Amex gets a regulatory nod in China, but a lot more work remains

American Express' progress with local officials in China regarding card payments provides a potential early advantage against rivals like Mastercard and Visa. But building a market in China has never been easy for a global card brand.

American Express, announcing Friday it has approval to clear card payments in China, has formed a joint venture with Chinese fintech LianLain to build a network to support charges on Amex cards to be settled domestically.

The venture is registered as Express Technology Services Company. Amex has worked with LianLian for years to support mobile payments in China, and in April received early word from Chinese regulators that its application would be approved.

SUSANA GONZALEZ/BLOOMBERG NEWS

Friday's announcement is the next step, a "preparatory approval" for a clearing and settlement license in mainland China. It has a year to set up its operation, with the final approval coming from China's central bank. Among other outside companies, U.K. payment processor WorldFirst is also close to receiving a license to provide payments in China.

"Amex took the first lap in what will surely prove to be a long marathon," said Tim Sloane, vice president of payments innovation at Mercator Advisory Group. "The other networks are likely to follow, but I would take bets that the first few million transactions on these new networks still remain years away."

Amex can use the regulatory approval to build a beachhead to eventually expand beyond clearing and settlement, but building products, marketing and merchant acquiring are separate challenges. "This is on the back end. Penetrating and immersing in the market is another story," said Richard Crone, a payments consultant.

Amex did not return a request for comment by early Friday afternoon. In a statement on Amex's site, Chairman and CEO Stephen Squeri said the move is an "important step toward being able to bring the benefits and services of our global network to Chinese customers" and expand the ability of Amex's card members to use cards in mainland China.

China and India are two of the most attractive markets for U.S. payment companies, given their huge size and growth potential, since digital payments are much less mature in China and India than in the U.S.

But both markets come with regulatory challenges that are as large as the opportunity. Outside companies have traditionally been required to partner with state-controlled UnionPay to process domestic payments.UnionPay's partners in China include Visa, Mastercard and Apple. There's also very little expansion in the other direction, as Chinese payment companies such as Alipay support mostly payments for Chinese travelers in the U.S.

China for years has promised to be more receptive to outside payment companies, most recently announcing in March that it was officially open to outside companies. That followed prior promises for openness, with Visa and Mastercard plotting a move into China as early as 2015. Since that time, both card networks have provided frequent updates on their application to provide domestic payments in China, mostly characterizing the process as long-term. Visa and Mastercard did not return requests for comment on Friday.

The primary regulatory issue in both China and India is a local-presence requirement that spells a major investment in facilities and data storage. India's local data storage requirements have recently caused controversy, with Mastercard CEO Ajay Banga contending the rules harm international payments innovation. The Indian government contends India's payment policies are helping local companies gain share against American card brands.

India has been considered the more open of the two markets for outside payments processing and retail innovation, a narrative that may pivot given India's recent data rules tightening and China's Amex approval.

The approval also comes ahead of the G-20 summit, during which the escalating tariffs between China and the U.S. may be discussed. An agreement to ease tariffs could benefit cross-border payment innovation by easing general tensions between the two countries and creating a better environment for international payments collaboration. A deal with a major U.S. financial institution could improve China's negotiating position by countering China's long-standing reputation for moving the goalposts for U.S. payment companies that want to do business in China.

"The People's Bank of China is trying to swim upstream against deglobalization efforts," Crone said. "This is something the bank can easily point to that helps them."