In-depth: What does a cashless society mean for insurers?

Key points:

• As a result of COVID-19 there was a huge rise in contactless payments across the world and Asian markets experienced a 20% increase in digital users in the three months to the end of 2020.
• This year, China’s $2.8 trillion retail ecommerce market, is set to become the first in history to transact more than half of its retail sales online.
• Mobile payments have catalysed the distribution of life and health insurance and begun to demonstrate an ability to perform market segmentation to allow better targeting of products.
• Today, more than 92% of China’s digital transactions are shared between WeChat Pay and Alipay.

Digital glue

As a region, Asia is by far the biggest contributor to global payments revenue. In 2019, it generated more than $900 billion. That’s nearly half the global total, according to McKinsey’s Global Payments Map.

It is now so important to the region’s aggregate banking revenues it has grown from 33% in 2007 to 44% today.

We tend to take them for granted these days, but digital payments are an essential part of commerce for Asia. They are the glue that binds relationships between businesses and consumers, providing opportunities for ongoing engagement, and brand presentation.

The rapid growth of digitally connected consumers in the region is the driving force behind the burgeoning e-commerce sector. And while COVID-19 greatly reduced discretionary spending, it was the catalyst for other trends within the payments landscape.

Out of necessity, there was a huge rise in contactless payments across the world and Asian markets, experienced a 20% increase in digital users in the three months to the end of 2020.

The status quo – duopoly

A report by McKinsey report identifies five key themes shaping the Asian payments landscape, but the benefits to e-commerce – and in particular insurance – have been most keenly felt in China.

The Chinese economy is fast developing into a cashless society. If you are conducting business or making purchases in China, you need to have an account with an online or mobile based third party payment system.

There are two key players – Tencent’s WeChat Pay and Alibaba’s Alipay – and they are huge. Apple Pay is the largest mobile digital payment platform outside China, with 227 million global users, as of July 2020. Apple has more users than both the platforms run by competitors Google and Samsung combined, which were estimated to have around 100 million users each in 2020.

WeChat Pay has more than 900 million monthly users, while Alipay has more than 1.2 billion as of April 2020. More than 900 million of these are based in China.

Making digital payments frictionless

China used to be a cash-based society, with a very underdeveloped banking system.

Zennon Kapron is a banking industry veteran and founder of Shanghai based financial services research firm, Kapronasia. He was working in China from early in the century and experienced the development of cashless payments.

The banking system was old fashioned and inflexible, but from the very beginning, most of his payments were “mobile”.

“When I got [to China] in 2004, the easiest way to pay my rent was by withdrawing cash from the teller, putting it in a paper bag and crossing the street to physically deposit it,” says Kapron. There were alternatives, but interbank transfer payments required the completion of a stack of forms and incurred a 1% to 2% fee, while withdrawals at ATMs were limited to between $200 and $300.

The electronic payment system was wholly unsuitable for e-commerce and just as inflexible as the traditional system. Few trusted the mechanism, and if you wanted to unwind a transaction, it was necessary to get the other party’s consent.

“The development of e-payments was less a revolution, than part of a constantly recurring theme of addressing key pain points in the traditional payment ecosystem,” says Kapron, with the first being e-commerce on the Alibaba platform and subsequently other e-commerce platforms.

Keep it simple

Simplicity is behind the success of the Chinese cashless payments system. Around 2010, NFC was being piloted as a platform for financial transactions, says Kapron. The trouble with NFC is it requires a particular kind of SIM and a payment system standing behind it. Even if the tech worked, there wasn’t yet a simple financial system to underpin it.

In an effort to find a hardware-agnostic platform, Alipay was experimenting with high frequency sound to interact with vending machines. At the same time, Japanese consumers were embracing the novelty of QR codes. It was QR codes that would be the catalyst for the cashless leap forward, says Kapron.

QR codes require much simpler technology – a basic smartphone with a 3.2 megapixel camera costs as little as $40 in China today. “QR codes enabled Alipay – and WeChat Pay – to set up their own payment ecosystem so both the merchant and the consumer be on the Alipay platform and the transaction would go across the Alipay network,” says Kapron. “This allowed the platforms to control the entire transaction and embed digital payments in the daily lives of hundreds of millions of people across China,” says Kapron.

