in Hong Kong Payment/Mobile Wallet

Transcription

1 Industry Report Fintech in Hong Kong Payment/Mobile Wallet 1 APRIL 2018 Contacts David Chung Director (852) david.chung@dagonghk.com A complicated Ecosystem Recently, we have seen a surge in the number of offerings in the HK Payments space. This report discusses some of its recent trends. In addition to the 16 Stored Value Facilities (SVF) operators, there are a number of other payment operators such as those from tech (namely, ApplePay, SamsungPay, AndroidPay) and the more traditional card operators (namely, MasterCard, VISA, JETCO and UnionPay). These operators can also cooperate, further complicating the market ecosystem. This is not to mention they are already in competition with the physical credit cards and Octopus. SVF mainly limited to point of sale currently HKMA statistics revealed that in HK, there are more than 6 SVF accounts per capita (with Octopus having a ~74% market share). SVF accounts grew at almost 15% annualized in 9M17. 97% of the number of transactions are point-of-sale, which is likely attributable to transport and small transactions in grocery stores as the average point-of-sale transaction is about HKD14. In terms of value of transactions, point-ofsale accounted for 60% and online 40%, mainly due to the average online transaction being about HKD320. Using data from Octopus, we estimate further the total size of the SVF market by turnover at about HKD1bn. Octopus has a Net Margin of just over 40% with revenue as % of the value of transaction at ~1.5%, which should be mostly bore by the merchants currently. HKers not fully utilizing their phones yet Having looked at a number of surveys (Google, Mastercard, Paypal), we have several observations: 1) mobile banking/payments are not really penetrated into some of its supposed target market such as the low income segment; 2) as expected, younger generations are more receptive; 3) HK consumers are active in online purchases but not through their mobile phones; 4) HK merchants still need to catchup with regards to accepting payments online. The penetration rate of EFT-POS terminals at merchants is high at >70% in HK. This combined with the 2.6 credit cards per person are some of the key reasons for the relative slow development in mobile payments. Apps Review shows startup/tech leading We have done an Apps Review based on the scores at the ios App Store and Google Play. We found that the new and specialized names such as TNG has a relatively high score while the more traditional names such as PPS, Octopus, Tap & Go and Payme (HSBC) are relatively mediocre. Tech operators such as AlipayHK also scores relatively high. We also note the significantly higher number of reviews for some of these apps such as TNG, Octopus in Google Play compared with the ios App Store The Center, 99 Queen s Road Central, Hong Kong

2 Fintech in HK an overview According to a Financial Services Development Council report in May 2017, The Future of FinTech in Hong Kong, there are about 160 FinTech start-ups in HK. EY Fintech quotes the HK FinTech workforce at about 8,000 or about 3.6% of the total employed within the Financing and Insurance sector. In the same report, 5 key areas for Fintech in HK was identified, namely, Cybersecurity Payments and Securities Settlement Digital ID and KYC Utility WealthTech and InsureTech RegTech Separately, according to a PWC survey completed in Dec 2016 with over 1,300 responses, 82% of financial institutions in HK plan to increase partnerships with Fintech over the next 3-5 years. 14% of their annual turnover is allocated to Fintech (this compares with 15% globally, 32% China, 15% US, 9% UK and 13% Singapore). Recent government budgets have continued to express support for the industry while regulators such as the HKMA, SFC and Insurance Authority also have their own supporting measures. In terms of funding, the Innovation and Technology Fund (ITF), the Innovation and Technology Venture Fund and the Cyberport Macro Fund has a combined pool of about HKD5bn (if including the potential for 40% matching of industry contributions to ITF supported projects). Additionally, according to the Secretary for Financial Services and the Treasury back then, there were USD370m VC investment in Fintech from Jan 14 to Sep 16 2

