Last week, Alipay announced that, beginning in October of this year, they are implementing a new, ad valorem money transfer fee of 0.1%. This fee would only be charged to consumers moving an accumulated amount over ~US$3,000 at a time from their Alipay account to their bank account. It’s not quite clear what the accumulation period is, but it’s generally assumed to be per month.
Earlier this year, Alipay’s main competitor, WeChat Pay instituted a similar ad valorem fee of 0.1% on the first US$1,000 in transfers. Justifying the change, WeChat cited that bank transfers were costing the company ~US$28 million per month.
At the same time, The People’s Bank of China (PBOC) instituted a new policy that went into effect on September 6th which established an ad valorem fee ceiling for card transactions of not more than 0.35 percent of a transaction amount for debit cards and not more than 0.45 percent for credit card transactions. Prior to this change, fees differed by merchant category type, which interestingly created a cottage industry of faking codes in order to pay lower rates.
It’s perhaps no coincidence that these changes are all taking place at the same time. Here’s my breakdown of the dynamics:
- Interchange Fee Regulation: The PBOC, like other regulatory bodies around the world, acknowledges through this action that variable interchange fees based on categorizations outside of the payment type itself tend to foster imbalance in the market and can be non-competitive in the face of alternative payments forms. Alipay and WeChat Pay charge about 0.55% to merchants, thus the new card rates improve positioning for bank-issued cards and align with a simplified fee structure. These actions follow similar changes in many other countries but are significant based on the size and growth potential of the Chinese market. This also underscores the strong competitive position that Alipay and WeChat Pay enjoy in the market and illustrates how alternative payment services can influence business models as they build scale and consumer influence.
- Consumer Fees: Conversely, the fact that Alipay quickly reacted to its main competitor’s move to institute consumer fees-for-service could point to a pent up demand for shifting some financial services costs back to consumers. Consumers may not like it, but in this situation, these two companies represent a significant share of the alternative payment market in China and consumers also enjoy the enhanced value these digital payments types offer including easy access to offers and promotions. Another benefit for Alipay could be that consumers leave more cash in their Alipay accounts. It’s possible that at some point, there could be a tie-in to the parent company, Ant Financial in the form of total relationship value pricing for example, but this is purely speculation on my part.
- The U.S. Market: In the U.S., we appear to have the opposite dynamic in play as both major card networks, Visa and MC, have recently announced partnerships with PayPal designed to drive more transaction activity away from checking accounts and onto card-branded products. However, PayPal earned some interchange fee forgiveness in those negotiations and issuers stand to gain from the opportunity to shift cost-based transactions (ACH) to revenue-based transactions (debit and credit cards) (see my previous post on this subject).
Bottom line is that the value constructs of alternative payments types are influencing the market whether through regulatory or market forces and as a result, these companies, which don’t carry the legacy of free financial services as a starting point, may be more inclined to consider introducing fees to consumers for certain services or finding ways to partner that improve their market share and mitigate costs.
When it comes to fees we should remember that younger consumers are much more accustomed to being presented with a fee option for enhanced digital services and may in fact, view free services as less valuable overall. As interchange fees continue to soften, card issuers should be thinking about how to create a transaction value paradigm that is relevant to their accountholders and offers enough benefits to rationalize a fee-for-service structure.