A lack of secure payment systems is hindering China¡¯s e-commerce scene, says e-entrepreneur Chen Yu. His company Yeepay is filling the gap - and thriving

----By Patty Daniels

Chen Yu always had a hero. He looked up to Max Levchin, the smart dreamer who grew the US-based payments company PayPal after co-founding it in 1998, and sold it to eBay for US$1.5 billion four years later. Now Chen, a US-educated computer science gradu-ate and veteran of technology multinational Oracle's marketing and strategy offices, has his own company. Established in 2003, the firm pro-cesses cash payments between customers and merchants over the telephone and Internet. Chen reckons YeePay can repeat PayPal's feat in China.

As YeePay vice president, 34 year-old Chen has the confidence of people who ought to know: YeePay was backed by both IBM - an indirect investor through a fund the technol-ogy provider operates - and respected venture capital firm MINT. Its backers' trust seemed well placed recently when YeePay saw transaction volume on its website increase 10-fold in only five months.

It hasn't been an easy climb, though. The company started out focused on mobile pay-ments but soon realized it had jumped the gun - China first needed more basic services. After pulling back, its main business became phone and off-line payments. Second to that is a service that connects bank accounts to mobile phones. A link-up with several Chinese banks allows cus-tomers to use mobile phones to transfer cash be-tween accounts.

Shifting focus

But the service is still reaching only a tech-savvy niche. "Registration is cumbersome," says Chen. Newer service offerings include mobile top-up and e-wallet, a more sophisticated payment sys-tem for mobile phone subscribers. "Mobile pay-ments are in our service options, but it's not the main focus."

The focus is rather on good old-fashioned phone calls. What makes YeePay unique, says Chen, is that it's the first service in China that has integrated both online and offline payment systems. "China is still considered a 'click and brick' market. That means payments are done by Internet and phone," says Chen, pointing to the model favored by Chinese travel company Ctrip.

So far only 20 percent of YeePay's business is done online, the other 80 percent coming from call centers. "Our phone transactions still account for the bulk of our business, but online is catching up quickly. Eventually online will take over, but in the foreseeable future there'll be a combination of off- and online payment systems in China."

Chen's prediction is based on the strategy adopted by leading Chinese portals like Sohu, which successfully refocused its business model away from advertising to e-commerce. Since only a minority of Chinese consumers have credit cards, Sohu and others need someone to perform cash transactions with customers. YeePay wants to be the payment provider everyone trusts and is building off its relations with the e-commerce wings of portals like Sohu, Baidu and TOM, as well as several major travel agents. Once they receive cash from consumers, Chen's staff notifies the merchant to deliver goods before electronically transferring the funds. China's biggest payment problem after all is trust - the lack of it. "People here don't trust, especially not remote transactions," says Chen. "Small and medium-sized merchants need to establish trust with clients and between each other."

An independent payment processor is badly needed in China, says Chen. But why are the country's shoppers so shy of plastic? "There's the lack of a credit system here, so there are few credit cards," he explains. "China is not a trust-oriented society. Psychologically, telephone payment is easier and more secure from Internet viruses, etcetera." China, he reckons, will use a hybrid system of mostly phone and Internet to shift cash about. "But in about five years the balance will swing towards online payments."

Mobile sophistication

In some ways it makes sense for China to stick with a push-button phone: there are 800 million telephone devices compared to 60 million installed PCs in China and 120 million Internet users. But China's long-awaited take-up of 3G mobile phone standards ought to provide YeePay with new opportunities. Chen isn't getting carried away just yet. "With 3G there will be more advanced mobiles, thus we can build more services. But in future we will see a mutually enhancing mix of telephone and mobile and Internet.

Mobile payment is a few years away because of a lack of infrastructure and mobile technology itself." More sophisticated mobile phones allowing security-enhancing encryption and decryption devices will be more important for mobile payment options. There's also what he calls the "user adoption barrier", because users are worried about security and the possible hassle of using the service. "They have to go to the bank and register. To use our e-wallet service you have to link mobile account to bank account. You have to physically go to bank. That turns people off. Our strategy is about lowering adoptability barriers.

The ideal way would be not to have to go to the bank to register but to complete the process on your phone."Mobile-based payment systems conducted through SMS are also less secure and there's no guarantee of delivery, therefore it's seen as unreliable. Subscribers to YeePay's more secure e-wallet service use a five-digit code allotted by the bank to transfer funds by mobile. The company is thus far working with three major Chinese banks, ICBC, China Merchants Bank and Minsheng. The e-wallet seems like sound business sense. "There are 300 million bank cards in China, but among these, less than 30 million are credit cards. Most are debit cards. In the US, you make a call to give your credit card details, but in China since only debit cards are used, you can't complete the transaction over the telephone."

But for mobile payments to take off, banks and mobile carriers will have to play ball. Most Chinese banks have been "relatively conservative", says Chen, but have been showing more enthusiasm lately as, under pressure from the WTO-induced liberalisation of China's banking sector, they look for more service openings. Carriers have been harder to convince. "Since there are more banks than carriers there's more competition.

With mobile payment you have to work with carriers but it's not about technology only. You have to pull in everyone, banks and carriers, and give them something. Carriers have many other projects and services, so we may not be their top priority. Mobile payment is an extension for carriers, but it's a must-have for banks."

Linking in

YeePay, too, is facing competition, but none with its product mix and strategy, says Chen. Alipay, a wing of online shopping portal Taobao, is limited in services and technology, he reckons. "The core difference between them and us is that they are in-house and not neutral. It's like the relationship between PayPal and eBay." AliPay's systems are trusty but slower moving money, whereas YeePay's IBM-based technology offers trust and speed, says Chen. And more importantly, AliPay doesn't have an off-line component. SmartPay, meanwhile, is "mostly a top-up service."

Since there's no credit system Chinese mobile phone operators won't trust users to post-pay and have largely stuck to a cumbersome method of selling prepaid cards through distributors. "It's not very efficient ... so there's a big incentive to e-based prepay." YeePay clients can top-up by linking their mobile phones to bank accounts and dialing in their five-digit banking code. "It's still a small percentage of business," says Chen. Again, he blames the low numbers of subscribers on the perceived hassle of signing up, though YeePay us-ers don't need to go to the bank to set the service up.

Prepaid mobile top-ups and other mobile banking services will take some selling. "It will take a long time, but we see the trend growing. We don't see any huge shift but we see enough for us."

As with its other services, YeePay earns from the top-up service by taking a portion of the transaction. Charges for its services depend on the transaction value. "It depends on the risk involved but usually it's anywhere from 1 to 5 percent." The firm is growing fast but has yet to turn a profit. "Yeepay is a scaled biz model," explains Chen. "You have to be prepared for a long haul to build critical mass. We are still na-scent. But payment is one of the biggest missing links in China so we see huge potential."

Chen meanwhile has a new hero. He looks up to US-based First Data, a payment systems provider that became profitable processing payments for merchants before branching out to provide data to credit card issuers. The mas-sively successful PayPal became too compla-cent for Chen's taste. "It's only a peer-to-peer business, 80 percent of its business comes from eBay. But in China the payment problem is much broader. It's not only online e-commerce. Offline is bigger here. We are not only peer-to-peer. We are trying to solve something much bigger."