3 Payments/Mobile Wallets in HK In this report, our focus is on Payments/Mobile Wallets. The Stored Value Facilities (SVF) Ordinance was introduced on November 13, The HKMA currently has granted 16 stored value facilities (SVF) licenses as per below. 33 Financial Services Limited, Alipay Financial Services (HK) Limited, Autotoll Limited, Bank of Communications Co., Ltd., Dah Sing Bank, Limited, epaylinks Technology Co., Limited, HKT Payment Limited, Hongkong and Shanghai Banking Corporation K & R International Limited, Octopus Cards Limited, Optal Asia Limited, PayPal Hong Kong Limited, TNG (Asia) Limited, Transforex (Hong Kong) Investment Consulting Co., Limited UniCard Solution Limited and WeChat Pay Hong Kong Limited. 13 of them are mobile e-wallet service providers and 3 (highlighted in bold) are banks. Note that the list above does not include ApplePay, SamsungPay, AndroidPay, MasterCard, VISA, JETCO and UnionPay, which according to our understanding, should imply that these/their apps cannot store value unless they partner with one of the above companies. For example, Tap & Go with MasterCard, Octopus with Samsung Pay (Smart Octopus). The table below is a comparison of 5 E-wallets in HK from the website MoneyHero though this was done back in Sep 16 so some of the features could have being updated. Source: MoneyHero - It is interesting to note that some E-wallets such as WeChat Pay and Alipay rely more on QR code scans while some rely more on near-field communications (NFC) such as Octopus and ApplePay. QR code seems generally easier and more cost effective to introduce from the merchant perspective. NFC requires a terminal and it appears that other SVFs would not be compatible with the Octopus terminals. 3

4 The Stats 4Q16 1Q17 2Q17 3Q17 Total number of SVF accounts in use ('000) 40,491 42,036 43,480 44,850 Total SVF float and deposit (HK$ Mn) 6,784 6,916 7,212 7,521 Number of transactions ('000) Point-of-sale 1,366,980 1,323,932 1,330,188 1,378,962 Online 41,341 32,242 37,160 41,683 Total Spending Payment 1,408,321 1,356,174 1,367,348 1,420,645 P2P Funds Transfer ,213 Total 1,408,571 1,356,657 1,368,016 1,421,858 Value of transactions (HKD m) Point-of-sale 18,074 17,875 18,903 19,983 Online 11,650 11,561 12,293 13,676 Total Spending Payment 29,724 29,436 31,196 33,659 P2P Funds Transfer Total 30,261 29,968 31,812 34,501 HKMA publishes quarterly statistics on SVF schemes based on data from the 16 SVF licensees beginning from March We have summarized the data in the table. Source: HKMA, Dagong Our observations are summarized below: According to the HK Census and Statistics Department, the population of HK is about 7.4m as at end of With around 45m SVF accounts in circulation, this implies more than 6 SVF accounts per capita. Other than each person holding multiple cards, we think this could also be due to the around 26m overnight visitors per annum. According to the Octopus website, there are more than 33m Octopus cards in circulation (or 99% of people in Hong Kong using Octopus cards according to the Octopus website). This implies o Octopus has a ~74% market share in the SVF market by number of accounts; o There are more than 10m other SVF accounts in circulation. Total number of SVF accounts in use is growing at almost 15% annualized (with the float growing at a similar pace). There is almost USD1bn in float how is this managed or invested? 97% of the transactions are point-of-sale, which we think is likely attributable to transport and small transactions in grocery stores as the average point-of-sale transaction is about HKD14. Looking at value of transactions though, we see a different picture with point-of-sale accounting for 60% and online 40%. This is because the average online transaction is about HKD320. A primitive calculation using HK retail sales data suggests online is about 10% of total retail sales value. Finally, P2P Funds Transfer is showing significant growth in number of transactions though its value per transaction is also falling likely indicating more common use by the mass market. 4

5 HKers not fully utilizing their phones yet According to a Google whitepaper published in Sep 17, 81% of HK mobile users believe they are digital savvy people, however, their actual behavior indicates only 42% are. The same research found that only slightly more than half of the survey participants use mobile banking and mobile contactless payments while only a third use P2P mobile transfer. It also found that high monthly household income (64% of participants) and years old (60% of participants) are more likely to use these smarter finance digital activities. These seem to imply that Mobile banking/payments are not really penetrating into its supposed target market, ie, the lower income segment, to help them save cost/improve convenience; It may still take time for the people in HK to adapt to these smarter finance digital activities as the older generation still mostly prefers cash or other traditional methods such as Octopus. Another survey published in April 17, the Mastercard Survey, revealed that 88% of HK respondents made at least one online purchase in the past 3 months, which ranks HK 10 th in Asia, though we note the difference is relatively small compared to the other Asia countries. However, only 44% made at least one mobile phone purchase in the past 3 months, which ranks 11 th in Asia but with a much larger difference. Percentage of respondents who have made at least one mobile purchase in the past three months in Asia Pacific. Source: MasterCard, Dagong Vs. Percentage of respondents who have made at least one mobile purchase in the past three months in Asia Pacific. Source: MasterCard, Dagong Therefore, it appears HKers are mostly receptive to online purchases but not necessarily through their mobile phones yet and perhaps that s where the opportunities lie. 5

