Why this Chinese New Year will be a digital money fest

Over this weekend's Chinese New Year celebrations, 
millions of people will give each other cash-filled 
red envelopes, called hongbao in Mandarin.

But this year, a record number of these red envelopes 
will be digital and sent online over social messaging 
services such as Tencent's WeChat, usually via 
smartphone.


The numbers are breathtaking.

Over the six-day Chinese Spring Festival period last 
year, 516 million people sent and received 32 billion 
digital red envelopes - 10 times the number as over
 the same period in 2015.

And this year forecasters are expecting up to 100 billion 
digital envelopes to be sent and received by Chinese
 Well-wishers around the world.

It's a vivid illustration of how the world of money is
 changing, given that we can now send money to
 each other as easily as sending an email or text.

Global research firm Ovum thinks the value of these 
mobile peer- to-peer (P2P) payments could top
 $270bn (£214bn) worldwide in 2019. So why is 
sending money this way proving so popular, 
particularly among younger people?

"Social messaging has become the defining app of 
the smartphone era," says Jeremy Allaire, chief 
executive of P2P payments app, Circle Pay.

"Social payments has been a natural extension 
of this phenomenon - it's going to be the locus of
 most communications activity."

Paying somebody by text is quick and easy, removing 
the Hassle of having to go out to a cash machine and 
hand over money in person. All you usually need is their mobile phone number or email address.

Even if they haven't yet downloaded the app they 
receive a message telling them money is waiting
 for them once they're registered.

Whether you're splitting a dinner bill between friends, contributions to shared household costs, or simply 
sending a gift, payment apps offer convenience 
within an encrypted, secure environment.

And the fact that these payment apps can sit 
within message apps means you can settle bills 
without even interrupting your group chat.

The Chinese social media platforms operated by 
the tech giant Alibaba, Tencent and Baidu have 
spearheaded the social payments explosion in Asia.

While in the US, PayPal-owned Venmo has been growing
 at a phenomenal pace and looks set to reach about 
$20bn in annual transaction volume this year.

 In Africa, M-pesa has blazed a trail and is also now 
available in India.

Facebook Messenger, which now claims to have more
 than one billion users globally, has been offering
 in-app payments since 2015 in the US, but is now 
poised to expand the service throughout Europe 
after acquiring the relevant "e-money" banking licenses.

"There's an opportunity to create the WhatsApp of 
payments and to make this work globally," says Mr
 Allaire, whose payment service is also available 
within the Apple iMessage app. 

He envisages a world in which there are no barriers to 
sending money anywhere.

"I can send and receive content instantly for free, by text, 
email and video - so why can't I do the same with money? 
It's just data and software," he says.

Circle's service is built on crypto currency Bitcoin's 
block chain system, which enables transactions to 
be verified and completed quickly and securely,
 even across borders.

And it is this crossborder facility that offers great potential,
 Mr Allaire believes, largely because banks tend to charge
 far more than P2P platforms.

"I can beam money to my kids wherever they happen to
 be in the world at a cost of 0.3%, whereas banks will 
typically charge 3%," he says.

But smartphones have been around for nearly a decade,
 so what has changed to explain this sudden surge
 in the popularity of social payments?

"The regulatory environment improved," says James
 Morton, head of UK and Netherlands for Mangopay, 
a P2P payments platform powering several other apps, 
such as Pumpkin.

"To hold client money you have to be regulated, which 
was a big hurdle to overcome. And the payments infrastructure was quite archaic, working only from
 bank to bank with a complex structure of issuers,
 acquirers and processors - it was a very Manuel process."


Allowing firms to become "e-money issuers" opened
 the door to tech companies to automate a lot 
of these background processes, including the 
authentication, data protection and money laundering requirements imposed by regulators.

An international bank-to-bank money transfer can 
still take days to clear - despite efforts to introduce 
faster payments - whereas P2P payments can be 
completed in seconds.

And now that younger generations trust the security
 of their app and phones - verifying transactions by 
fingerprint or even fatial recognition - P2P service
 providers are interposing themselves between banks
 and acting as money repositories themselves.

For example, Venmo enables its 12 million users to load 
their Venmo accounts with money and use this fund 
to pay other people and make in-app purchases.

They can also transfer money back to their main
 bank account within a business day. It's the kind
 of service PayPal already offers for its customers 
through its PayPal.me service.

"If you look at how the gig and sharing economy is 
growing, I think payments infrastructure will remove 
the necessity for having your bank debit account for 
anything other than paying bills," says Mr Morton.

New P2P payment providers have spring up all over the 
place:

Square Cash, FaceCash Payfriendz, TransferWise, the relaunched Google Wallet, People Pay, Popmoney, 
Snapcash, Dwolla - the list goes on.

Not that the big banks are twiddling their thumbs while 
teach upstarts steal their business.

In the US, a company called Early Warning, which is 
owned by big names such as Bank of America, JP
 Morgan Chase and Well Fargo, has set up a P2P 
payments business called Clear change with access 
to more than 100 million customers.

All you need to send money to someone else's bank 
account for free is their email address or mobile
 phone number, much like the UK's PayM system.

Card issuers Visa and Mastercard have joined up
 with ClearXchange to allow people to make P2P 
payments via their MasterCard Send and Visa 
Direct platforms.

These are exciting times in the world of P2P payments -
 more competition, more convenience, lower costs.

But in the Chinese Year of the Rooster, it remains to be 
seen whether a digital red envelope will bring as much 
luck and good fortune as the traditional paper one.