PayPal has become the first foreign company to gain a Chinese payments license following the acquisition of a 70% stake in GoPay, an online payments firm based in China. The company, officially known as Guofubao Information Technology Co., was set up in 2011 as a joint venture between the China International Commerce Centre and HNA Retailing Holding, a subsidiary of the Chinese conglomerate HNA Group. On the 30th of September, PayPal received approval from the People’s Bank of China for the acquisition and therefore the licence to operate in China by proxy. Through Gopay, PayPal will be able to offer mobile, online and cross-border yuan payment services, and will be able to issue debit cards. The terms of the deal were not disclosed, and the transaction is expected to close in Q4 2019 and is subject to customary closing conditions.
While the Chinese central bank (PBOC) has previously pledged to give “equal treatment” for domestic and foreign groups alike, the PayPal-GoPay deal is the first of its kind in the Chinese digital payments market. Both Mastercard and Visa have submitted applications to process renminbi payments to People’s Bank of China in 2017. However, they are still waiting for a license since the PBOC has not formally acknowledged these submissions. According to the application procedure published in 2017, formal acceptance and acknowledgment is the initial step towards approval, and the central bank must decide applications within 90 days of acknowledgment. Only American Express was able to get preliminary approval to establish a renminbi bankcard clearing company through a 50-50 joint venture with a Chinese partner.
As far as PayPal is concerned, the company will have to compete with two Chinese national champions, Alibaba and Tencent, that are firmly rooted in the lifestyle of the Chinese consumer. The two technology giants have undoubtedly changed how people live in China by digitalising and connecting every dot in a consumer’s life. Alibaba and Tencent, who had already accumulated millions of active users across the country through their core businesses - e-commerce and social media platform - have benefited from scale in entering the payment market. Today, Alipay and WeChatPay, the two leading applications that hold more than 90% of China’s mobile payments market, are leaving little room for the newcomer to make its mark. However, the move towards cashless payments will continue. According to Frost & Sullivan, the mobile payments market is expected to grow threefold to $97 trillion in 2023 from the $29.93 trillion of 2017, driven partly by increasing demand for e-commerce. The same report said that the total number of active mobile payments customers is expected almost to double, reaching 956 million by 2023, up from 562 million in 2017.
While the local payment services, dominated by the two giants, don’t appear to leave much room for new players, PayPal is likely to focus on cross-border transactions. PayPal’s global network would help Chinese consumers to gain access to online stores worldwide. In 2017, PayPal already tried to tap this lucrative niche partnering with Baidu. The partnership allowed PayPal to access an additional 100 million users and enabled the Baidu Wallet to be accepted by roughly 17 million PayPal merchants globally. Before the acquisition, PayPal has been a stored-facility license holder in Hong Kong. The company could integrate its Hong Kong business to enable cross-border transactions and fund transfers for Chinese customers, especially for buying overseas products.
Meanwhile, Alipay and WeChat have been making aggressive moves to expand their payment networks overseas. Earlier this year Ant Financial, the fintech affiliate of Alibaba Group, has acquired WorldFirst for $700 million, a UK based payment services group focusing on international money transfers. The deal gives a massive international boost for its global payment business, and would eventually allow Alipay to provide cross-border payment services. WeChat Pay announced that Europe would be their next key market for cross-border payments. According to the company, in April 2019, the number of European merchants offering WeChat Pay mobile method was 3.5 times higher compared to 2018.
Will PayPal be able to gain market share from the giants Goliath? In the hugely growing Chinese market, there is room for PayPal to expand, but the company will have to fight hard to gain market share against the giants, who are already well entrenched with Chinese consumers.
Volker Schloenvoigt wrote this article with the support of Manuel Cigala (Consultant, London).
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).