China's Big Tech companies taught Asia to pay by scanning QR codes, but made a mess along the way

Feature From Bangalore to Beijing, when Asians go out to shop, they seldom use a credit or debit card and instead pay using their smartphone to scan a QR code.

While this form of payment is occasionally seen outside Asia, across the continent it is utterly ubiquitous. It also typically costs the shopper nothing extra and costs merchants less than one percent of a transaction's value - lower than fees charged for credit card transactions elsewhere in the world.

But QR code payments are also problematic because schemes offering them proliferated, meaning consumers could not be sure their preferred service would be accepted by their favored merchants.

Efforts are now underway to address that issue and ensure QR code payments get easier, with even the Association of Southeast Asian Nations (ASEAN), a trade bloc representing ten countries and more than 600 million people, recently resolved [PDF] to pursue interoperability of QR code payment schemes more aggressively, because doing so is seen as greasing the wheels of cross-border commerce.

How it works

QR code payments usually work in two ways, depending on whether the code used is dynamic, or static.

Dynamic codes are generated for each unique retail transaction. A shopper visiting a convenience store and selecting items worth $10 would present them to staff who would scan them all, after which a point-of-sale terminal would display a dynamically-generated QR code.

Our hypothetical shopper would scan that code with their smartphone which, after reading it, would open a digital wallet app and request approval for a $10 transaction. Agreeing to that sum would see funds flow from the shopper to the merchant. All that QR code generating and scanning takes a few seconds.

Static QR codes are usually printed or can be present on the screen of a point-of-sale device. In our convenience store example, the clerk would advise a shopper that their desired items cost $10. The shopper would then scan the static code, enter the value of the transaction, and initiate a payment to the merchant.

The merchant is then notified of the payment, through an on-screen notification, the production of a printed receipt, even a synthesized voice announcing the value of the transaction.

It began in China

QR code payments were popularized in China. In 2011, Alibaba's financial services arm Alipay adopted QR codes as a means to have offline stores accept payment from the wallet function of its flagship app. In 2014, Tencent followed suit by adding QR code payments to WeChat - its social messaging app that integrates numerous applets.

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Dr Jan Ondrus, a researcher of digital business models and ecosystems at Singapore's ESSEC Business School, told The Register QR code payments flourished because they faced little competition.

"The financial system and payment market in China was underdeveloped compared to the rest of world," Ondrus told The Register. "Penetration rates of credit cards were low, cash was king, and there was no big player that could gather the whole country, nor any bank that could roll out mobile payments in the existing system."

That state of affairs meant that the West's embrace of near-field communications (NFC) tech to power tap-to-pay services that relied on credit and debit cards - either standalone or virtualized in smartphones - had little chance of success in China.

Furthermore, a financial divide existed. Middle and upper class Chinese may have had a credit card, but many other citizens didn't even have access to a bank account.

In the early 2010s most Chinese did, however, have a smartphone.

The lack of credit cards presented a problem for the likes of Alibaba, which wanted to streamline payments on its e-commerce services. Its solution needed to be simple enough that anyone could use it to pay, without requiring a new network, costly payment terminal, or other barrier to entry.

"What the Chinese players eventually developed is a peer-to-peer system while the West was operating in a business-to-consumer relationship with credit cards," Dr Ondrus surmised.

When it comes to QR code payment adoption rates today, China still leads the world.

In fact, it's downright hard to pay for anything in China if you don't have access to QR code payments - a scenario that has often left foreigners without the ability to pay for stuff and forced Chinese payments players to link their schemes to major credit cards.

Unifying a highly fragmented market

While QR code payments have become utterly ubiquitous across Asia, Christophe Uzureau, a VP analyst at Gartner, told The Register the many schemes across the region are "highly fragmented."

While it's possible to use apps and wallets from China's big payment players in other countries, few schemes offer the same convenience as the major credit card schemes in terms of operating across borders.

