The late arrival of foreign competition in the China payments market

Written by Kapronasia || June 08 2023

For the longest time, the China payments market was an oligopoly of the privileged three: first the state-owned UnionPay, and then as the country transitioned to mobile payments, Alipay and Tenpay. U.S. card giants like Visa, Mastercard, and American Express as well as PayPal could only look on with envy and frustration as Beijing kicked the can down the road on boosting market access – which was supposed to have been complete by 2006 per the conditions it agreed to upon accession to the World Trade Organization in 2001.

If patience is a virtue, then these firms must have become virtuous over the years. And their patience, has perhaps, paid off: Eager to attract investment in the financial sector and shake up the mobile payments duopoly, Beijing has gradually permitted more foreign investment in its payments sector.

What is at stake is a colossal payments and cards market, valued at $21 trillion in 2021 by research firm Global Data. The sheer size of the market means that even niche segments are worthy of cultivation by well-capitalized firms willing to be patient.

The cards segment

Since China allowed UnionPay to maintain a card-clearing monopoly until 2020, U.S. card firms have to focus on niche markets. American Express is perhaps the most suitable for this type of business model and plans to focus on China’s premium segment. According to Amex’s research, there were more than 2.2 million people with more than 6 million yuan in investable assets in the Chinese mainland in 2020, which was expected to continuously increase at an approximately 10% compound annual growth rate until 2025. Amex reckons that these consumers would be interested in its premium cards.

To be sure, Amex is known internationally for its high fees and we expect that this will put a ceiling on its growth in China. The mass market won’t want to pay the fees. That said, HNWIs will find the fees less objectionable if Amex is able to offer them adequately exclusive products.

To that end, the U.S. card company is betting that an exclusive physical card will appeal to HNWIs who want something rarified. In the U.S., Amex offers its “Black Card.” In China, it offers a “Red Card,” given the auspicious connotations of that color.

Amex has also done its homework on Chinese consumers’ preference for debit cards, which account for 57.4% of total card payments value. To that end, in late 2021 Amex’s China joint venture Express Technology Co. teamed up with China Industrial Bank to introduce two American Express-branded debit cards, the first debit products to support renminbi transactions on the U.S. card giant's network. Its credit cards first have been able to support local currency transactions since 2020.

One other factor for Amex to consider: fee revenue per user. According to Bloomberg, in China the card-clearing fee rate is 0.065% for domestic banks and the acquiring fee rate ranges from 0.5% to 1%. In the U.S., issuers like AmEx charge between 1.4% and 3.5%. Amex will need to build enough merchant scale in China to compensate for lower fee revenue per user.

Digital payments opportunities

For its part, PayPal was the first foreign company to receive approval to provide online payment services in China. Alipay and Tenpay together account for about 90% of China’s digital payments, PayPal could give them a run for their money in cross-border payments.

Not only has the duopoly fallen out of favor with Chinese regulators, but PayPal’s wholly-owned China subsidiary also recently won approval from the People’s Bank of China to almost double its registered capital to 4.52 billion yuan (US$666 million), which will be the largest capital base of any non-bank payment provider in China. This is significant because it is far more than Alipay, which has 1.5 billion yuan, and Tenpay, which has 1 billion yuan.

PayPal’s persistence may go to show that in China, late is truly better than never. After years of being shut out of the market, it finally was finally able to enter following its acquisition of 70% of Beijing-based Gopay Information Technology in early 2019 and the rest of the company two years later. In May 2022, Gopay was officially renamed PayPal Payments. The Chinese PayPal subsidiary has secured several key licenses, including those for online and mobile transactions.

When it comes to cross-border payments, Alipay remains formidable given its e-commerce ecosystem. However, PayPal now has money to spend to compete. The question is whether PayPal can offer lower fees than Alipay. We do not recommend holding one’s breath for that though given PayPal’s reputation for high fees.

Cautious optimism

We expect that given the patience and persistence shown by both Amex and PayPal, as well as their enormous resources, at a minimum they will eventually enjoy some modest success in China. As recently as four years ago, we might have said otherwise, but then the pandemic happened, and China’s economy slowed down more quickly than anyone expected. While the Chinese economy is now recovering, foreign investment is needed, and financial services is one sector in which Beijing is increasingly willing to introduce more foreign competition because it sees doing so as in both consumer and national interests.

While the Chinese government remains cautious about disrupting state-owned firms in the financial sector, private tech companies like Alipay and Tenpay do not enjoy the same protections. Once we factor in the involvement of a Chinese partner in both the Amex and PayPay ventures, then the outlook for them arguably becomes even better.

As for other U.S. payment giants, both Mastercard and Visa appear to be stuck. The former was given approval to prepare to enter China in February 2020, but has not reported any progress since. Visa has yet to reach even that preliminary stage.

It is worth tracking the progress of their respective China ventures closely. Quicker greenlighting of both companies’ bids to enter the China market would signal a clear commitment by Beijing to increasing competition in the financial services sector. A continued delay of their applications, on the other hand, would suggest a less-firm commitment to financial reform.