Cashless payments laid the foundations for digital insurance, it also created opportunities for digital lending. Though credit cards were available, the tech was old, with chip and pin only beginning to be introduced. The anachronistic approach to customer service, that placed all risk with the consumer, even after a card was stolen, was unappealing to consumers and reinforced the use of digital payments.

Other financial services are wholly complementary to this system. It didn’t take long for providers to realise that consumers were leaving money in their digital wallets. To capture this opportunity, a wealth management platform was launched to offer micro investment opportunities.

“Individuals could invest as little as one RMB for as little as one day. Overnight, this democratised the wealth management system, which previously required minimum Investments of the equivalent of $1,000 a month,” says Kapron. “Digital payments made this possible, and set the scene for its application in the insurance arena.”

Mobile first, mobile only

This year, China’s $2.8 trillion retail ecommerce market, with its 800m consumers (one third of the world’s consumer base) is set to become the first in history to transact more than half (52.1%) of its retail sales online.

Compared to the West, few homes in China have a computer, but then internet penetration is less than 60% across the country, and less than 50% in rural areas. However, most citizens in China have a mobile phone – there were 1.59 billion contracts as of February 2021 – with more than 75% of phone sales being smartphones. As a result more than 99% of those who access the internet in China do so from their smartphone. It has become fully integrated into their lives, and with that the usage of mobile payments.

Today, more than 92% of China’s digital transactions are shared between WeChat Pay and Alipay. (See case studies below)

Influence in the insurance world

While the development of e-commerce and cashless payments has been a journey of trial and error to find fixes for broken market mechanisms, mobile payments has finally delivered on its original promise to insurers, and consumers, by among other things making renewals simpler and faster.

It has acted as a gateway for people who were unaccustomed – or unwilling – to buy life or health insurance and the frictionless process has minimised the lapse rate that plagued other life and health initiatives.

Mobile payments have catalysed the distribution of life and health insurance and begun to demonstrate an ability to perform market segmentation to allow better targeting of products.

WeChat and Alipay are not the only payment platforms operating in China, but they do have the lion’s share of the market. And they have been so successful at selling insurance products because they have made it easy for consumers to purchase – or renew – cover.

Mobile payment takes all the obstacles out of purchasing insurance. It is a frictionless process for the consumer – completed at the touch of a button.

Alipay （支付宝）

Alipay is Alibaba Group’s third-party online and mobile payment platform. In 2013, it passed PayPal to become the world’s largest mobile payment platform. Its success is based on the size and reach of its parent’s e-commerce platforms, Taobao and Tmall, though it has been under increasing scrutiny from regulators in recent times.

In order to have access to the full range of functionality, users require a Chinese credit or debit card. Once registered, users are able to make payments online, in stores, pay bills, book taxis, transfer money, etc.

Businesses registered with Alipay can create cross-border online payments or in-store payments. Purchases are made via a website through the Alipay account in Chinese RMB and the payment is settled within the merchant’s account in the required currency.

Xianghubao is Alipay’s ‘mutual aid’ program, designed to introduce China’s smaller cities to the concept of health insurance through low price/low limit coverage. It is based on the concept of mutual insurance whereby members contribute premiums to a collective pool while claims and members are capped.

Users contribute RMB 1 to the programme on a monthly basis, which is considered an acceptable premium for many Alipay users. Interestingly, almost half of Xianghubao’s members come from rural areas and 47% are migrant workers from other provinces of China. Over time, Alipay hopes to convert these members to long-term health insurance.

Other efforts at Alipay include international expansion into South East Asia, through its Lazada acquisition and investment in Tokopedi and Grab.

Alipay has also been aggressive in establishing partnerships with mobile payment providers overseas. In Europe there are close to 200,000 merchants now accepting Alipay across the EU, largely catering to Chinese citizens travelling overseas.

