FINANCE: Foreigners Get E-Payment Green Light
Bottom line: China’s opening of the electronic payment services market could see PayPal and other foreign providers finally receive long-awaited licenses to operate in the market by year-end.
Foreign financial companies came a step closer to realizing a long-awaited goal last week, when Beijing announced it would allow them to open fully-owned electronic transaction processing ventures for e-commerce services in the year-old Shanghai free trade zone. The move comes after years of lobbying by foreign companies like PayPal, MasterCard (NYSE: MA) and Visa (NYSE: V), which have watched enviously at the rapid growth of a domestic financial system that China committed to open when it joined the World Trade Organization (WTO) in 2001.
The electronic transactions sector has grown especially fast, first as China’s banks popularized debit and credit cards and more recently with the explosive growth of e-commerce. The sector was initially dominated by domestic state-owned monopoly UnionPay, which more recently has faced a growing challenge from homegrown private-sector rival Alipay, an affiliate of e-commerce giant Alibaba (NYSE: BABA).
Beijing’s decision to finally allow the foreign companies into the market reflects its confidence in these 2 homegrown companies, as UnionPay rapidly expands globally and Alipay booms at home and contemplates its own international expansion. China should be commended for finally opening the market, and also for dropping some burdensome restrictions that often hamper foreign companies from doing business with maximum efficiency.
The Chinese regulator should now move quickly to finally approve business licenses for Visa, MasterCard, PayPal and others who have waited for years for permission to enter the market. Despite the long delays, such a move could inject new life into the sector by breaking the current duopoly of UnionPay and Alipay, providing consumers and businesses with more options for conducting their financial transactions.
China committed to opening its financial services sector when it joined the WTO, but has been extremely cautious in implementing the promise. The result is that the sector was still dominated by traditional state-run organizations until 4 years ago, when Beijing formally began issuing licenses in the then-nascent but fast-growing sector for online electronic payments.
In 2014 UnionPay processed a staggering 41 trillion yuan ($6.7 trillion) in transactions between banks, up more than 27 percent from the previous year, as its total number of credit and debit cards doubled to about 1.2 billion. A big part of that boom has come from an explosion in e-commerce, whose annual transaction volume jumped 25 percent last year to 13.4 trillion yuan, according to the Ministry of Commerce.
Both UnionPay and Alipay have thrived on the boom in transactions, and have quickly become fierce rivals in the space, even as the foreign companies watched as envious outsiders. PayPal has been waiting for more than 5 years for a license to operate a domestic version of its popular global electronic payments service, but has yet to receive such permission despite saying several times it was seeing positive signals.
Meantime, Visa and MasterCard took their case to the WTO, which ruled in 2012 that China was violating its commitments by keeping them and other foreign companies out of the market. Beijing responded to that ruling last year, when it invited domestic and foreign companies to apply to set up bank clearing card systems. Even with that development, the foreign companies will only be able to provide domestic transaction settlement services in foreign currency for their first 3 years after receiving licenses, and only after that will they be allowed to provide yuan-denominated services.
The latest rule from the Ministry of Industry and Information Technology is specifically aimed at online payments, and says companies based in the nearly 2-year-old Shanghai free trade zone can open fully-owned ventures engaged in data and transaction processing for e-commerce. (Chinese article) That decision should most directly benefit companies like PayPal, which engage mostly in online payment services, and is part of Beijing’s broader efforts to open the financial services sector to private-sector competition.
Having announced this step, Beijing should move quickly to finally grant licenses to foreign companies for all electronic transactions so they can start setting up rival services before UnionPay and Alipay become more entrenched. The central government should also consider loosening restrictions on other financial services, both in terms of ownership and also limitations on providing yuan-based services.
China’s financial services market would be the biggest beneficiary of such steps, which would create a more competitive and innovative sector that could play a greater leadership role on the world stage. Chinese consumers and merchants would also benefit from more choices, and the foreign companies would profit from the market’s explosive growth.
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