Maverick China Research - Maverick China Research

The flip side of having a "bankcard penetration rate" of 26% is that bankcards are still not being used for most payments. As in many developing countries, cash remains the most widely used form of payment in China. For convenience, for perceived safety, for a lack of other payment options, and even for no better reason that it being a lifetime of ingrained habit, cash is king. Even with recent advancements in payment and money transfer services (such as debit cards and interbank fund transfers), it is still quite common in China to settle major transactions with cash.

The players in China's online payment market, albeit growing at an astounding rate, have to overcome these inherent obstacles in order to reach consumers. This has resulted in an online payment sector quite different from its western counterparts. According to a survey of online merchants conducted by my company, Maverick China Research, in 2009, over three quarters of respondents still offer some form of cash-based purchasing option, most often cash-on-delivery and cash-on-pickup.

This high figure does not take into account that online stored-value accounts or e-wallets are often topped up by cash at post offices, banks, or through the cash purchase of top-up cards. According to our survey, cash-based payments still make up approximately 25% of all online transactions volume.

As high as these numbers may seem, we believe China, like the rest of the world, is still headed toward a future based on electronic payment. Cash-based payments will continue to decline as more consumers switch to third-party online payment providers such as Alipay, 99Bill, and Tenpay. The shift away from cash-based payments will depend on several key factors:

• Continued increases in credit card issuance, which will encourage more non-cash spending by consumers
• The elimination of barriers imposed by China's major banks on online payment (such as the need for a dedicated online banking account that requires registration)
• Increased exposure to e-commerce and domestic payment providers, which should help alleviate current trust issues
• Increased activity by regulators to guarantee user safety (e.g. by requiring that all payment providers be licensed by the government)

The following figure displays our forecast for the gradual transfer of payments from traditional cash-based methods towards online payment in the next five years. We believe that by 2013, approximately three quarters of purchases in China's e-commerce sector will be made with online payment methods, and cash-based payment will decrease to approximately 10% of e-commerce payments.