Tencent Q3 Earnings: Beats Estimates, But Payments System Is a Drag on Profits

November 10, 2015, 3:26 PM UTC
Images Of Tencent Applications As Second Quarter Earnings Are Released
The icons for Tencent Holdings Ltd.'s messaging applications WeChat, left, and QQ are displayed on an Apple Inc. iPhone 5s smartphone in an arranged photograph in Hong Kong, China, on Wednesday, Aug. 13, 2014. The success of messaging services QQ and WeChat has helped boost Tencents market value to about $161 billion, making it the most valuable Internet company in Asia. Photographer: Brent Lewin/Bloomberg via Getty Images
Photograph by Brent Lewin — Bloomberg via Getty Images

Tencent, the giant behind China’s biggest social network, WeChat, said on Tuesday that its third quarter revenue rose 34% as profits rose by the same. Revenue beat analysts’ consensus estimates; profits just missed.

But the most interesting thing inside the Tencent’s quarterly earnings report is how the company’s is using its massive social user base—WeChat has 650 million users, or about twice that of Twitter (TWTR)—to drive its relatively new payments system in China.

In China, WeChat Pay is positioning itself to be the Mastercard (M) to Alibaba’s Visa (V). Alipay (BABA) controls around 80% of online payments in the country. Mobile payments in China are expected to triple to $3 trillion in 2018 from $1 trillion in 2014, according to iResearch estimates. Some market researchers predict that Tencent could earn $5 billion in annual revenues from payments if it’s able to control one-third of the market.

Tencent has driven usage of WeChat Pay through investments in the online-to-offline companies—in categories such as food delivery and online shopping—that are gaining traction among Chinese users. It then gives those companies the incentive to use payments to be included in Tencent’s ecosystem.

So far, it comes with a catch: Though consumers are loving it, supporting payments is proving costly. Tencent nodded to the costs in today’s earnings. They were likely a reason the company’s profits fell just short of expectations even as sales sailed past analysts’ estimates.

“As we enrich payment scenarios and invest in initiatives to deepen users’ mobile payment habit, we are incurring significant bank handling fees on the C2C money transfers which we offer to users largely for free,” Tencent said in a statement. “We believe such cost represents a worthwhile investment for the future given the rapid growth in users binding their bank cards to their Weixin Pay or QQ Wallet accounts, and the fast increase in monthly usage of such accounts.”

Expect to hear more about Tencent’s efforts to build a new Mastercard in future quarters.

Subscribe to Data Sheet, Fortune’s daily newsletter on the business of technology.

For more on China’s tech giants, watch this episode of Fortune Live:

Read More

Artificial IntelligenceCryptocurrencyMetaverseCybersecurityTech Forward