Alipay to discontinue offline-payment service

Industry observers say provider 'failed to address concerns' from State-backed competitor UnionPay

Alipay, China's largest third-party e-payment provider, announced on Tuesday it will discontinue its still-nascent offline-payment service, a move widely perceived as a capitulation to its State-backed rival, China UnionPay.

While the company declined to elaborate on its reasons, industry observers believe Alipay's encroachment into the business of offline payments was eating away market share once firmly held by the country's largest card processor. UnionPay has recently insisted that its services are still required to conclude all bank transactions.

The abrupt cancellation of the collect-on-delivery service stands in stark contrast to Alipay's bold entry into the market last year, when it unveiled a 500 million yuan ($81.7 million) investment plan with the introduction of a handheld device to consolidate package tracking records with card payment functions.

"Due to certain widely known reasons, Alipay will stop all offline point-of-sale services," the company said on its official micro blog to announce the move.

Alipay promised to handle the issue properly with its merchant partners, and apologized for any inconvenience, according to the announcement.

But the company will not hesitate to "continue exploring payment innovation".

In March, Alipay introduced its proprietary POS machine, which allowed couriers to track parcels and accept payments for online-ordered goods at the same time.

The rollout was part of the broader strategy of Alibaba Group Holding Ltd, Alipay's parent, to grab a bigger share of business in the financial sector and satisfy soaring demand for package-tracking from China's booming e-commerce industry.

According to iResearch, a Beijing-based IT consultancy, online payments are expected to account for only 15.8 percent of all online transactions in 2015. About 70 percent of all online purchases made on China's business-to-customer sites are paid on delivery.

While Alipay holds almost half of the online-payment market, that has failed to translate into even bigger revenue, given consumers' preferences to pay for online-purchased, big-ticket items at the time of delivery.

Delivery people in China typically carry two devices, one for tracking and the other a portable POS terminal. Alipay's wireless device was able to combine both functions into one machine, ensuring that merchants receive payment within 24 hours of delivery.

Zhu Zhu, a Hangzhou-based company spokeswoman, said that over 10,000 such devices, which cost less than its competitors, were installed nationwide to cover e-commerce logistics, airlines operators, hotels, and similar businesses.

According to a news release by Alibaba's public relations team in Hong Kong in March, each Alipay device cost 3,000 yuan. To encourage use of the device, Alipay allowed package delivery services and e-commerce sites to use them for an unlimited period of time by paying a 500-yuan-per-device deposit.

Alipay said at the time that it was "essentially giving away these devices ... and is showing it's willing to lose money on hardware in exchange for a piece of the potentially vast revenue stream from COD processing fees," it said.

Alipay Vice-President Fan Zhiming had said that his company was not competing with China's banks by entering the COD market, and would stay focused on offline payment for online purchases only.

A small processing fee paid by consumers upon delivery was split with UnionPay, a banking consortium that runs the country's interbank network, as well as the bank providing the card.

But it still failed to dismiss concerns from UnionPay, which has tightened third-party payment policies since July, experts said.

In a recent board meeting, UnionPay has urged banks to complete all online transactions and clearing through its own channels, indicating that third-party payment enterprises cannot skirt UnionPay to complete bank transactions, Xinhua News Agency reported on Tuesday.

UnionPay aims to have all nonfinancial institutions settle through its channels by July 2014, Xinhua said.

"Alipay had obtained from the central bank the license to carry out offline payment services. There should be no policy restrictions on that front," said Zhang Meng, an analyst on Internet finance at consultancy Analysys International.

Xu Hongcai, a senior researcher with the China Center for International Economic Exchange, agreed. "The unification under the UnionPay framework may facilitate supervision. But UnionPay's monopoly is not conducive to the market at large," he said.

Xu believed that it is now critical to see how the central bank, which releases licenses to third-party payment platforms, views and handles the issue.