American Express gets a break in China, but geopolitical pressure remains

Given American Express was reporting a 95% hit to one of its core businesses less than two months ago, announcing access to the world’s largest digital payments market has to be a major sigh of relief — even if there’s still entrenched competitors, an international virus and a cold war to navigate.

American Express announced it expects to begin processing payments in mainland China by the end of 2020, following approval from the People’s Bank of China for a network clearing license. China’s regulatory clearances for outside payment companies are notoriously opaque, but Amex’s announcement appears to be a step beyond the January announcement that China had “accepted” its application. Mastercard and Visa earlier this year received approval to “set up” clearing companies in China.

Amex, Mastercard and Visa are all vying for share of the Chinese payments market, which has more than $27 trillion in yearly transactions and more than 1.4 billion digital payment users.

Amex did not make an executive available for an interview by deadline, and Visa did not return a request for comment. Mastercard’s PR office called China a “vital market,” adding Mastercard has preliminary approval for its license application allowing Mastercard and local partner NUCC to work through the application process over the next year.

Amex is getting clearance to move forward at a time when travel, one of its main business lines, has been all but shut off by the coronavirus. In its most recent earnings report, Amex said travel and entertainment spending, which was almost a third of its business in 2019, had fallen 95%.

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Gaining access to a large market that’s further along in its economic recovery from the coronavirus — on Monday, The Wall Street Journal reported consumer spending in China is picking up — offers Amex upside potential. Given early signs of a travel recovery in an industry that has almost nowhere to go but up gives American Express even more maneuverability.

Amex has established a joint venture called Express Company with Lianlian DigitTech Co. Ltd., a Chinese fintech, to process payments. Express Company has built a network to clear domestic transactions on Amex-branded cards, and is also compatible with mobile wallets in China. Amex anticipates serving millions of consumers, businesses and merchants in China, as well as enhancing support for global customers when they travel to China. Since it’s operating as a network, Amex will not be issuing cards in China but instead will work through bank partners.

Beyond providing a potential market for domestic payments, China has provided other benefits for U.S. firms, most notably serving as a test market for companies like Starbucks, which has gotten an early look at new store concepts in a mature mobile-savvy market. New retail and payments technology is widespread in China, providing Amex with a view into how U.S. and European consumers and merchants will respond to innovation.

There are still obstacles. China UnionPay has operated similar to a monopoly for years, making it hard for a U.S. company to compete, though U.S. firms would have an opportunity to digitize supply chain transactions — a major source of revenue as B2B payment rails become an important part of the coronavirus recovery. Amex will additionally have at least some American competition. PayPal owns 70% of GoPay, a Chinese fintech that has licenses to offer online, mobile, cross-border payments and debit cards.

There are also geopolitical problems. China and the U.S. have spent much of the Trump years squabbling over trade policy, a battle that’s threatened cross-border fintech collaborations and B2B payments. More recently that battle has extended to the travel business, a major part of Amex’s income.

“That Amex, like Mastercard, feels it has to do this through a joint venture with a Chinese processor underscores the barriers,” said Eric Grover, a principal at Intrepid Ventures, who also said the interchange won’t be greater than UnionPay making incentive marketing a challenge. “One cannot be too cynical about China honoring its trade commitments.”