China’s AI Revolution Advances, One Mobile Payment at a Time

Breathless coverage in western and Chinese media casts Alipay and WeChat Wallet—the mobile payment outfits linked to Alibaba and Tencent—as leaders that are creating a post-cash society. It’s a dramatic transformation where until recently cash was king, with with credit and debit cards never making a serious dent. Researchers estimate that in 2016 Chinese mobile payments topped $5.5 trillion, almost 50 times the US total. The transformation is described as one of China’s first instances of world-leading indigenous innovation. The applications are eye-catching, spanning from beggars accepting digital donations  to customers paying with facial recognition technology at KFC.

For the uninitiated: Alipay and WeChat are linked to a user’s bank account and operate via QR codes—unique digital bar codes that can be generated or scanned by smartphones to make a purchase. To confirm that purchase, users give a fingerprint scan or security pin, and money is instantly transferred from the bank account. It’s usually a seamless process, and takes about half the time of using a credit or debit card in the United States.

So what? Sure, mobile payments reduce friction, but using Alipay at stores is still functionally equivalent to making a purchase with a debit card, while lacking many of the advantages of a credit card. If the move to mobile payments is just a one-to-one swap—wallets for phones, and cash for QR codes—it would be a change in form, but not necessarily substance. Nothing revolutionary there.

Hyperventilating about the rapid rise of mobile payments or dismissing them as just debit cards replacements both miss the real significance going forward. Today mobile payments are indeed just payment friction reducers, but they will soon become one of the core building blocks of Alibaba and Tencent’s push into artificial intelligence (AI).

That’s because Alibaba (through its finance affiliate, Ant Financial, under which Alipay operates) and Tencent aren’t just digitizing the purchases of Chinese consumers. By combining reams of real-world payment data with data gleamed from their sprawling online empires, these companies are mapping the consumption habits of hundreds of millions of users at a level of granularity not seen anywhere else. On top of that real-world map of purchases, they can also layer a social map of the millions of digital transfers between friends, family, and colleagues within the apps.

At the dawning of the AI era, data is the raw energy that fuels new advances—everything from better products to bespoke services. Mobile payments are helping Chinese companies capture massive amounts of what has traditionally been the most elusive kind of data: offline consumer activity in the real world. In short, they are creating a real time, real world map of consumer behavior, an incredibly valuable tool for these consumer-facing internet companies.

In the United States, internet giants also vacuum up massive amounts of data from our digital lives: what we search for, whose posts we like, what we read, and what we buy online. But in the offline world—where 91% of consumer spending occurs—they are largely flying blind. Other than tracking your location and your requests for information (or in Amazon’s case, delivery of online purchases), they have few windows into the content of your daily life as a consumer.

After using Facebook for over ten years, I’ve still never purchased anything through it, and despite using Amazon for the same amount of time, the company still doesn’t know who I hang out with or where I like to eat lunch. Apple has reported considerable growth in the usage of its Apple Pay, but since the company doesn’t release data on transactions, it’s hard to get a sense of total consumer adoption. Real-world observations certainly suggest that adoption of Apple’s mobile payment system lags far behind China’s leaders.

Mobile payments give Alibaba and Tencent an unprecedented level of insight into the real world. That data allows them to know when and where you get your hair cut, shop for vegetables, transfer money to friends, sing karaoke, split bills, and visit the doctor. Mobile payments allow Alipay and WeChat Wallet to pull massive swaths of the consumer economy out of the digital darkness, opening it up to analysis and exploitation with deep learning algorithms. (It should be noted that Alipay’s parent company, Ant Financial, is an affiliate, not a subsidiary of Alibaba. Though the two are separate companies, they are both part of the Alibaba Group, and it’s probably safe to assume data will be exchanged liberally between the two. If not, then these benefits will primarily accrue to Tencent.)

That offline data can be contextualized with data from areas these companies already dominate online: social networking, online shopping, digital entertainment, and internet finance. Alibaba’s e-commerce empire rivals Amazon, while Tencent’s WeChat dominates Chinese social media and has expanded functions to include everything from paying taxes to buying train tickets and booking a doctor’s appointment. Both Alibaba and Tencent run leading online video platforms. Alibaba has come to dominate cloud infrastructure while Tencent leads in gaming and digital literature. The two giants are also promiscuous in their strategic investments, forging partnerships with market leaders in food delivery, ride-hailing, bike sharing, and just about every other promising online service lumped under the umbrella of the “sharing economy.”

Taken together, the digital data generated by these diverse products and investments already weave a tightly knit tapestry depicting user behavior, one that has now been augmented by mobile payments. This is laying the foundations upon which Alibaba and Tencent will build AI-driven businesses that promise to shake up large swaths of the Chinese economy.

Take mortgage lending. Traditional banks base their lending decisions on a handful of correlated but crude metrics: credit history, current income, and zip codes, among others. If Alibaba or Tencent decide to seriously move into this space, those baseline metrics could be supplemented with a rich depiction of a mortgage applicant’s life as a consumer, borrower, worker, commuter, friend, eater, or even gamer. Such data would be overwhelming and largely meaningless to a human loan officer, but the magic of AI deep learning algorithms would theoretically more accurately model a debtor’s credit worthiness than traditional tools alone.

The tech giants’ wealth of data, combined with deep learning algorithms, has revolutionary applications for many more sectors of the economy: optimizing logistics networks, producing movies, choosing locations for restaurants, rerouting buses, modeling systemic financial risk, managing urban traffic flows, mapping the spread of disease, or merging on- and offline retail in fresh seafood markets, as Alibaba is already doing. (The Communist Party also sees AI’s potential for social control, which may be why it is considering taking a stake in these companies.) China’s tech giants clearly won’t be going into all of the above industries—the real-world footprint is just too large—but they will be able to squeeze massive value out of mining and licensing their data, or forming strategic partnerships.

Theoretically, US credit card companies could cull similar value from much of their data. They have the advantage of decades of payment history, but beyond those purchases they are blind to almost everything else about their customers’ on- and offline life. They’re also largely excluded from small purchases and digital money transfers between friends or family that mobile payments capture, one of the reasons why some market watchers predict Alipay and WeChat Wallet will soon surpass Visa and Mastercard in total daily global transactions.

And with each of those transactions, China’s biggest technology companies put one more dot on the most massive map of consumer behavior ever drawn. What they choose to do with that knowledge is still anyone’s guess—but it will be lucrative.

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