Small Steps in China

U.S. payment companies finally appear to be gaining some traction in China, but how—and when—that foothold will develop is still unknown.

China, as the world’s second-largest economy, has long been an attractive market for U.S. payments companies. It’s only in recent years—starting in 2005 and accelerating in the past few—that a handful of these companies began to announce the first steps to doing business in mainland China.

The most recent activity is Mastercard Inc.’s joint venture with Nets­Union Clearing Corp. to establish a domestic bank card clearing entity. In February, the entity formed from the joint venture—Mastercard NUCC Information Technology (Beijing) Co. Ltd.—received in-principle approval from the People’s Bank of China.

Mastercard says within a year the joint venture will be able to apply to the bank for formal approval to begin clearing transactions.

PayPal Holdings Inc., too, is readying for more transactions in China. It has two programs in preparation. One stems from its 70% stake in Guofubao Information Technology Co. Ltd., better known as Gopay. With that deal, PayPal won the right to be the first foreign company to offer online payments in China’s vast market.

The other is an acceptance deal with UnionPay International that sees PayPal support UnionPay cards in its digital wallets, enabling those cards to be used for online payments at PayPal merchants. By 2020, PayPal says the capability will be available in more than 30 markets.

In late 2018, American Express Co. was the first major U.S. payment network to get a so-called preparatory approval for a clearing-and-settlement license. This action is through a joint venture with a Chinese financial-technology company, Lianlian Yintong Electronic Payment Co. Ltd., to process domestic transactions on AmEx cards.

“[O]ur license has been accepted, we are waiting for the final approval, and hopefully some time this year, we will launch the network,” Stephen J. Squeri, AmEx chairman and chief executive, said in a January earnings call, according to a transcript from SeekingAlpha.com.

That venture will increase not only coverage in China, but it also will put more cards on the network as AmEx engages “with the Chinese banks to have more Chinese travelers as they go into—and the reality is, they are going to go into a lot [of] European and Asian cities, which is going to put more demand and will actually then help drive more coverage,” Squeri said.

Other deals, such as Discover Financial Services’ pact with UnionPay for mutual acceptance on their respective networks, and Total System Services Inc.’s stake in China UnionPay Data Co. Ltd., the processing unit of the card brand, started in the mid-2000s. TSYS is now part of Global Payments Inc.

Overarching these ambitions is the newly signed 86-page trade agreement between the United States and China. The agreement, in its first phase, enables U.S. electronic payments providers to operate in China as wholly foreign-owned entities. The agreement also provides a mechanism and timeframe for Chinese authorities to review applications.

Chinese Culture

The big question remains: Does all of this bode well for U.S. payments companies and their prospects in China after decades of having been shut out of this enormous market?

“At this time it’s too volatile of a market to provide any solid feedback on payments in China,” says Krista Tedder, director of payments at Javelin Strategy & Research, a Pleasanton, Calif.-based payments research firm. “You will continue to see Chinese payment methods acceptance at merchants, however, it is to facilitate international commerce [and] travel.”

Tedder discounts the trade deal’s provisions. So much depends on Chinese approval. “To deliver services in China requires a partner,” she says. “I do not anticipate non-Chinese companies will ever be allowed to work on their own without a Chinese backer. American Express is a bank themselves, yet they still required a partner. The U.S./China deal should have little impact on the payment strategy of China. This has been their plan for decades.”

Still, U.S. payments companies are undeterred. “We are delighted and encouraged by this latest decision from the PBOC,” Ajay Banga, Mastercard president and chief executive, said in a statement. “China is a vital market for us, and we have reiterated our unwavering commitment to helping drive a safer, more inclusive and seamless payments ecosystem for Chinese consumers and businesses. We remain focused on working with the Chinese government and local partners to grow the overall payments infrastructure.”

And Visa Inc. views the trade agreement as providing another opportunity. “Visa welcomes the signing of the Phase One trade agreement between the United States and People’s Republic of China, as well the Chinese authorities’ decision … to continue expanding opportunities for international players in the domestic payments market,” a Visa spokesperson says in a statement.

“Visa is working closely with the Chinese government, including the People’s Bank of China, throughout the application process for a Bank Card Clearing Institution license,” the statement continues. “We see significant potential for Visa to support the continued growth and evolution of digital payments in China, including through the 2022 Beijing Olympics. Visa is approaching the Chinese domestic market entry opportunity with a long-term focus.”

License approval is a few major steps away from actually processing domestic China transactions. But U.S. companies, experts warn, could stir a culture clash. “The challenge American companies will need to face is if they really want to work with China,” Tedder says. “The corporate strategies and American business principles of free markets and free speech do not fit with Chinese culture.”

Sometimes U.S. companies have tried to resolve issues by taking steps they figure will please Chinese authorities. One example is Apple Inc., which recently removed two apps from its store, according to Wired.co.uk. One was for a news site that reported on Hong Kong protests and the other enables individuals to locate police on a map.

“Companies may be forced to not be as inclusive socially in China,” Tedder says.

Unknowns Abound

Still, the trade agreement, in particular, is a major step ahead, says Gilles Ubaghs, a senior analyst at Boston-based Aite Group LLC. “The announced news marks a major move in global payment schemes finally getting access to the Chinese market, after years of battles taken to the [World Trade Organization], where China was found at fault, and foot dragging by the regulators on allowing Western firms into the enormous domestic payments market,” Ubaghs says.

“Chinese payments have long been a goal market for Western payment firms, but access to the market has been extremely limited if not reversed, most notably Yahoo losing out in its ownership dealings with Alipay,” he says.

In 2011, according to the Financial Times, Yahoo was a major stakeholder in the mobile-payments service owned by e-commerce behemoth Alibaba. When Alibaba’s ownership structure changed, Yahoo feared the value of its share in the company might decrease. Yahoo acquired its 43% share in Alibaba in 2005 for $1 billion. Alibaba then was valued at about $2.5 billion and now is valued at $24.6 billion, according to BusinessInsider.com.

“Access to the payments market in China has since blown up into a global trade issue, while domestic payments in China exploded in size and scale, particularly in the realm of mobile payments with Alipay and WeChat Pay,” Ubaghs says. Alipay has more than 1.2 billion users and WeChat Pay 900 million users.

The unknowns abound about when and to what degree U.S. payments companies might succeed in China. But, as Aite’s Ubaghs says of the Mastercard/NetsUnion deal, “This is still early stages, and it is likely the devil will prove to be in the details on any finalized deal.”