Most China observers are aware of how successful WeChat Pay and Alipay have been at turning China into the world’s first predominantly cashless society. By scanning QR codes with their mobile phone cameras and doing transactions in real-time, most Chinese have entirely skipped using credit cards.
Critics however, have said that while WeChat Pay has been tremendously successful in China as a part of WeChat Wallet, it will be much harder for WeChat to gain traction outside China. After all, Chinese banks have tight limits on transaction size, and the Chinese government has proposed the setup of a government-owned transaction clearinghouse, so that it could tightly monitor transactions, and even roll them back if needed.
On seeing these restrictions, most observers said that WeChat’s chances of breaking out of China, and establishing a presence among non-Chinese were small. After all, WeChat Wallet’s chances of finding banks which would want to partner with it were limited, restricting WeChat Pay users to China, Hong Kong and South Africa, where WeChat Wallet are enabled. This view was reinforced by the US government’s decision to block the sale of Moneygram to Alibaba on security grounds in January. Without their own banks or financial institutions to process payments outside of China, it looked like it would be very hard for these Chinese giants to establish a foothold outside China. After all, how many retailers outside China would be willing to go to the trouble of establishing a Chinese company and Chinese bank accounts so that they could process mobile payments the Chinese way, especially when Chinese banks have restrictions on currency going out from China?
Until Tencent, WeChat’s parent company, revealed that it was investing in N26.
This German fintech startup raised a US$160 million Series C round from Tencent and Allianz, and is a major player in Europe. The company is established in Europe, and plans to have five million customers by 2020. It would make perfect sense for Tencent to bet on N26 incorporating WeChat Pay users outside China among its user base, making it possible for non-Chinese companies outside China to accept payments from Chinese tourists and visitors. The capability to make purchases outside China using WeChat Wallet is something Chinese tourists have been looking for, and it looks like N26 will be able to offer it.
The other news is that N26 is expanding to the US in 2018. Since the EU and US are two major tourist destinations for Chinese tourists, this is good news for the businesses which will serve Chinese tourists. When one considers that the average Chinese tourist spends an average of US$5,800 per overseas trip, this adds up to a lot of money to be made.
For many businesses which rely on Chinese tourist/travel spending, building N26 into WeChat Wallet would remove a major friction point for their retail business because they would not have to open accounts with Chinese banks and deal with Chinese government restrictions on transactions.
This will be a major challenge for Visa, MasterCard, American Express, and China’s UnionPay which are dominant in the credit card space, and have a very large business ecosystem of their own. It is also likely that Alibaba will have to come up with a remedy to their attempt at purchasing Moneygram.
It looks like Alibaba and Tencent are going to jumpstart the next generation of banking outside China, as they try to bring QR codes for real-time transactions to the rest of the world from China.