What PayPal’s entry into China's payments market means for competitors

How PayPal obtained a payments license to operate in China — an achievement that’s long frustrated the biggest U.S. banks and payments networks — sheds light on the unique challenges of breaking into the world’s biggest payments market.

Working through its Shanghai-based subsidiary, PayPal acquired 70% of a small Chinese online payments company called GoPay that owns licenses to offer online, mobile and cross-border payments and to issue debit cards.

China’s central bank approved the deal, which is expected to close at the end of this year, PayPal said on Monday. Financial terms were not disclosed.

Peter Foley/Bloomberg

The move — coming in the midst of the U.S.’s trade conflict with China and rumors of a broader Chinese economic slowdown — could signal hope for Visa, Mastercard, Amex and Discover along with certain U.S. banks and processors, which have tried over the years to enter China’s payments market without any meaningful success.

But analysts are skeptical that China is poised to broadly open its market to foreign competition or actually enable China-originated transactions on U.S.-issued payment cards.

Optimism rose early last year when the People’s Bank of China said it would open China’s market to foreign electronic payments companies. Visa and Mastercard applied anew for licenses, but to date no foreign credit card company-issued transactions have resulted. Earlier this year Mastercard renewed its efforts to operate in China, continuing years of attempted negotiations.

Amex late last year obtained preliminary regulatory approval to operate in China through a partnership with Chinese fintech LianLian, but Amex has not reported any progress on further moves there. Discover since 2005 has had a reciprocal network acceptance deal with China Union Pay, and Industrial and Commercial Bank of China since 2013 has issued a Diners Club credit card in China.

Ant Financial’s Alipay and Tencent’s WeChat already dominate mobile payments in China. Alipay’s affiliation with e-commerce operator Alibaba provides rich cross-marketing opportunities, while WeChat Pay is deeply integrated with its social media platform.

While both Alipay and WeChat Pay have aggressively expanded acceptance outside of China, purportedly for the convenience of Chinese tourists, the QR code-based platforms have limitations and don't broadly support cross-border payments.

GoPay, operated by Guofubao Information Technology Co., offers a mobile wallet supporting credit and debit payments and P2P transfers, according to the company’s website.The site also describes support for corporate disbursements and airline ticket purchases.

“The People’s Bank of China has approved PayPal Information Technologies Co. Ltd.’s acquisition of a 70% equity interest in Guofubao Information Technology Co. (GoPay), a holder of a payment business license in China,” said PayPal CEO Dan Schulman, in a statement.

PayPal is the first foreign payment platform to be licensed to provide online payment services in China, Schulman noted.

“We look forward to partnering with China’s financial institutions and technology platforms, providing a more comprehensive set of payment solutions to businesses and consumers, both in China and globally,” Schulman concluded in the statement.

Despite the hurdles China places in front of foreign payment companies, there is a clear incentive to continue pursuing this market.

“China is one of the fastest growing markets and represents a large opportunity for payments suppliers that can get in to participate,” said Tim Sloane, head of payments innovation at Mercator Advisory Group.

But Chinese regulators have a history of tightly controlling payment companies’ operations, including the rumored ouster of Alibaba’s chief Jack Ma, Sloane pointed out.

“The PayPal news suggests that while an acquisition may pry the door open, it in no way guarantees it won’t swing shut in the future,” Sloane said.

It’s actually not PayPal’s first foray into China.

PayPal for several years has had a strategic partnership with China’s Baidu Wallet, though its reach is not clear, according to Eric Grover, a principal with Intrepid Ventures LLC.

As far back as 2001, China made a World Trade Organization commitment to open up its domestic payments market, but no foreign payment network has yet made any headway, Grover said.

“Picking up GoPay will give PayPal a domestic license, which is more than it had. But bear in mind that Alipay and WeChat Pay are almost a duopoly in the world’s largest e-commerce market already, and skepticism about any real competition is in order,” he said.

Being first to market isn’t always an advantage, pointed out Patricia Hewitt, a principal with PG Research & Advisory Services.

“PayPal is not a card-issuing network and their business model is more akin to Alipay and WeChat, so perhaps the Chinese government saw this as a way to test a U.S. payments relationship,” Hewitt said.

Others are more optimistic about PayPal’s opportunity to expand operations in China.

“This is a pretty big thing for PayPal, getting an entrance to one of the biggest economies in the world, and it may enable PayPal to tackle the Chinese tourism payments market that many companies are trying to solve for,” said Talie Baker, a senior analyst with Aite Group.

Alipay’s recent interest in buying MoneyGram, for example, shows the need for richer local payments connections enabling Chinese tourists along with students and nationals working in the U.S. to more easily transfer funds across borders, Baker said.

“This move will make PayPal a truly global brand,” she said.