6 Going cardless, not just cashless A study from Paypal published in Aug 17 suggests cash payments only account for 44% for people in HK, which is below the Asia average. That is, HK is already relatively cashless compared to Asia. Percentage of respondents who answered cash is the most often payment method they used. Source: Paypal However, the same study also revealed that only 53% of HK merchants are accepting payment from consumers online via internet banking, which is lower than the 64% Asia average. Percentage of merchants accepting payment from consumers online via internet banking. Source: Paypal This appears to suggest that HK consumers may have appetite to go more online/cashless, however, this is not matched by merchants. Could this be due to added monetary cost, inconvenience or security issues bore by the merchants? 6

7 Credit card is clearly an important substitute product to mobile payments/e-wallets The below is a diagram from the prospectus of EFT Solutions Holdings Limited (8062 HK) that illustrates the card payment flow process. According to data from the HKSAR Census and Statistics Department and Frost & Sullivan, the consulting firm, as at 2015, there are about 115,000 merchants in HK and the number of establishment using EFT-POS terminals was about 82,000 leading to a penetration rate of 72%. The latest HKMA data indicates that there are almost 19.5m credit cards in circulation in HK by 3Q17 implying 2.6 card per person. The relatively high penetration rates of credit cards in terms of both merchants and users, the ease of use and the overall population s confidence in financial institutions, in our opinion, are the possible key reasons for the relatively slow development of mobile payments in HK. While we understand that certain promotions could boost mobile payment uses in short periods, we think more drastic changes may be required to structurally change the habit. Other than that and without stating the obvious, new payment apps will need to target certain niche segments, which have been underserved by the more traditional financial players. For example, TNG with the Philippines helper market, which do not have easy access to banking. 7

8 Octopus is another important substitute product especially with low value transactions According to Octopus, there are more than 7,000 service providers covering about 20,000 outlets that were accepting Octopus as at end of We take a look at some of its figures based on its website and 2016 annual report. Source: Octopus, Dagong Our observations again are summarized below: The market size of the total SVF market by turnover is about HKD1bn. Octopus appears to have a relatively stable Net Margin of just over 40% if we simply divide its Net Profit by Revenue. Both revenue and net profit are growing at a relatively healthy rate. Net Profit per card is about HKD12 though we have not accounted for the inactive cards implying the actual figures could be higher. However, we would also note that most of Octopus infrastructure has been setup so for a new entrant, the initial expenses could be higher. As noted previously in the report, Octopus has a ~74% market share in the SVF market by number of accounts. However, by both number and value of transactions, we estimate this increases to ~90%. This implies the other SVF accounts are even more dormant. Revenue as % of the value of transaction is ~1.5%. We think this cost is mostly bore by the merchant currently. 8

9 The Apps Review The below is a list of the apps review we could gather from the ios App Store and Google Play. Note that we have not included some apps as they are either unavailable (such as ApplePay, which is only available for the ios App Store) or inappropriate (such as WePay, which is linked to the WeChat app so there is no specific review for WePay as such). We note a number of observations from these figures: Most of these apps score higher in Google Play than the ios App Store, which seems interesting since Google Play also has higher number of reviews. The higher number of reviews in Google Play is likely a reflection of its more dominate position in terms of app downloads. According to appannie.com, in 4Q17, worldwide downloads on Google Play exceeded 19 billion, or 145% of the Apple Store. Therefore, perhaps the higher reviews is due to a relatively better app given the higher user level. However, it is worth noting that (according to the same report) ios accounted for USD11.5bn of worldwide consumer spend in 4Q17, which is a nearly 2x lead over Google Play. This implies the per app spend for ios is much higher, which should mean developers pay more attention to ios. That said, if we just use the number of reviews as a very crude index comparing the number of downloads/users, the difference is quite phenomenal for some of these apps such as TNG, Octopus. This could be also a reflection of their respective targeted markets, which for TNG, is more niche while Octopus is more mass market. The new and specialized names such as TNG has a relatively high score while the more traditional names such as PPS, Octopus, Tap & Go and Payme (HSBC) are relatively mediocre. Clearly, strong user experience is a key differentiator for new names while the traditional names can rely more on their existing customer base/reputation. Tech operators such as AlipayHK also scores relatively high. ios App Store Google Play Review Score Number of Reviews Review Score Number of Reviews Weighted Score TNG Wallet , KeyChain Pay AlipayHK 4.2 1, , Finance na na PPS , Octopus , JetcoPay Tap & Go , Payme (HSBC) 2.6 1, , Data as at Feb 18; Source: ios App Store, Google Play, Dagong 9

