Mainland shoppers are swiping more cards and using less cash in a trend that is luring more providers into the burgeoning mobile payment market.
Among the new players is a company called QFPay, a start-up co-founded by a young entrepreneur from Hong Kong, which says it aims to serve "tens of millions" of micro-merchants who are struggling to get connected to the electronic payment network.
Many small merchants in China are unable to serve the new breed of card-carrying shoppers because they cannot get point of sale (POS) terminals from banks. "We are too small and big banks disregard our needs," said Shu Qinqin, who runs a small boutique in the Wudaokou Clothing Market in Beijing.
Shu said complex application procedures kept her from getting a terminal and she began to miss out on some deals as customers were carrying less cash.
There are more than 40 million private merchants in China, but fewer than five million have such machines, said Tim Lee Ying-ho, co-founder of QFPay, a mobile payment solution provider which launched its QPOS machine last June.
Merchants can charge a customer by connecting a QPOS terminal to a smartphone, tablet or computer installed with QFPay's application. A customer can then swipe a bank card in the terminal to make an electronic payment from their bank accounts.
Traditional POS terminals are equipped with a central processing unit that is used for verifying and processing bank card transactions. They also print out receipts. The QPOS terminal is a simpler and smaller device for swiping a bank card, and processing is done through the smartphone, tablet or computer it is connected to.
The cost of a QPOS terminal is therefore lower, said Lee. A second-generation QPOS terminal costs 899 yuan (HK$1,133) and QFPay charges a fee of 0.78 per cent of the transaction.
Shu turned to QPOS four months ago and said 90 per cent of her customers now pay by swiping their bank cards in the terminal.
That service has seen QFPay accumulate 30,000 merchants in 30 mainland provinces and cities over the past year, and process more than 800 million yuan worth of transactions. Merchants using QPOS machines include boutiques, beauty shops, taxi drivers, digital product retailers, and direct sales firms like Amway.
"Our target is to have more than one million merchants in three to four years," Lee said. "Although we have yet to break even, what we are more concerned about now is to expand our client base and develop more services rather than pursue profitability."
The company has about 140 staff, half of whom are responsible for research and development. Lee said QFPay aimed to provide more value-added services which would help generate revenue in the future.
"For example, we have added a service to allow merchants to save customers' information after they swipe their cards. The data can then be used for customer relationship management," he said. "We can charge for the service in the future, if we can help them do business, they are willing to pay for other services."
QFPay is backed by investors including Sequoia Capital, which is also invested in Square, a California-based mobile payment processor. QFPay is also known as "China's Square", but Lee says there are key differences between the two systems. "More encryption is needed in China to ensure security, so customers here need to sign and input passwords. Our product is more complicated than Square," he said.
Data from the People's Bank of China show that electronic transactions made by internet and mobile payments increased by 26.2 per cent to 217.59 trillion yuan in the first quarter from the same period last year. Mobile payment transactions were up by 204.5 per cent to 1.1 trillion yuan.
The promising development in the mobile payment market has lured not only financial institutions and internet companies, but also some big names from other sectors.
Mobile carrier China Mobile this week announced a plan to provide near field communication (NFC) payment services with bank card company China UnionPay. Subscribers of Android-based devices using a NFC SIM card can download a mobile wallet application and link the wallet to their bank account.
E-commerce giant Alibaba also launched its Alipay Wallet mobile application earlier this year, while similar products also include Google Wallet.
Lee said these products were aimed at turning a customer's smartphone into a bank card, and were not QFPay's direct competitors. "They are serving the customer side. We are targeting the merchant side," he said.
Local third-party payment platforms Shengpay and Qiandai were similar to QFPay, providing mobile payment solutions to merchants, Lee said. "But our product idea, marketing strategies, and innovation are better than other mainland players," he said. "These are the advantages of Hong Kong people."
Lee co-founded QFPay with two mainland partners in 2011 and formed a partnership with local company All in Pay, which owned a third-party payment licence. The company has since partnered with a number of licensed third-party payment firms.
"As a Hongkonger, it's very difficult to find investors and meet regulatory requirements, in particular in the finance industry. I don't know the mainland market well, and don't have a network," he said. "To start the business of our kind, the most important thing is to find local partners and staff."
Lee, who was born and raised in Hong Kong, said this background gave him many advantages over his mainland competitors. "But if you want to succeed on the mainland you cannot just copy the way you do things in Hong Kong," he said.