Fast Track Interview

Adrian: I’m in Beijing, China and talking with Chen Yu who is the co-founder of YeePay. YeePay is a payments company based right here in Beijing. Chen, can you tell us about yourself and where you come from?

Chen: I was born and raised in China, but I lived in the States for about 10 years. I was in Chicago for three years and in Silicon Valley for seven years. I actually went to college here in Beijing, and after the Tiananmen Square crackdown, I spent a year in the Chinese military as well. Then I went to graduate school in the States. I worked in the States mostly in the IT industry for about eight years before I moved back to China and founded this company.

We started YeePay in August 2003, and we officially announced the service in early 2005. We are one of the leading payment service providers here in China.

We provide a variety of payment service products that merchants can use to collect payments from their consumers. We work with many merchants across all different industries from e-commerce to digital entertainment, like online gaming websites, as well as major airlines and travel agents.

Adrian: What kind of volume are you processing right now through YeePay?

Chen: We process roughly $400 to $500 million per month. Last year, we actually grew about five times compared to 2007. This is a very fast growing market, because the starting point in China is really low. For example, if you compare the payment segment to a lot of other internet segments, payment is one of the areas that we are so behind in.

More people actually have either a credit card or debit card, but the problem is that a lot of people do not know how to use these debit cards or credit cards for online payments. As of last year in China, the number of online payment users was around 50 to 60 million, which compared to the overall market is just a small percentage.

Adrian: Are these billion dollar internet companies in China being built on a base of 50 to 60 million users?

Chen: Not necessarily. Not all these internet companies necessarily have to collect online payments from their users because they have different business models. Many of them rely on advertising where you don’t need a payment mechanism to collect money from your users.

Even gaming companies don’t necessarily rely on E-payment. They have what we call the prepaid card system with a distribution network where physical prepaid cards are sold by vendors. In other words, people can go to any newsstand or convenience store to buy a prepaid game card and use that as a payment method.

These cards are very similar to mobile phone prepaid cards except these cards are issued by vendors and online game operators. You can actually buy a China mobile prepaid card and also use that as a form of cash to pay for other games. In other words, instead of using the mobile prepaid card to recharge your phone bill, you can use that $20 card to pay for online games. That’s what we call a universal prepaid card.

Adrian: Can you talk about debit cards and credit cards and how they work in China?

Chen: Absolutely. Overall the debit card and credit card penetration in China is still relatively low, but it’s taking off very rapidly. Over one billion debit cards are issued by various banks in China. The overall population of China is 1.3, if you assume that one person has two or three cards that would translate into 20 to 30 percent of the people actually have bank cards.

People still heavily rely on the legacy payment system, such as cash on delivery, postal wires, and bank wires. E-payment is just taking off in this market because there is now a very practical need for it.

In regards to the cards, all the banks are required to connect into China UnionPay network. As a result, every bank issues their own debit cards or credit cards, but ultimately they have to brand this card as China UnionPay cards. Many of these cards also have the Visa and Mastercard logo but don’t really go through those networks.

Adrian: Do consumers feel comfortable buying things online with their debit cards?

Chen: A lot of people still do not feel comfortable buying things online. It’s probably because of a cultural thing. Asian people, in general, believe in tangible things, so in a way trust is a much bigger issue than payment and the technology itself. People here usually do not trust each other even when they’re doing business face to face, let alone when they’re doing business over the internet. On the other hand it’s changing, especially for the younger generation because they’re quicker when it comes to adopting new technology and new ways of payment.

Adrian: I’ve heard that in Germany there is no such thing as a chargeback. When you charge something on your account, there is no right to turn it back. How do chargebacks and refunds work in China?

Chen: That’s pretty much also the case in China. There’s no credit card chargeback. As a consumer, you can’t say I don’t want to pay for this or this was not a transaction made by me. You don’t really have the right to say that because it’s very limited protection for the end users here in China. Overall, the end users bear the ultimate responsibility for their own card.

This is both good and bad. The bad thing is that it probably slows the adoption of credit cards while the good thing is that there is less risk for the banks and payment operators.

Refunds work in a different way because they are actually initiated by the merchants. If a merchant agrees and initiates a refund to you, you can get your money back.

Adrian: If there is no chargebacks and no refunds, what about fraud?

