Disrupting Cross-Border B2B Payments in China
Mainland China continues to grow and extend its reach into various industries across the world. As it grows, there is increasing pressure to resolve the B2B cross-border bottleneck that plagues its current payment system. The cross-border B2B payment problem is a serious issue for small and medium-sized enterprises that have difficulty accessing the countries banking system due to regulations in China. In addition, companies that do business with SMEs inside and outside of China are also suffering from the B2B payment bottleneck.
Chinese Banking B2B Payment Monopoly
There are three ways to make B2B payments in China. The first and most common is the bank transfer, also known as telegraphic transfer. Telegraphic transfers are the preferred way to send cross border payments, even to Chinese companies located in mainland China. This option is particularly difficult for SMEs to get access to because they may lack the capital, paperwork, and other items that are required to authorize bank transfers inside of China and payments made into China, not to mention it is also an extremely arduous process to prepare for a telegraphic transfer.
The bank transfers tend to take at least five business days after the day of the transaction. In addition, after the money is received within China, the receiving company may be required to send personnel and paperwork to the receiving bank in order to have the electronically wired funds deposited into their business accounts.
Even if SMEs and newly established companies can fulfill all the requirements for receiving and sending funds via telegraphic transfer, there is still the issue that Chinese banks have heavily restricted access to bank transfers by smaller financial institutions and non-banking firms. Currently, there are 4500 banks in China that are authorized to send and receive bank transfers.
While that number is quite large it is not enough to meet the needs of the market. The failure of the current system to meet the needs of the burgeoning market in China is the bottleneck that has been created by the innumerable transactions flying back and forth across the mainland Chinese border.
Electronic payments have become widely popular with mainland Chinese consumers. In 2018, 92% of urban and 47% of rural mainland Chinese consumers used their smartphones on a daily basis to pay for things. The main service providers used are WeChat Pay and Alipay. The ease of such transactions is unparalleled. Consumers simply scan a seller’s QR code and the payment is made via the buyer’s mobile phone.
Merchants outside of China can use these applications to sell goods to Chinese tourists. In fact, the availability of electronic payments greatly increases the likelihood that Chinese tourists will make a purchase and their spending can make up 25% of brands sales, in millions of dollars, in a given year. The catch is that merchants must sign on to the Chinese payment system and have its sales processed through the system. For firms with limited business contacts and/or business activity in China this may pose a significant challenge.
Cash on Delivery (COD)
Cash on Delivery is the most popular payment system used by Chinese consumers today. The system surpasses the electronic payments and bank transfers because it can be used by people with no online accounts and who are not tech savvy. COD is also preferred because customers can examine the quality of goods purchased before paying for them. The non-banking service provider performs this service for a small fee and returns the balance of the payment to the seller. So, ultimately everyone wins with this system. The biggest third party non-banking payment service providers are Dangdang, Amazon, and JD.com.
The downside of this system is that a third party must be paid to deliver the goods and handle the payments. A third party in the transaction can increase the time it takes for the seller to receive customers’ payments and reduce the revenue from such payments because of third party transaction/service fees. Ultimately, it would be better for the customer and the seller to remove the third party from the transaction and streamline the delivery of goods and services and the movement of the payments from the customers to the sellers.
SMEs Drive Financial Sector Innovation
As of 2015, mainland Chinese SMEs accounted for more than 60% of foreign trade and were the primary reason for the rapid development of e-commerce and fintech solutions to cross-border e-commerce problems. Currently, mainland China’s SMEs are the powerhouses behind the disruption in the Chinese banking system and revolutionary changes to how cross-border payments are handled within and outside of China. Moreover, as SMEs cater to the niche areas that large established firms cannot service, there will be even more pressure on the Chinese banking system to streamline and simplify commercial transactions so that smaller less established firms can grow and meet the expanding demands China’s burgeoning commercial sector.
Finally, as the belt road initiative gains more momentum and large firms must focus on meeting the exacting requirements of the Chinese government to get its business, SMEs are likely to be the ones serving the needs of the less economically affluent and powerful. Thus, they need banking products that are accessible to them and the populations that they serve.
B2C and Fintech
In the long term, Aleta Planet’s solution to the cross-border bottleneck problem, its delivery of payments is faster than traditional bank transfers, and simpler, hassle-free transactions means that it is fueling growth in local industries. Growth in the fintech and SME sectors benefit from such innovations. Plus, such technological developments are fueling B2C e-commerce cross-border spending, which in turn is driving development of fintech solutions for B2C transactions.