10 Disclaimer THE CREDIT RATINGS OR RESEARCH ISSUED BY DAGONG GLOBAL CREDIT RATING (HONG KONG) CO., LIMITED ( DAGONG HK, US, WE, OR OUR ) REFLECT OUR OPINION ON THE CREDIT CONDITION OF THE SUBJECT AND/OR INDUSTRY, WHICH INCLUDES THE ENTITY AND/OR ITS RELATED DEBT INSTRUMENTS (IF APPLICABLE), AS OF THE DATE THE CREDIT RATINGS OR RESEARCH IS ISSUED. NONE OF THE INFORMATION CONTAINED IN THE CREDIT RATINGS OR RESEARCH ISSUED BY DAGONG HK, NOR THE PUBLICATION ITSELF, SHALL BE CONSIDERED A RECOMMENDATION TO BUY, SELL, OR HOLD ANY SECURITY. THE CREDIT RATINGS OR RESEARCH IS NOT INTENDED TO ADDRESS AND/OR REFLECT THE MARKET VALUE OF THE RATED ENTITY AND/OR ITS RELATED DEBT INSTRUMENTS (IF APPLICABLE). DAGONG HK ASSUMES NO RESPONSIBILITY FOR ANY LOSS OR DAMAGE ARISING FROM USE OF THE CREDIT RATINGS OR RESEARCH WE PRODUCE. IN RELATION TO PROVIDING CREDIT RATING SERVICES AND PRODUCING RESEARCH, DAGONG HK RELIES ON FACTUAL INFORMATION PROVIDED BY THE RATED ENTITY AND/OR ACQUIRED FACTUAL PUBLIC INFORMATION. DAGONG HK ENDEAVORS TO ENSURE THAT THE INFORMATION USED IN THE CREDIT RATINGS OR RESEARCH IS OF SUFFICIENT QUALITY; HOWEVER, NO AUDIT IS CONDUCTED BY DAGONG HK, AND NO IMPLICIT OR EXPLICIT GUARANTEE IS MADE OR SHALL BE ASSUMED FOR THE ACCURACY, CORRECTNESS, TIMELINESS, AND/OR COMPLETENESS OF THE FACTUAL INFORMATION AVAILABLE. The credit ratings included in the rating report were solicited and disclosed to the rated entity prior publishing. Neither the rated entity nor its related party did not participate in the credit rating process aside from providing the information requested by Dagong HK s rating team. The credit ratings or research issued by DAGONG HK is not intended for distribution to, or use by, any person in any jurisdiction where such usage would infringe the law. Any user accessing information available through the research is responsible for consulting the relevant agencies or professionals accordingly and for complying with applicable laws and regulations. The contact information for the Complaint Officer is available at DAGONG HK expects and understands that users of the credit ratings or research provided by DAGONG HK are professionally trained and capable of exercising independent assessments when making investment and business decisions. None of the content related to the credit ratings or research produced by DAGONG HK may be modified, reproduced, distributed, or reverse engineered without prior written consent from DAGONG HK. For any further information on key elements underlying the rating and rating procedures, please refer to the following link: DAGONG HK is a subsidiary of Dagong Global Credit Rating Co., Ltd. The Credit Rating Committee of DAGONG HK is responsible for and reserves the ultimate power of interpretation for the methodology used in its independent credit ratings or research. Copyright Dagong Global Credit Rating (Hong Kong) Co., Limited 10