Chen: There is still fraud. As long as you are dealing with money, you can expect a certain level of fraud because people might use stolen cards to pay for online transactions. Sometimes if they can prove that those cards were indeed stolen by someone else who made the payment, the bank has to refund the charges. There might be some on the merchant’s side as well who are involved in fraudulent transactions.

As a payment company, you need to be able to detect those fraud transactions, and you need to have a very sophisticated risk management system to constantly monitor all the transactions. We do have a dedicated risk management team who actually plays this role.

The other, more fundamental difference in China is that most people use debit cards for online payment even when using credit cards. In other words when you’re using a credit card for an online payment, we treat it as if it’s a debit card payment because all transactions are considered debit card transactions protected by a password. As a result, there is more protection for the transaction intrinsically.

It is not like in the U.S., where you simply go to the merchant’s website, put in your credit card number, expiration data, and authorize payment. In China, it’s a very complicated process, and the user experience is not as friendly as what you see in many other countries. Here you have to enter your card number, your password from the card-issuing bank, and then there is also a check code to make sure you are a human being instead of a robot. Theoretically, it’s definitely much safer because all transactions are protected by a password. You can’t just authorize a transaction by giving out your credit card number and expiration date.

Adrian: Another model used a lot in the U.S. is recurring billing where you sign up for something and then are billed $10 or $20 a month. Do you have the ability to do that?

Chen: We have a product called ePass for recurring billing. Essentially it’s a service that allows you to set up your own YeePay account and link that with a bank card. By default, the banks would not allow you to charge something automatically without issuing a password because all transactions are protected by a password.

Adrian: In other words, the consumer can’t authorize it if it’s recurring every month. The password can only be used at the time each transaction is made unless they sign up with that system and they explicitly give it to you. Does that mean you don’t end up having much recurring billing?

Chen: We have very limited adoption, but we do see that as a trend probably in the future. It comes down to the trust issue and probably a cultural factor. Because the Chinese people tend to trust in more tangible things, recurring billing is something far in the future.

Adrian: Can you talk about mobile payment and how that works?

Chen: When we talk about mobile payment in China, we are mostly referring to remote transactions, not retail situations. It is where you are using your mobile phone to pay remote transactions that happen on the internet or mobile network. We also have different methods for mobile payment. One form is to use a mobile bank card payment gateway, which allows you to use your debit cards or credit cards on the mobile phone by putting in your card number and password to authorize the payment just as if you’re doing it online. The adoption of that kind of payment is still relatively small.

Alternatively what we have is universal prepaid card payment on the mobile phone, which is the most popular form of mobile payment. It’s the same as using the universal prepaid card online. People can just go to a convenience store, buy any prepaid card, and use the card’s PIN number as a form of cash to pay on the mobile phone by entering that PIN number on your mobile phone either through a WAP interface or directly in an application.

Adrian: What types of industries use mobile billing?

Chen: Mostly digital contents like gaming, fortune telling services, weather forecasts, and all kinds of digital content services that you can buy from your mobile phone.

Adrian: I know direct response TV is quite big here in China. How do people pay for that sort of stuff?

Chen: You can pay either when you order the goods or you can pay upon the arrival of the goods. In the former case, you can use a debit card or credit card through the telephone to pay for the transaction. In the latter case when you pay upon the arrival of the good, you can pay in cash, which is cash on delivery or you can pay through a mobile terminal the delivery guy uses. The mobile terminal has really taken off and is supported by more and more vendors.

Adrian: Is there anything that you want to talk about that we haven’t covered?

Chen: One thing I can touch upon is that we are not the only player here in the Chinese payment market. If you ask us what are the major differentiators that we have compared to some of our competitors, it is mostly in three areas.

The first thing is we provide total solutions. Not only do we do support online payment we also support telephone payment as well as mobile payment. Not only do we support bank card payment we also support universal prepaid card payments. Our philosophy is to give the maximum options to the end users and the merchants.

The second thing is that we are industry-focused. We are trying to provide custom-made solutions for different verticals. For example the requirements of the airline industry could be very different from the requirements of the online gaming industry.

The third area is that in addition to the core payment service we also provide a lot of value-added services. For example, we actually have online platforms that help our online game operators promote their contents and products. We also have a credit lending service where we lend travel agents money so they can buy tickets from the airline, but at the same time we also help them collect the money when they sell the ticket. Their money has to go through our system first, so the risks are totally manageable.