China’s Digital Belt and Road Initiative (BRI) seeks to promote strategic digital connectivity across the Asia Pacific in a time where great powers are vying for regional and global influence. To assert its technological supremacy, the Chinese government is working in conjunction with domestic Internet companies Alibaba and Tencent to create its own digital BRI in Southeast Asia – a key battleground in this geopolitical competition. Yet, an important but perhaps often overlooked pillar of China’s plan is its embrace of the digital payments revolution, which carries both immense potential for regional trade connectivity as well as risks to the region’s financial regulatory landscape.
The electronic payments market (e-payments, for short) is predicted to become the future of transactions, playing an important role in the region’s e-commerce trade. Southeast Asia provides the perfect market for digitalization with high smartphone penetration and a large, financially underserved population. In 2019, the region boasted 360 million Internet users, but less than one third of whom are considered fully “banked,” meaning that most do not have full access to financial services. As a result, the rise in e-payments adoption can connect people to new online products and services, promote greater financial inclusion, and provide small- and medium-sized enterprises (SMEs) greater access to domestic and global markets.
At the forefront of this digital revolution are Alibaba and Tencent, two Chinese technological giants that are estimated to have invested over $12 billion in the region since 2015. However, the rapid pace of their investments suggests that at least for the near future, China will continue to hold substantial market share and influence over the digital economy in Southeast Asia. This trend should be of profound concern to U.S. policymakers, whose interests lie in promoting a common digital market based on liberal norms.
To better assess the impacts of Alibaba and Tencent’s growing presence in the region, we must first turn to look at their strategies and successes in driving the digital payments revolution – starting from their explosive growth in China.
Alibaba & Tencent’s Business Models
Electronic payments took off in China after Alibaba and Tencent launched mobile phone apps in 2011. The Internet companies began building their own online payment systems, then introduced easy-to-use, low-cost, real-time, mobile payment applications to approximately 550 million retail and corporate customers. Alibaba and Tencent’s market dominance can be attributed in part to their apps’ ease-of-use and low-cost strategy, since the goal is to drive sales of goods and services rather than seek transaction-related profits.
To attract an initial customer base, the Internet companies intentionally charged much lower transaction fees than banks and international credit card companies. For example, PayPal charges merchants 7 times more than Alibaba or Tencent but transacts only 5% of the payments volume. To drive customer usage of the apps over time, Alibaba and Tencent then used payments data to expand and tailor services on their platforms.
The companies have now diversified their product offerings to include financial services, e-commerce services, and even convenient bill payment services. One research publication found that more than 1 million restaurants, 40,000 supermarkets and convenience stores, 1 million taxis, and 300 hospitals are connected to the Alipay app.
LAUNCHING SOUTHEAST ASIA’S DIGITAL ECONOMY?
The degree to which Alibaba and Tencent have been overwhelmingly successful in Southeast Asia, however, cannot simply be attributed to their low-cost strategies – or even to regional characteristics alone. Indeed, these companies have invested heavily in Southeast Asian projects and businesses, resembling the Chinese government’s role in financing infrastructure and large energy development projects in emerging economies. China’s Belt and Road Initiative operates on the same concept, exchanging monetary support for a foothold in critical regions.
In Malaysia, for instance, Alibaba partnered with the national government to launch the Malaysia Digital Economy, an initiative promoting a digital free trade zone that will give the country’s SMEs access to big, new markets in China and abroad. In 2018, Alibaba also announced the implementation of its City Brain Project in Kuala Lumpur, set to replicate China’s smart city infrastructures as well as a China-based set of digital information standards.
In Thailand, Alibaba committed 11 billion baht (roughly $320 million USD) to building a “digital hub” as part of the country’s Eastern Economic Corridor (EEC), which will include a new facility for processing logistics data as well as efforts to support Thai agricultural exporters and provide them access to Chinese markets. The agreement also seemed to go far beyond just trade, with Alibaba promising to develop training programs for the Thai labor force through a “Digital Talent” project.
