WePay: The Future of Digital Finance

A case in point is Tencent Holding’s WeChat social network. WeChat is somewhat like Facebook’s WhatsApp platform for messaging and is approaching similar size: WeChat reports over 700 million monthly average users, while WhatsApp reports around a billion. However, as the Economist points out, WeChat in fact has developed much richer features, well beyond what the Facebook group has so far managed to offer. In addition to having wider messaging options and membership for corporates, WeChat’s additional features include an integrated wallet which the half of subscribers who have so far linked their bank accounts can use to make P2P payments and to pay bills or buy from merchants of all sorts who are listed on the platform. Although the WeChat subscription is largely free to personal users, these combined services have enabled WeChat to monetize its offering, earning an estimated $1.8 billion in total revenue in 2015 (out of total TenCent revenue of around $19 billion), while WhatsApp and Facebook Messenger barely yet earn any revenue at all.

As a payment service which is largely free to individuals, WeChat’s business model is important. WeChat until recently largely absorbed the costs of transfers to and from bank accounts, but this has gotten harder with soaring volumes: its 2015 annual report drew attention to a net loss of some $50m on payments arising from increased bank charges on the back of increased volume. In other words, the payment business itself doesn’t make money. If course, it doesn’t really need to, since payment services, and even WeChat, are still a relatively small part of TenCent’s bigger Value Added Services segment (which includes online gaming and content as well as other network QQ). This segment earned a gross profit margin of 65% in 2015, making it by far the largest contributor to TenCent’s bottom line. Online advertising is the second main source of TenCent’s income (and the main source of Facebook’s), still much smaller than VAS but growing fast; and with a profit margin of 50% not far behind VAS.

WeChat’s business model so far enables cross subsidy of its retail payment services from its adjacent core business. Payments enhance the stickiness and functionality of the platform, so that many users can remain fully within WeChat’s ecosystem for their daily needs, rather than having to enter and exit a range of apps to message, to pay, to buy online. Payments also generate information about payers which can be monetized through targeted advertising. But even with a very strong adjacent business funding the payment business, it seems that there are limits to WeChat’s willingness to absorb ongoing losses: WeChat has recently introduced fees for larger withdrawals from its wallet to bank accounts, while removing all P2P fees. Its large volumes mean that even very small fees could generate large revenues in future.

This ability to cross-subsidize payment costs while expanding the universe of payees for fast, convenient payments is what makes TenCent a formidable competitor to specialized payment providers and banks: the former can’t cross-subsidize, and while the latter can, they don’t typically earn anything like Tencent’s margins on their core business.