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Lesson 1: High Rates
High credit-card fees inspire merchants to search for alternatives. Lower fees drive investments and profits.
Think about the typical fees a merchant in China can expect to pay for processing three hot payment methods.
- WeChat Pay, the most popular payment system, is approved by 72 million merchants in China and claims to process more than 1 billion transactions daily. WeChat Pay’s average merchant processing fee is 0.6 percent.
- Alipay, China’s second most popular payment app with use statistics like WeChat Pay, has a mean merchant fee of 0.55 percent.
- China Union Pay, China’s most popular credit card, has a mean merchant fee of 0.8 percent.
The typical card-present fee in North America is approximately 2.2 percent; card-not-present is approximately 3.5 percent. Thus the distinction is apparent: North American merchants are paying much more to process fewer transactions. (There are approximately 100 million daily credit card transactions in the U.S. versus 1 billion in China.)
To be certain, the unbelievable growth of ecommerce and mobile payments in China can’t be attributed exclusively to reasonable transaction fees. But if fees in China were like those in North America, adoption could be much lower.
High merchant prices could eventually prompt North American merchants to:
- Seek alternatives to card-based payments. An example is the Starbucks mobile wallet. Customers load funds in their accounts and use those funds (and loyalty-based rewards) to cover purchases. The saved funds allow Starbucks to prevent interchange and card-assessment fees on each purchase. Expect different merchants to adopt their own stored-value pockets and reloadable gift cards.
- Call for more regulation on card brands (Visa, Mastercard, American Express, others), such as more antitrust suits.
- Adopt less expensive payment methods, such as debit cards, direct-from-bank payments, and peer-to-peer payments.
Lesson 2: Consumer Credit-card Debt
Crushing credit card debt induces consumers to search for alternatives.
Credit card debt is as much of a problem in China as in North America. In 2020, Chinese cardholders accrued roughly $2.5 trillion of credit card debtAmericans accrued $930 billion.
In 2019, recognizing the danger of credit card debt into the nation’s economy, the Chinese government capped credit card interest rates at 12 to 18 percent, depending on the type of card. Those prices are more or less consistent with North America.
Nonetheless, excessive debt continues to plague consumers in China and North America, which could induce shoppers to”debt-free” alternatives, for example:
- Debit cards and direct-from-bank payments, which allow consumers to make purchases only if adequate funds are in their account. Merchants should anticipate more debit card payments and much more bank-based payments.
- Buy-now-pay-later, while still a type of credit, can help consumers manage their debt. Despite the comparatively high fees, merchants are accepting BNPL payments as shoppers are searching for options to card-based debt.
- Prepaid cards, that could gain wider acceptance because they behave like credit cards but don’t allow consumers to pay with cash they don’t have.
Lesson 3: Point-of-sale Hardware
In China, payment apps like WeChat Pay and Alipay utilize QR codes. A documented 98 percent of urban Chinese consumers use their electronic wallet for daily purchases. Most consumers don’t carry cash.
The end result is that Chinese merchants aren’t burdened by expensive registers and point-of-sale gear. Merchants simply display QR codes for clients to scan.
Lesson 4: Super Apps
In China, amusement, shopping, social networking, payments, and more are combined in”super apps” — typically WeChat. Chinese users use one app for:
- Internet surfing,
- News intake,
- Chat messaging,
- Payments and cash transfers,
- Social networking,
- Picture sharing,
North American consumers use one app for a couple of purposes, typically. A good example is Instagram for sharing pictures. Only recently has Instagram enlarged into shopping and payment approval. Maybe Amazon will develop into super app standing by combining entertainment .
Regardless of the political rhetoric in the U.S. to split up Substantial Tech, merchants should carefully track the development of super apps. Should they become anywhere near as popular as in China, those apps could help merchants reach great audiences.
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