In India, the government decided to ensure interoperability for domestic schemes by creating a Unified Payments Interface (UPI) that connects more than 300 banks and other players, allowing any payment system to connect to any source of funds - if providers sign up for UPI. Most do and today UPI means shoppers can use the likes of Google and Amazon, plus local heroes like PhonePe, and Paytm - all of which use QR code payments - regardless of which scheme they pick as their preferred option.

"They [India] have a good vision," Uzureau told The Reg. "They created addresses linked to bank accounts and the QR code fits their infrastructure. It's not infrastructure driven, but it's a natural alignment."

Interoperability also matters in countries where the banking sector is more mature, such as Singapore where a system called PayNow links QR code payment schemes.

Dr Ondrus drew on experiences with Singapore's hawker markets - outdoor food courts - to illustrate how the island nation consolidated its QR code payment schemes and plugged them into a common backend.

Hawker markets were once cash-only, but the COVID-19 pandemic-inspired them to adopt contactless payments, and QR code payments fit the bill.

But because Singapore is home to multiple payment players that each operate their own QR code schemes, hawker stalls would display a QR code for each digital wallet they supported.

"The hawkers started to have multiple QR codes, so when you arrived you had to scan for each wallet to use and it became crazy. Error messages made it messy," explained Dr Ondrus. "So the Monetary Authority of Singapore (MAS) quite brilliantly decided on one single QR code provider (known as SG QR) for all of Singapore. It linked to the operator, which became the provider called 'NETS,' which made payment happen."

The process meant that all wallets had to be compliant to SG QR and work with NETS to integrate.

The holy grail of interoperability

Interoperability within a country is one feat, but ASEAN's dream of connecting schemes across nations is a whole different game.

Some systems are already interconnecting. India and Singapore agreed in February to link systems and enable real-time cross-border payments.

Indonesia and Singapore were linked late last year for QR code retail payments, and Singapore's PayNow and Malaysia's DuitNow are linked for person-to-person fund transfers.

Thailand's PromptPay has linked to Singapore's PayNow, and also offers cross-border payment connectivity with Japan, Laos, Cambodia, and Vietnam.

Challenges and downsides

What could possibly go wrong when transferring money across borders can be achieved just by scanning a code and tapping an app?

Money laundering is an obvious issue. But Gartner's Uzureau believes banks' role in the wider payment ecosystem means Know-Your-Customer checks will still be conducted and should mean cash-washing by QR code is not easy.

Scams are a whole different issue.

"One of the main hurdles in achieving interoperability lies in the domain of security," suggested Claire Wilson, partner at HM - a boutique management consulting firm providing advisory services to the payment services sector.

"Various systems deploy distinct security measures for QR codes, and establishing a uniform and secure experience for users across these diverse platforms presents a significant challenge," she added.

Ondrus agreed that security and scams are problems. In the early days of widespread QR code payments attacks were sometimes as simple as placing a QR code sticker on top of real QR code, and voila - the user scans the wrong QR code and pays the wrong amount or merchant. The academic asserted that, in the end, security issues were considered less important than rolling out a system.

Those that are engrossed in using QR codes often do swear by its convenience as time is saved calculating costs, finding coins, as well as keeping track of transactions.

According to Wilson, QR code payments are a "significant shift in payment methods that aligns with global trends toward digitalization."

Not exactly setting the world on fire

But just because Asia finds it convenient doesn't mean it will translate to the rest of the world.

"To a certain extent it's not spreading, it's not the same intensity elsewhere. But from a payment perspective experience, in places like London and Paris, it's almost already there. After all, merchants in those cities accept Alipay," argued Uzureau.

He acknowledged that many are trying to expand QR code schemes across borders, but argued that changing a society's behavior is difficult - particularly when working systems are already in place.

"For example, look at the debit card in France. It's an insurance policy as well as payment. A QR code won't provide that," concluded the Gartner VP.

But even if the West does shift to QR code payments, by that time - at the pace things are developing - Asia may have already moved on.

"If you look at China, they are innovating a lot with biometric solutions and moving away from the QR code," said Ondrus. "The QR code has done its job with mobile payments and financial inclusion. The next step is biometric - especially given phones will get more complicated and give way toward it." ®

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