China unlocks its door to foreign payments, but how open is it?

China's declaration on Wednesday that its payments market is now open to foreign companies gives Chinese payments processors an opportunity to grow globally — but it's made similar moves before, with little effect.

The thaw in China's payments market actually started several years ago, with decisions such as the nation's removal of UnionPay's regulatory monopoly over card payments. Mastercard and Visa saw this as a lucrative opportunity, but not an immediate one, as their chief executives explained in earnings calls in early 2015.

vkilikov - stock.adobe.com

Mastercard CEO Ajay Banga called China a "clear opportunity for us over the next long-term decade."

Charlie Scharf, then Visa's CEO, expressed a similar sentiment. "This is a long-term commitment, which will pay off over the long term," he said. Scharf reiterated this position over a year later.

China's market thawed further in 2017 when a trade pact between the U.S. and China opened the door for U.S. payments companies to apply for licenses in China. And this week, the time has apparently come for the companies that expressed interest in the Chinese market to finally step in.

Certainly, business was already flowing in the other direction. Alipay, the digital wallet operated by Alibaba's payments affiliate Ant Financial, has struck numerous partnerships in the U.S. to enable Chinese tourists to spend at local merchants. It also attempted to buy U.S.-based MoneyGram.

Ultimately, it seems China realized the pitfalls of making international payments a one-way street. With global commerce and cross-border payments becoming more common and easier to deliver in an advancing digital age, China has determined it is in the country's best interest to take down one of the remaining roadblocks by opening its payments market to foreign companies.

"This announcement certainly is an invitation for competition, especially in the area of cross-border payments," said Erika Baumann, senior wholesale banking analyst with Aite Group. "But more importantly, this represents continued recognition that restricting the global payments market is restricting to the global economy."

Chinese payments processors have seen the benefits of expanding into other markets, including the U.S., so the country has a built-in case study that proves global payments can spark growth, Baumann added.

China may see an opportunity in engaging foreign companies that would still have to operate under Chinese regulations.

"The desire to introduce more competition must certainly be part of the regulators’ thinking, but it will not be easy for any foreign firms to compete with the dominant domestic giants," said Zil Bareisis, a London-based senior analyst for research firm Celent.

"I suspect another reason is supporting cross-border payments for Chinese consumers – while the acceptance of AliPay and WeChat Pay abroad is growing, they are far from ubiquitous, and other options would help more Chinese consumers who want to shop abroad," Bareisis added.

Besides the major U.S. card brands, other U.S. companies have been mining China's potential for the past year. PayPal, for example, was increasing its efforts to advance cross-border payments with Chinese consumers, a strategy it promoted in its China Connect program, while continuing to research the concept that U.S. retailers had much to gain by engaging with Chinese consumers. The company also partnered with Baidu's mobile wallet in China to allow users to link PayPal accounts to the wallet.

The gold mine that China represents has been at the forefront of many foreign payments and technology companies. Apple CEO Tim Cook has been known to discuss opportunities with Alibaba's Jack Ma, a relationship that likely facilitated Apple's move to accept the Alipay mobile wallet in its stores in the U.S.

It was another example of what is driving Chinese regulators to consider allowing foreign companies into its market. Chinese tourists are already spending a lot of money when traveling, or on e-commerce sites from other companies. Having payments companies familiar with those regions operating on Chinese soil could help grow that type of commerce for China and related markets.

Also, allowing foreign payment companies to operate within China, might allow the country to more closely scrutinize new technologies. For now, China's central bank won't allow QR code payment schemes or the launching of virtual cards from non-bank entities.

The country also has always been extremely wary of bitcoin and other cryptocurrencies.

In another step to potentially get its house in order for a growing payments landscape, People's Bank of China last year set a June 2018 date for firms such as Ant Financial and Tencent to route transactions through a new central clearinghouse.

"There is also the mandate that payment companies will need to store all data and payment information locally, as well as disaster-recovery sites as well," Aite's Baumann said. "This may limit the players that can invest in the Chinese payments economy to some of the biggest players like PayPal, who already has some presence in China with their partnership with Baidu."