Forecasts for mobile payment adoption in the United States remain flat for now; however, two major brands – WeChat and AliPay – offer a glimpse of what the future may eventually hold for mobile payments in North America.
Digging Through WeChat’s Wallet
WeChat, a platform owned by Tencent, is a force to be reckoned with. It’s fast closing in on one billion monthly active users (MAUs), and the average user spends over an hour on the app each day. WeChat users aren’t just unusually chatty – there’s actually a high level of utility to the platform that North American apps have yet to match. WeChat’s wallet alone is packed with features ranging from mobile payments to ride hailing. Below is a look at just some of the features.
WeChat’s wallet is packed with features that are constantly evolving, but here are some current features worth noting: Payments in the real world “Scan-and-pay” is widely popular in China, particularly in big cities where it’s hard to find a product or a service that cannot be purchased with a mobile device. According to China Channel, over 90% of Chinese consumers have adopted WeChat as a method of payment in offline purchases. That compares with a 32% adoption rate for debit and credit cards. Red Packets WeChat has seen tremendous growth of its wallet by capitalizing on China’s tradition of gifting cash-filled red envelopes (known as hongbao). In fact, the volume of digital red packets sent has skyrocketed from 16 million to 14.2 billion in only three years.
Digital Tip Jar WeChat also offers a glimpse at a new avenue for content creators to monetize their hard work online. WeChat’s Tip Jar feature allows users to send micro-payments to writers, musicians, artists, and more. Go Dutch Splitting the bill in a busy restaurant or pub setting can be major hassle. “Go Dutch” is a feature that allows WeChat users to divvy up a bill and pay using the app. Features like Go Dutch make digital payments an appealing option because they solve a real world problem. Third-Party Apps WeChat has robust third-party integration within its wallet. Functionality is so deep that users can order anything from transportation to home cleaning services with the push of a button. China’s largest e-commerce, group buy, and ride hailing companies are already on these platforms, but Western brands like Starbucks are getting in on the action too.
Going Head-To-Head
The mobile payments sector is becoming increasingly binary as WeChat and AliPay dogfight for market share. AliPay – Ant Financial’s payment brand – was once the undisputed leader in mobile payments, but the company has recently seen its market share eroded by an increasingly scrappy WeChat. WeChat has smartly leveraged its popularity and massive user base to get people using it as a payment tool as well.
ApplePay, which had high hopes for the Chinese market, continues to lag far behind domestic brands.
Growing Pains for Digital Wallets
China’s central bank recently imposed tougher rules regarding scan-and-go payments, a move that Ant Financial and Tencent are publicly praising, but that may dampen the meteoric growth trajectory of mobile payments. The new regulations take aim at aggressive tactics used to capture market share from competitors, and set limits on how much consumers can spend daily using barcode-based payments. Despite growing pains, mobile payments and digital wallets will continue to be a dominant part of the Chinese economy. The only question is, when will the rest of the world follow suit?
on But fast forward to the end of last week, and SVB was shuttered by regulators after a panic-induced bank run. So, how exactly did this happen? We dig in below.
Road to a Bank Run
SVB and its customers generally thrived during the low interest rate era, but as rates rose, SVB found itself more exposed to risk than a typical bank. Even so, at the end of 2022, the bank’s balance sheet showed no cause for alarm.
As well, the bank was viewed positively in a number of places. Most Wall Street analyst ratings were overwhelmingly positive on the bank’s stock, and Forbes had just added the bank to its Financial All-Stars list. Outward signs of trouble emerged on Wednesday, March 8th, when SVB surprised investors with news that the bank needed to raise more than $2 billion to shore up its balance sheet. The reaction from prominent venture capitalists was not positive, with Coatue Management, Union Square Ventures, and Peter Thiel’s Founders Fund moving to limit exposure to the 40-year-old bank. The influence of these firms is believed to have added fuel to the fire, and a bank run ensued. Also influencing decision making was the fact that SVB had the highest percentage of uninsured domestic deposits of all big banks. These totaled nearly $152 billion, or about 97% of all deposits. By the end of the day, customers had tried to withdraw $42 billion in deposits.
What Triggered the SVB Collapse?
While the collapse of SVB took place over the course of 44 hours, its roots trace back to the early pandemic years. In 2021, U.S. venture capital-backed companies raised a record $330 billion—double the amount seen in 2020. At the time, interest rates were at rock-bottom levels to help buoy the economy. Matt Levine sums up the situation well: “When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is “we will lose money for a decade building artificial intelligence, and then rake in lots of money in the far future” sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off.” Source: Pitchbook Why is this important? During this time, SVB received billions of dollars from these venture-backed clients. In one year alone, their deposits increased 100%. They took these funds and invested them in longer-term bonds. As a result, this created a dangerous trap as the company expected rates would remain low. During this time, SVB invested in bonds at the top of the market. As interest rates rose higher and bond prices declined, SVB started taking major losses on their long-term bond holdings.
Losses Fueling a Liquidity Crunch
When SVB reported its fourth quarter results in early 2023, Moody’s Investor Service, a credit rating agency took notice. In early March, it said that SVB was at high risk for a downgrade due to its significant unrealized losses. In response, SVB looked to sell $2 billion of its investments at a loss to help boost liquidity for its struggling balance sheet. Soon, more hedge funds and venture investors realized SVB could be on thin ice. Depositors withdrew funds in droves, spurring a liquidity squeeze and prompting California regulators and the FDIC to step in and shut down the bank.
What Happens Now?
While much of SVB’s activity was focused on the tech sector, the bank’s shocking collapse has rattled a financial sector that is already on edge.
The four biggest U.S. banks lost a combined $52 billion the day before the SVB collapse. On Friday, other banking stocks saw double-digit drops, including Signature Bank (-23%), First Republic (-15%), and Silvergate Capital (-11%).
Source: Morningstar Direct. *Represents March 9 data, trading halted on March 10.
When the dust settles, it’s hard to predict the ripple effects that will emerge from this dramatic event. For investors, the Secretary of the Treasury Janet Yellen announced confidence in the banking system remaining resilient, noting that regulators have the proper tools in response to the issue.
But others have seen trouble brewing as far back as 2020 (or earlier) when commercial banking assets were skyrocketing and banks were buying bonds when rates were low.