In Indonesia, Alibaba and Tencent gained access by heavily investing in many local companies, such as e-commerce and ride-hailing services, that offer or use electronic payments. For example, Chinese investments helped to jump-start Gojek, one of Indonesia’s five unicorn fin-tech startups with a business model that closely resembles Alibaba and Tencent’s. Originally a ride-hailing platform, Gojek has evolved into a “super-app” that connects over 30 million users to more than 400,000 businesses, providing services such as buying groceries and medicine, food deliveries, and even back massages. The tech company has been described as helping to spark an Indonesian banking revolution, and boasts that 93% of its SME partners experienced an increase in transaction volume and earnings after joining.
AN UPHILL FIGHT FOR U.S. DOMINANCE
In the span of a decade, Alibaba and Tencent have achieved a truly remarkable rise domestically and across the broader Southeast Asian region. As a result of their strategies, Chinese tech companies have taken tremendous strides in acquiring minority stakes of hundreds of Southeast Asian startups. The Alibaba and Tencent experience should serve as a wake-up call to the United States, reminding us that Chinese private investments will continue to pose a major threat to our regional position for three main reasons.
(1) As Alibaba and Tencent are being drawn closer than ever to the Chinese party-state, the synergy of private sector innovation and government directives provides China with an overwhelming advantage over U.S. businesses. The Chinese state has become an active partner, providing financing, test beds, and even shortcuts to these digital players as needed. For instance, although Alipay introduced online money transfers in 2005, regulators took 11 years to set a cap on the value of such transfers. Mobile payments were also not required to be routed through a central clearinghouse for security verification until 2018. As a result, Alibaba and Tencent were able to penetrate Southeast Asian markets much more quickly than their U.S. competitors.
(2) The unregulated landscape these fintech firms are operating in should alarm U.S. policymakers, especially given the close connection between the state and private sector. The IMF, for instance, signaled money-laundering concerns regarding 70 percent of the approximate $19 trillion in electronic payments that Alibaba and Tencent conduct on their own IT systems. Reports also implied national surveillance risks from the Chinese government exploiting private Internet payment data to further regime objectives. As Southeast Asian countries continue to adopt Chinese technologies and consequently Chinese-based technological standards, the U.S. will face serious security threats unless it can take active steps to promote a safe, free and open digital economy.
(3) It cannot be presumed that our Southeast Asian partners will readily stand by the United States against Chinese investments. To be sure, nations have expressed concerns about Chinese influence and corruption in their domestic economies, particularly how a Chinese monopoly can potentially crowd out SMEs. However, for many countries like Thailand and Malaysia whose economies are struggling to find new drivers of growth, the appeal of a digital free trade zone cannot be neglected. Moreover, what is clear from Alibaba and Tencent’s strategies is that they are not offering just a cut-rate deal, but rather a host of substantive investments to boost the countries’ global competitiveness, offering technical assistance, know-how, and workforce training. For all these reasons, Alibaba and Tencent will undoubtedly continue to find willing partners in the region.
Just as the United States is fighting for dominance in the global 5G race, it should engage in a similar battle for a more open and global digital economy. Thanks to government-led initiatives and rapid private sector investments into Southeast Asia, China has emerged as a front-runner in shaping the region’s digital standards. What happens next will depend on U.S. policymakers.
To counter Chinese influence, the United States needs to provide its own concrete, substantive investment alternatives to allies and partners in Southeast Asia. The U.S. can begin by providing development assistance directed towards digital infrastructures, but the most important step will be to rejoin regional trade agreements that were crucial to US-ASEAN relations. Otherwise, China will not only open the region to a host of money laundering and surveillance concerns, but will also stifle U.S. business interests and gain unchecked dominance in the region.
(Image: Indonesia’s Ministry of Foreign Affairs sending students to China in the “Santri for World Peace, Goes to China” activity, where students visit China’s leading e-commerce companies including Alibaba; Source: Ministry of Foreign Affairs of the Republic of Indonesia)
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