Caixin
Dec 20, 2019 08:09 PM
FINANCE

It’s Open Sesame for PayPal in China After Gopay Deal Closes

PayPal will have to fight an uphill battle to break the duopoly of Alipay and WeChat Pay.
PayPal will have to fight an uphill battle to break the duopoly of Alipay and WeChat Pay.

U.S. payment giant PayPal Holdings Inc. has become the first foreign company able to officially process online payments in China after completing the acquisition of a majority stake in Chinese online payment provider Gopay, allowing it to challenge the country’s two dominant players, Alipay and WeChat Pay.

The purchase, which was approved by China’s central bank at the end of September, marks another step in the country’s efforts to open up its financial services market to foreign companies. San Jose, California-based Paypal bought a 70% stake in Gopay Information Technology Co. Ltd. from a unit of debt-ridden aviation-to-real estate conglomerate HNA Group. The remaining 30% stake is held by Cofortune Information Technology, a unit of China International Electronic Commerce Center, an agency under the Ministry of Commerce. The value of the deal has not been disclosed.

"We're pleased to complete this historic transaction, which enables us to broaden our participation in such a dynamic market," Dan Schulman, PayPal’s president and chief executive, said in a statement.

The deal makes PayPal a front-runner in the race by foreign payment companies to enter the huge Chinese electronic payments market, especially yuan-denominated payment clearing.

China has been slow to open up the sector to foreign companies, and in 2010 the U.S. complained to the World Trade Organization about its restrictions on electronic payment services for yuan-denominated card transactions. In 2012, the WTO ruled Beijing was violating the body’s rules by maintaining UnionPay as a monopoly supplier for the clearing of certain types of yuan-denominated payment card transactions.

Cross-border payments boom

China decided to open the card clearance market in 2015 (link in Chinese), issuing regulations that allow foreign companies that meet certain standards to provide card clearance services. American Express Co. (AmEx) in November 2018 became the first foreign company to win approval from the People’s Bank of China (PBOC).

Through a 50-50 joint venture with Lianlian Yintong Electronic Payment Co. Ltd. (Lianlian Pay), a Chinese financial technology services firm, AmEx is building a network that enables yuan-denominated charges on AmEx-branded cards to be cleared and settled through its own network. The venture has not yet started operation. Mastercard Inc. and Visa Inc. are seeking similar licenses.

PayPal now has access to China’s vast domestic online payments market, which is dominated by mobile payments. Research group Frost & Sullivan estimates the value of transactions made through mobile payments will grow to $96.7 trillion in 2023 from $29.9 trillion in 2017, according to a five-year outlook published in January.

But PayPal will have to fight an uphill battle to break the duopoly of Alipay, which is owned by Alibaba Group affiliate Ant Financial Services Group, and WeChat Pay, owned by social media and gaming giant Tencent Holdings. Between them, they control more than 90% of China’s third-party mobile payments market, according to data researcher Analysys Ltd.

PayPal recognizes the challenge and in a conference call in October, Schulman said the U.S. company’s initial focus will be on providing cross-border payment solutions to Chinese merchants and consumers, and linking China’s e-commerce “ecosystem” to PayPal’s network.

Nearly 65% of Chinese tourists have used mobile payments abroad, approximately six times higher than the average non-Chinese traveller, according to Frost & Sullivan. Chinese shoppers are also increasingly buying goods online from overseas, where PayPal has strong networks and few merchants accept Alipay and WeChat Pay payments.

There is limited room for Paypal to grow in China because Gopay does not have a large number of customers and it is very difficult for payment companies to attract new customers, Xue Hongyan, an internet finance expert at the Suning Institute of Finance, wrote in an article (link in Chinese) in Caixin in October.

Xue said PayPal’s international presence gives it a significant advantage developing a cross-border payments business in China, as it operates in more than 200 markets around the world and its platform supports more than 100 currencies.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com)

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