Why PayPal’s Approval to Enter China’s Payments Market May Be Less Than It Seems

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PayPal Holdings has become the first foreign payments company to gain a foothold in China, more than a year after Beijing said it would open the space to foreign firms.

But the deal may be less than it seems, as PayPal, a leader in U.S. digital payments processing, enters China as a bit player. Incumbents Ant Financial and Tencent occupy 90% of the market already, leaving little room for the newcomer to make its mark.

“I’d imagine PayPal’s going to struggle to punch through the existing incumbents,” says Robert Carnell, Chief Economist and Head of Research Asia-Pacific at ING Asia. “China tends to only open up markets when it thinks domestic firms already have it pretty much stitched up and aren’t too worried about the competition.”  

A long time coming

The People’s Bank of China (PBoC), China’s central bank, announced it would open the payments processing space to foreign firms in March last year but has been since been accused of slow-walking the process.

American Express won permission to enter a joint venture with local partner LianLian Group last November but Visa and Mastercard, which applied for licenses more than a year ago, have yet to receive an answer. PayPal is the first foreign firm allowed to go it alone.

On September 30, PayPal announced the PBoC had approved its purchase of a 70% equity stake in local payments processor GoPay, which holds licenses to process online and mobile transactions and primarily operates in the ecommerce and cross-border commerce spaces.

Writing on his personal LinkedIn account, PayPal CEO Dan Schulman said, the firm was “honored to become the first foreign payment platform to be licensed to provide online payment services in China.”

The acquisition is expected to close in the fourth quarter of this year for an undisclosed amount.

The acquisition actually marks a return to the market for PayPal, which entered China in the early 2000s alongside eBay but left when eBay pulled out of the market in 2006. Around the same time, Beijing introduced regulation for the payments processing industry and shut out foreign competitors.

“This is a clear sign the government is finally opening up the last segment of the mainland financial industry to foreign competition so I think, at a basic level, it’s a bit of a trophy for PayPal to have made it through this process and get a position that will allow it to compete,” says Zennon Kapron, director of Asia fintech consultancy Kapronasia.

Opportunities at the edges

China’s digital and mobile payments markets generated $200 trillion in revenue last year. Mobile payments alone were $29.93 trillion in 2017 and are expected to grow threefold to $97 trillion in 2023. With the market growing there is at least room for PayPal to expand into, but it will have to jostle for space against giants Alipay and WeChat, which are heavily integrated with consumer lifestyles.

ING Greater China economist Iris Pang said in a blog post last year that the benefit to foreign firms from China opening the payments space will come from Chinese customers making cross border payments. PayPal is already in that space.

In 2017 the company partnered with China search-engine giant Baidu to provide PayPal services for Baidu Wallet users shopping overseas. PayPal previously partnered with Alibaba’s international shopping site Aliexpress, too, but the partnership has been fraught and PayPal is not currently an accepted payment method on the cross-border e-commerce site.

“The real news here is that the payments market is opening up,” Kapron says.

So far China’s financial reforms have focused on the capital markets, culminating in JP Morgan becoming the first foreign bank to own a majority interest in a Chinese fund earlier this year. Kapron says it’s positive to see that change happening in the payments side as well but warns that, for foreign firms coming in, finding a niche will still be a problem.

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