As the mainland Chinese economy moves towards becoming more of a consumer economy it is critical that there be few, if any, impediments to the flow of goods and money across the Chinese border. Chinese suppliers receiving payments via platforms like AP-1 Business have more confidence in getting their payments in a timeline manner.
Fintech to the Rescue
Fintech firms have identified the gap in services in the market. Their clients, SMEs, e-commerce sellers and newly established tech firms, are clamoring for better services and financial solutions. Fintech firms are combining technology, finance, and their creativity to manufacture innovative solutions that limit the restrictions placed on SMEs and make it easier for them to do business.
The goal of the firms is to make cross-border B2B payments more accessible, easier to manage, less of a hassle, and a preferred way to do business in China. One such firm that is leading the way is Aleta Planet. Aleta Planet has designed a system that rides on the UnionPay network to streamline payments into and out of China and makes regular payments by foreigners sustainable.
AP-1 Business is a digital business account that is accessible to business entities outside of China. The best part of AP-1 Business is that it delivers the payments in T+1. In comparison, banks generally make bank transfers available in T+5 or more. This rapid access and certainty of payments is because AP-1 Business rides on the UnionPay network, hence the payment is transferred from an offshore UnionPay account (AP-1 Business) to an onshore UnionPay account belonging to the supplier in China.
There are still other notable benefits to using AP-1 Business. All of AP-1 Business’ benefits make the service extremely attractive to foreign businesses that do business with Chinese companies.
AP-1 Business provides an all-in-one service that makes it easy for customers to send, receive, and process remittances. The service is can be used by foreigners and there are no restrictions on foreign shareholders and owners in regards to the business accounts opened with AP-1 Business. Moreover, companies can open business accounts with AP-1 Business without a company director’s physical presence in Singapore.
AP-1 Business is able to provide superior customer service to its clients and all in one service because it’s part of the UnionPay platform. The UnionPay platform is operational throughout China and it is used by all Chinese banking and financial institutions. By using this platform, AP-1 Business removed the middleman from the equation.
Unlike banks, that must transfer money through other intermediary banks, money transferred via AP-1 Business and credited directly into the recipient’s’ bank account. AP-1 Business also permits users to withdraw money from ATMs all over the world. Its system is supported by Huawei Pay and Visa. This ATM cash withdrawal facility will become operational in the second quarter of 2021.
Attractive Forex Rates
Another extremely attractive feature of AP-1 Business is its forex (FX) rates. AP-1 Business offers direct FX rates (SGD to RMB) for China via the UnionPay network. These FX rates are competitive when you consider that many online payments services charge less competitive FX rates and charge their customers a fee for moving the money across national borders. AP-1 Business ensures that customers get the best FX rates whenever cross border payments have to be conducted.
No Minimum Account Balances or Deposits
Finally, AP-1 Business does not require its customers to maintain a minimum balance or make minimum deposits into their accounts, unlike many other business accounts. The lack of a minimum balance and deposit requirement has enabled some SMEs to maintain their business operations during the COVID-19 pandemic and to recover with time, albeit slowly. With that, AP-1 Business aims to provide modern day financial solutions that cannot be addressed by the reigning banking industry.
AP-1 Business customers can easily make cross-border payments with China through the AP-1 Business virtual card. The card functions in a similar way to a prepaid debit card where purchases or payments are directly deducted from the existing funds available in the account.
The use of an AP-1 Business card enables the service’s customers to avoid the lengthy time consuming process of clearing payments, submitting documentation, and other procedures that banks require be done for cross-border payments done via bank transfer. Ultimately, this is a win-win situation for SMEs involved in e-commerce and cross-border B2B payments.
Aleta Planet’s Roadmap for the Future
Aleta Planet, like other fintech firms, has experienced tremendous growth and continues to evolve as the Chinese economy grows and more e-commerce transactions increase. Although the COVID-19 pandemic dampened the Chinese economy, China has been the only nation to not only return to normal economic levels but to also experience economic growth.
In short, the three systems used for handling commercial transactions in mainland China lack flexibility and are not easily accessed by foreigners and people outside of China. AP-1 Business solves this problem by giving offshore businesses easy access to Chinese goods, services and payments. This easy, streamlined access fuels the development of Chinese SMEs, a mainland Chinese consumer economy, and growth of more technologically advanced payment systems that facilitate financial transactions for B2Bs and B2Cs. AP-1 is the leader in this area, helping buyers and sellers avoid the commercial bottleneck in China and to exercise and grow their business.