Last December, the financial services giant Paypal finalized a deal that allows the American company to formally enter China’s fast-growing mobile payments market, which is now dominated by home grown behemoths WeChat Pay and Alipay.

China had long promised to open up the market to foreign competition, and Paypal became the first foreign firm licensed to provide digital payment services in China by acquiring a 70 percent stake in GoPay, a domestic Chinese payments company with a license to conduct mobile, online, and cross-border payment services. 

Now, the company — which trades on the Nasdaq and is valued at close to $150 billion — gets a crack at a market that has been experiencing explosive growth. According to a report by McKinsey, the consulting firm, mobile payment transactions in China grew at an astronomical rate between 2013 and 2018 and reached $600 billion in payments revenue, making it the world leader in digital transactions. 

Two other foreign mobile payment companies have followed Paypal’s lead into China. In 2019, Wirecard, a German company, purchased an 80 percent stake in Allscore Payment Services, a Chinese company with a payment license, for about $80 million, with an option to buy the remaining 20 percent after two years. The deal has not been finalized. Also in 2019, Payoneer, a New York-based digital payment company, agreed to purchase 46 percent of Anfu Shenzhen Information Technology Co. Ltd., a Chinese company that is applying for a digital payment license. 

Global credit card companies, which are not engaged in mobile payment services, are also vying to set up shop in China. American Express won approval in 2018 to conduct card clearing services in China. On Saturday, the company also finalized a deal to operate in China, through a joint-venture with Chinese fintech company Lianlian Group. Mastercard also announced this year that it had received approval from the Chinese government to begin setting up a bank card clearing business through a joint venture with NetsUnion Clearing Corporation, an online platform for processing online transactions backed by the Chinese central bank. Visa is also trying to enter the market, but has yet to receive Chinese government approval.

Analysts see the recent string of Chinese government approvals for foreign payment companies as a response to trade disputes with the U.S. 

“Because of the U.S.-China trade war, China is trying to further open the market to U.S.-based companies, including payment companies. This was one of the key components of the U.S.-China trade deal,” said Meng Liu, an analyst at Forrester, a Cambridge, Mass.-based market research firm. 

Paypal has been attempting to tap into the Chinese market for the last fifteen years. The company established a presence in China in 2004, with offices mostly providing technical services, market consulting and customer services, according to Taylor Watson, a company spokesperson. 

Martin Chorzempa, a research fellow at the Peterson Institute of International Economics, a Washington think tank, said that third party payment platforms were operating there in a “regulatory vacuum,” until about 2010. A number of companies, including Alipay and Paypal, then part of eBay, were operating without licenses. 

Then the government stepped in, and initially barred outside firms.

“When payment regulation came out in 2010 and licenses in 2011, the People’s Bank of China indirectly said no foreign firms would be allowed,” Chorzempa said. “There was a provision saying that rules for foreign firms would come later.” 

And so, after operating in China for years, Paypal is only now formally entering the country’s market with a third party license. Following the acquisition of GoPay, the company also announced a partnership with Union Pay, a government-owned Chinese financial services and credit and debit card company which, as of 2019, had issued more than 7.59 billion cards globally. Announced in January 2020, the agreement will allow UnionPay cards to be added to most Paypal wallets and will pave the way for Paypal to be accepted at retail stores where Union Pay is accepted.

Securing a payment license in the Chinese market, first approved by China’s central bank in 2018, is a significant step for Paypal. The number of companies licensed to conduct payments over the internet in China is limited at 110, according to Wang Leilei, a fintech consultant at Kapronasia, a research and consulting firm with offices in Hong Kong, Shanghai and Singapore and focused on Asia. But there are significant challenges to overcome for a new entrant like Paypal.

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The payments market in China is effectively a duopoly, dominated by spinoffs of two of China’s internet behemoths. Wechat Pay, which is owned by the Chinese company Tencent, and Alipay, which grew out of the Chinese company Alibaba. Together, the two companies process about 90 percent of all mobile payments in the country. 

“It will be quite difficult to compete head-to-head with Wechat Pay and Alipay,” said Liu. Not only do the Chinese mobile payment companies have a head start, she said, but they are also highly efficient for both merchants and consumers.

But Paypal doesn’t have to dominate the whole market to make a significant profit in China. As Alex Rolfe, the managing director and publisher of Payments Cards and Mobile, an England-based provider of news, research and consultancy on the payments industry, said, “Putting it into perspective, if Paypal can carry between one and five percent away from the competition in China, that is billions of transactions. That would make a massive difference for their bottom line.”

Paypal says it plans to initially target cross-border transactions with China, which includes both Chinese merchants selling to customers abroad and Chinese customers buying overseas goods. Chinese cross-border e-commerce is a surging market, making up more than half of the sales in the $1.2 trillion Chinese e-commerce market, according to a 2019 J.P. Morgan report. And because Paypal is already an established brand in the international payments world, analysts expect that the company will more easily find a niche in the market.

Managing inside China, though, tends to be a challenge. In 2018, the Chinese government enacted stricter control of the mobile payment space. All mobile payments, according to the new regulation, must now be routed through a central clearinghouse, giving the government oversight access to all of the payment consumer data. According to Paypal’s spokesperson, the payments processed by their system also must be processed through that central system. 

Payment licenses are very precious in China, so any company with a license wants to use it. Paypal probably saw an opportunity because GoPay was having financial difficulties.

Wang Leilei, a fintech consultant at Kapronasia

GoPay, also known as Guofubao, the company that Paypal acquired, was formed in 2011, as a joint venture between China International Electronic Commerce Center (CIECC), which is affiliated with China’s Ministry of Commerce, and HNA Retailing Holding, a unit of the privately-held conglomerate, the HNA Group. 

Gopay’s history is interesting. Corporate records reviewed by The Wire show that GoPay was at one time owned, in part, by several of HNA’s top executives, as well as companies affiliated with the relatives of some of those executives. In 2016, however, those personal stakes were sold back to a division of HNA, before being purchased last year by Paypal. 

It’s not surprising that HNA sold off the unit. The Haikou-based company fell upon hard times in 2017 and 2018, after racking up huge debts following a $50 billion global acquisition spree. Beijing then began pressuring the company to sell off some of those global assets, and recently the Chinese authorities took over the company.

That may help explain how Paypal ended up with what many regard as a potentially valuable asset. According to Wang, at Kapronasia, a foreign payment company may have acquired the struggling Chinese company because they were the only company willing to give up their valuable payment license. “Payment licenses are very precious in China, so any company with a license wants to use it. Paypal probably saw an opportunity because GoPay was having financial difficulties,” Wang said. 

Paypal’s entrance into the Chinese market is significant, but many warn against interpreting it as a true opening of the Chinese payment arena. “The Chinese government can use this to show that they have loosened the payment market up and given access to foreign companies,” said Rolfe, at the publisher Payments Cards and Mobile. But in reality, it remains to be seen whether Paypal has a chance at gaining any foothold in the challenging Chinese market. 

Chorzempa at the Peterson sees it similarly. “The recent approval for Paypal is interesting; it seems the P.B.O.C. [Central Bank] is trying to remove one of the most visible barriers that looks like contravention of its W.T.O. accession promises,” he said referring to the World Trade Organization. “However, my understanding is that it will be limited in impact because it is so late. Alipay and WeChat are now not only dominant domestically but competing globally.” 

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David Barboza contributed research.