 예고… 대체할 기술은? Retrieved November 6, 2019, from https://it.donga.com/27360/.

[25] The 83rd Meeting on Current National Affairs. (2019, June 27). Retrieved November 6, 2019, from https://primeministerkr.blog.me/221571920826.

[26] The 4th Industrial Revolution: Disappearing Cash, Now is the Era of Mobile Payments. (2018, July 18). Retrieved November 6, 2019, from https://blog.naver.com/kpostbank/221321314100.

Cover image: https://www.scmp.com/tech/big-tech/article/3010109/alipay-extends-mobile-payment-services-300000-retailers-japan