Biometric payments

Cashless China embraces a biometric future.

Facial recognition is set to turbo-charge payments as competition for consumers’ data grows.

At some fast-food outlets in China, one smile is all it takes to pay for a meal. Thanks to facial-recognition technology developed by Ant Group, the parent company of Alipay, China’s largest digital payments platform, the hungry diner simply allows his or her face to be scanned by a camera built into a touchscreen used for ordering, and the order is placed in less time than it takes to process a card transaction.

Use of such futuristic biometric technology is moving gradually toward the mainstream in China’s rapidly developing payments landscape.

UBS analysts believe that the progress of biometric technology in China paves the way for a new, data-rich, seamless payments ecosystem involving retailers, banks and telecommunications groups. It predicts this will help drive economic growth by reducing commercial friction in China far beyond the contactless experience now so familiar to most people in China and the rest of the world.

In a glimpse of what is to come, roughly 21 percent of shoppers at Ant’s Alipay app and rival Tencent’s WeChat Pay service were using facial-recognition payments systems once or twice a week, according to an April survey by UBS Evidence Lab, an alternative data provider.

A separate analysis by UBS China 360, a new thematic China research offering that leverages UBS Evidence Lab data and partners with analysts across the globe, showed that by the end of 2019, the two biometric payments systems had penetrated as many as Chinese 300 cities, with adoption spanning a broad range of merchants.

There is potential for further growth as China’s traditional digital-payments ecosystem approaches maturity, and as regulators move to reshape the landscape to spur competition in the payments business.

That is setting the stage for a battle between tech companies, banks and others for a share of the data that have become essential to building businesses in everything from emerging “new retail” models, to insurance, wealth management and more.

“China’s payments landscape this decade could well be defined by the migration toward biometric payments,” says Natalie Cade, Head of UBS China 360. “Regulators are keen to build a fully contactless [payments] framework, which we believe can only be achieved by biometric means. There is an emerging battle between ecosystems and it’s about capturing as much data as possible.”

China’s mobile payments market already leads the world in terms of total transaction volume, significantly overshadowing that of the U.S. By the time New York’s subway system became the first network in the U.S. to accept mobile wallets in 2019, Alipay was already well on its way to being widely used in 400 Chinese cities’ transport systems, with WeChat Pay in use in about half of them.

But such growth is starting to run out of steam. While there are no official data on merchants and payments, observations by UBS China 360 on the ground, and conversations with merchants, suggest that making payments using QR codes has reached saturation in China’s tier 1 and tier 2 cities, with Alipay and WeChat Pay ubiquitous from shopping malls to “mom and pop” shops.

Acquiring more merchants is one reason why Ant launched its Dragonfly facial-recognition payments system in late 2018, with Tencent bringing out its own version, called Frog Pro, a year later.

By using biometrics, both are able to boost transactions in supermarkets and stores due to the ability of the technology to reduce so-called “payment friction”—that is, the time it takes to complete a transaction after verification and authentication by the buyer and seller. Card transactions and those involving scanning a QR code take about 15 seconds, while with facial recognition the entire process of verifying a user’s biometric data and processing the transaction takes about one second. Valuable data on the consumer are harvested in the process.

Pressure to push into biometrics is also coming from regulators. Ever since the People’s Bank of China, the central bank, issued the country’s first payment license in 2011—a move that effectively placed the digital-payments sector under regulatory oversight—scrutiny has been increasing.

The latest sign came in August 2019, when the bank published a Fintech Development Plan that introduced the concept of a unified QR code, to be implemented in 2021. At the moment, consumers use different QR codes developed by Ant and Tencent to access each.

Certain to be a game-changer, a unified code would allow competitors to enter the market. Consumers would be able to use not only the two e-commerce giants’ payments apps, but also apps offered by their preferred banks, or other payments providers such as UnionPay.

Internet companies with existing payments licenses and e-commerce platforms would then be allowed to cross-sell payments services to their users easily. Conversations that China 360 analysts have had with industry experts suggest that Xiaomi, Meituan Dianping, China’s biggest food delivery app, and JD.com are keen to develop their fintech offerings once regulations allow.

UBS believes that winners in the world of “new retail” will not only be defined by the design of their omnichannel offerings, but by which company has the most comprehensive set of biometric, retail and transactional data.

“In the long run, a fully contactless and seamless biometric-payments system is more likely to be mass commercialized by the more established and well-funded retailers that have robust consumer data, the tech advantage, and existing offline presence,” says Ms. Cade.

“There is a battle between ecosystems around data, so the big players need access to consumers in as seamless a way as possible.”

Looking ahead, UBS analysts believe there will be opportunities to export biometric technology to developed markets, with malls, supermarkets and restaurants adopting biometric-payments hardware produced by companies like Sunmi and Malio, which already provides biometric touchscreen kiosks to KFC, the chicken fast-food chain.

Canada is pointing the way, with Chinese-owned grocery chain Foody Mart working with SnapPay, a Canadian payments gateway services company that allows North American merchants to accept digital payments from Chinese pay users.

“Both biometric technology companies and financial-sector adopters of biometric-recognition technology applications stand to benefit,” says Xiaomeng Lu, Senior Analyst for Geo-Technology at Eurasia Group, a consultancy.

Moreover, this profound shift in China’s payments landscape could position the world’s second-largest economy at the forefront of establishing a new standard for payments systems that the rest of the world may follow, based on advanced artificial intelligence and machine learning.

“It may sound like science fiction, but it is not hard to envision the endgame—the payments interface being no interface at all,” says Ms. Cade.

Views correct as at 3 September 2020