One of the best things about visiting Hong Kong in the early 1990s was the Octopus Card.
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Issued by MTR, Hong Kong’s mass transit operator, the Octopus Card was a stored-value money card. You could pay your subway fare by simply tapping the Octopus Card at the turnstile. Or you could use it to buy the South China Morning Post or a can of Diet Coke at a 7-Eleven convenience store.
You could also use it to pay fares on the ubiquitous bright blue Kowloon Motor Bus that went down almost every major street in Hong Kong.
By today’s standards, the utility of the Octopus Card might sound dull… but back then, it was a huge innovation.
It was quick… easy… convenient… and time-saving.
So it wasn’t surprising that everyone used it. And one of the benefits for MTR was that it had a huge pool of cash – stored on users’ cards – from which it could earn interest.
In short, the Octopus Card was one of Chinese consumers’ first tastes of mobile payments, and they loved it.
Today, the Octopus Card is still in use. And the range of its applications have grown tremendously.
More than 22,900 retail outlets across Hong Kong accept the Octopus Card as payment.
You can now buy clothes at Giordano (their version of The Gap), pay for gasoline and even pay for roasted duck at your favorite Cantonese restaurant with it.
The Octopus Card also has a widely used app called O! Pay that lets users send money in real time to anyone with a similar account.
That’s why 99 percent of Hong Kong’s grownup population uses it. It’s more popular than plastic money. In total, 35 million people use the Octopus Card. That’s five times more than the entire population of Hong Kong. It means there are 28 million people, mostly from China, who have been to Hong Kong and still have their Octopus Card.
I personally have four of them in my safe at home, tucked into my passport holder, one for each member of my family.
And with the average balance of an Octopus Card estimated between US$8 and US$9, users park about US$315 million with the MTR at any given day.
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The Octopus Card was just the beginning
The successive generations of Octopus Cards are a key feature of the Chinese economy today, thanks to the development of near-field communications (NFC) technology. That’s what allows two electronic devices to “talk” to one another when they’re within a defined radius.
With a smartphone that’s linked to your bank account, you can buy just about anything in China. All you need to do is move your smartphone close to a payment counter and — voilà! — the transaction is complete.
In 2015, about US$2 trillion in transactions were done via mobile payment in China, according to market research firm iResearch. That’s a 25-fold increase from just US$81 billion in 2012. And in 2017, total transaction value is expected to reach an incredible US$14 trillion. (That’s 285 times larger than the estimated US$49 billion in mobile payments made in the U.S. last year.)
The total value of mobile payments in China exceeds the country’s official GDP of US$13.2 trillion. That’s because in China, mobile payments aren’t solely purchases of goods that officially contribute to GDP. For example, a transaction could involve sending US$100 to your mother in your home province using WeChat (China’s most popular social media messaging platform) – who in turn sends US$20 to each of her five sisters.
In fact, in many places in China, the traditional custom of handing out little red packets (or hongbaos) containing money as gifts during holidays and birthdays is now conducted via smartphone transactions. During last year’s Lunar New Year, for instance, WeChat processed 46 billion electronic Hongbaos over a six-day period.
Not surprisingly, fewer people are using cash. In 2010, 61 percent of retail payments were made in cash. Now, cash is used just 40 percent of the time. By 2020, that’s expected to fall to 30 percent.
Two companies that dominate this field are Chinese tech giants Alibaba Group (New York Stock Exchage; ticker: BABA) and Tencent Holdings (U.S. OTC; ticker: TCEHY; Hong Kong Stock Exchange; ticker: 0700). Their AliPay and WeChat Wallet mobile payment systems, respectively, account for a combined 94 percent of all mobile payment transactions in China.
What about mobile payments in the U.S.?
There’s a growing number of U.S.-based mobile payment providers, including PayPal (the largest), Apple Pay and Amazon Pay.
But there’s no way the growth in China’s mobile payments could be replicated in the U.S.
First of all, sending large amounts of money to individuals through your smartphone’s PayPal app could tag you as a potential terrorist.
If that doesn’t happen, the IRS (the U.S. tax service) may come knocking on your door for failing to pay proper taxes on gifts – while the person receiving money could be on the hook for not declaring it as part of his or her income.
That compares with zero gift taxes in China, with respect to monetary gifts between individuals, such as friends and family.
And on the application side, the acceptance rate of mobile payments by U.S. retailers is much slower than in China. A study by JPMorgan Chase cites only a third of U.S. retailers currently accept mobile payments in-store.
In China, almost all dining and entertainment establishments, as well as convenience stores, accept mobile payments.
Meanwhile, the vast majority of Americans are still skeptical about going cashless. According to research by Mexican financial services firm Fintonic, just 11 percent of Americans believe wallets won’t exist in five years.
More than half of Americans (55 percent) still believe that they need to use cash to protect their identities, particularly in light of recent large data breaches (i.e. Equifax, Heartland Payment Systems, Target Stores and Uber).
By contrast, a survey done by WeChat of its mobile payment users found that 84 percent of Chinese could accept a totally cashless life… right now.
These are part of the reason why there is just one mobile payment user in America for every 11 mobile payment users in China today. And that gap will continue to widen in coming years.
Editor, Stansberry Churchouse Research