WeChat Pay（微信支付）

Launched in 2014, WeChat Pay rose to prominence by enabling WeChat users the opportunity to give each other cash during national holidays. Since then, WeChat Pay has played host to a range of digital insurance campaigns. This Includes a viral life insurance campaign by Taikang Life in 2015 that allowed WeChat users to insure their friends, and, more recently, the establishment of WeSure formalised owner Tencent’s involvement in digital insurance.

WeChat is the most widely used multi-purpose app within China, with an estimated 900 million daily users, and more than 800 million users holding digital wallets. Users can send messages, make voice or video calls, play games, and send or receive payments, pay bills, etc.

Though WeChat appears to be ubiquitous among consumers, Alibaba’s Taobao remains dominant.

Like Alipay, users must link their bank cards to the digital wallet in the WeChat app. Once linked, the wallet can be used as a debit card for direct payments. Money can also be transferred to create a balance within the wallet. Customers can pay in Chinese RMB, but the settlement may be made in the currency of the user’s choice.

Perhaps WeChat Pay’s biggest strength is its spider web of complementary resources. For example, WeChat Pay has integrated with health portal WeDoctor, providing access to China’s largest public hospital network within the WeChat ecosystem. This combination of WeChat’s user base, WeChat Pay’s offline payment terminals, and WeDoctor represents a triumvirate of assets, which Tencent can use to evolve health insurance in China.

Ping An Pay

Ping An Pay is anchored in Ping An’s ‘single view’ of the customer, which allows it to upsell and cross sell other financial services from the Ping An Group.

As the undisputed leader of digital insurance, Ping An recognised the importance of mobile payments early on. However, instead of partnering with mobile payment providers, it set its own course by establishing a mobile payment service.

Though most insurers are not in a position to develop a standalone mobile payments service, several of the use cases introduced by Ping An Pay are broadly applicable, particularly within bancassurance and claims processing.

Ping An Pay has also moved aggressively into processing public health insurance claims. For example, the AI component in the claims processing software can recognise instances of overcharging and over utilisation of treatments across public and private hospital networks.

There are other payment platforms, but none have the scale of any of these players. UnionPay is the only interbank network in China. It links all ATMs in the country and any debit or credit card issued will be linked to UnionPay. With seven billion cards issued to date, it is the largest card network in the world.

The ability to make payments is considered so intrinsically important to social media platforms that TikTok, the video sharing social network, recently launched its own mobile payments service.

The final analysis

Alipay and WeChat Pay are two payments giants that have provided considerable disruption to e-commerce, payments and insurance markets. However, they are now facing disruption to their own businesses. This must also be worrying for others who harbour desires to take a piece of the action.

The Chinese government has now determined that these two tech giants have had things too good for too long, and is looking to smash the duopoly that exists by introducing its own sovereign digital currency, the digital yuan, or e-CNY (for more information on the digital yuan read the TDI analysis here).

Whether the digital yuan project manages to clip the wings of these payments titans remains to be seen, and there remain many lessons for insurers to learn from their innovative mobile payments initiatives.

The success of mobile payments within the Chinese insurance industry relies on the size of their user base and that WeChat and Alipay are two of the most popular apps in China. While this duopoly made its mark on the industry through distribution, there is increasing acknowledgement that the data produced by payments apps will help to identify and segment consumers.

For example, China’s younger highly educated workforce increasingly view insurance as a protection tool instead of a savings tool. Those aged 45 and older – a segment that will soon represent more than a third of China’s population – are seeking retirement products such as fixed annuity options and critical illness cover. There is a clear opportunity for insurers to develop products and services that can address both these rising needs, and the uses can be identified through mobile payment services.

Early stage markets, particularly those in South East Asia, have yet to see a proliferation of mobile payments. Vietnam alone has more than 30 active mobile payment and e-wallet operators. Insurers who learn the lessons from what has – and hasn’t – worked in China are more likely to implement successful projects in Asia, South America and Africa.

However, insurers should not be thinking of reinventing the wheel. They already have enough transformational headaches without trying to develop an in-house payments processing capability. The proliferation of middleware payment services – to traditional  bank accounts – can help to minimise the lapse rates that plague long term life and health products.

What is clear, is that mobile payments offer the key to unlocking many markets with high demand for, but low penetration of insurance products.