U.S. banks and payments companies are attracted to China's explosive population growth and surging economy, but the country's regulatory climate makes the market a wild card.
Yahoo Inc. can testify to that. The online search giant's reputation has taken a hit after last week's disclosure that Alibaba Group Holding Ltd., an Asian e-commerce operator in which Yahoo owns a stake, transferred ownership of its online payments company Alipay to an outside business.
"It's just one more of the complexities that, as companies look to expand their trade globally, and in particular into China … banks should be aware of," said Nancy Atkinson, a senior analyst who covers wholesale banking for the Boston research firm Aite Group LLC.
Alibaba has said it transferred ownership of the PayPal-like service to a separate Chinese company owned by its chairman and chief executive, Jack Ma, to meet new Chinese licensing requirements for payments businesses.
News of the transfer and questions over when Yahoo, which owns about a 40% stake in Alibaba, first learned of the change have caused Yahoo's shares to drop by as much as 14% since the company disclosed the move. There has also been speculation that its board wants to replace its president and CEO, Carol Bartz.
"The cautionary tale is that China is going to continue to be somewhat protective of its markets despite being more open than it was at one point in time, and … if you are going to go into that market … be prepared that you might find yourself in a different situation a few years down the road from where you think you are going to be," Atkinson said.
As of 2009, foreign banks accounted for 1.7% of bank assets in China, according to a January report by Celent analyst Hua Zhang. That was down from 2.2% market share in 2008, a decrease that Zhang attributed to the financial crisis, regulations on how foreign banks can sell products, competition from domestic banks and other factors.
For payments vendors, specifically, China has long been a tough market to crack because of tight restrictions.
China's central bank, the People's Bank of China, has restricted the ability of foreign payment networks such as Visa Inc. and MasterCard Inc. to process domestic transactions made in renminbi, China's local currency, despite agreeing to ease restrictions when it joined the World Trade Organization in 2001.
U.S. networks must also partner to provide cobranded payment cards with China UnionPay, the national bank card association in China.
Banks in China can only issue cards carrying Visa's brand, for example, if they also carry China UnionPay's brand. Transactions that customers make with those cards in China are to be routed over China UnionPay's network and those made outside of China are to be routed over Visa. However, China UnionPay opposes limiting routing of international transactions to Visa.
Despite such challenges, Visa's "interest in China is not diminished," a Visa spokesman said by email. "We believe China would benefit from a competitive domestic payment market, but it is clearly not for us to decide how and when this might occur."
In September the U.S. government filed a WTO action against China, claiming its government has given China UnionPay a monopoly over electronic payments services there. The WTO agreed in March to establish a panel to review the case.
Payments companies are eager to tap into the Chinese market because of its growing cardholder base.
The number of bank cards in circulation in China jumped to 2.4 billion in 2010 from 475 million in 2002, according to a May 10 research note by Barclays Capital analyst Darrin Peller.
But despite clear signs that China has violated its WTO commitments in respect to opening up its payments market, U.S. companies have been reluctant to aggressively challenge regulators for fear of retaliation, said Eric Grover, a payments consultant with Intrepid Ventures.
"On paper, the China market is very, very enticing for the obvious reasons," but "the reality of what kind of access do foreign players have … is very disappointing," Grover said.
The fallout Yahoo is dealing with could dull some companies' appetite to expand there, Grover said.
Last year the People's Bank of China established new licensing requirements for nonfinancial institutions that perform online payments, bank card acquisition and other payment services.
In the measures, the PBOC did not specifically address foreign-owned operators but said it planned to issue separate rules for those entities later, prompting speculation that it would restrict outside ownership.
"China's clearly a market where we would like to do more," David Duncan, the group executive for the Asia-Pacific region at Total System Services Inc., said in an interview this week.
However, the company wants "to wait and see what happens with these regulations before we decide to do more," Duncan said.
TSYS, a Columbus, Ga., payments processor for banks and merchants, acquired an equity stake in a joint venture with China UnionPay in 2005. The size of its stake is about 45% today.
The subsidiary, China UnionPay Data Co. Ltd., provides processing services for card issuers in China and has about 100 clients, Duncan said. None of the processing services that TSYS performs through CUP Data are covered by the requirements that China's central bank issued last year, Duncan said.
Still, such regulations discourage expansion into certain new services in the near term, Duncan said.
"We've clearly gone to market, and one of our core strategies is to look at becoming a direct acquirer, not just in the United States but around the world," Duncan said. "We've looked at many markets. We've definitely looked at becoming an acquirer in China, but up to this point we have not felt like … now was the time to do that."
Brian Riley, a senior research director at TowerGroup in Needham, Mass., said payments companies should think of China as a long-term investment in light of its legal structure.
"I think they have to look at Yahoo as an example of how complicated things can get," Riley said. "You have a very powerful U.S.-based company in a very attractive market … but it circles back to the fact that you just don't jump into the Chinese market. It should be a secondary investment, not a primary investment."
