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PayPal (NASDAQ:PYPL) recently acquired a 70% stake in GoPay, a Chinese online-payments provider, in its first move into China’s payments market. The deal, which was cleared by China’s central bank in late September, marks the first time a foreign company was authorized to offer direct digital payments in the country.
CEO Dan Schulman stated that PayPal was “pleased to complete this historic transaction, which enables us to broaden our participation in such a dynamic market.” However, investors who are familiar with China’s digital-payments market should realize that PayPal’s plans could be dead on arrival — due to the dominance of Tencent‘s (SEHK:700) WeChat Pay and Alibaba (SEHK:9988)-backed AliPay.
Why does PayPal want to enter China?
PayPal’s revenue rose 18% in 2018, and the company anticipates 15% growth in 2019. That growth rate remains robust, but the slight deceleration indicates that it needs to fire up new growth engines.
One area ripe for improvement is its international business, which generated 47% of its revenues last quarter. The unit posted 19% annual revenue growth (20% on a constant-currency basis), but that merely matched the 19% growth of its U.S. business. PayPal is already available in over 200 countries and regions worldwide, so it doesn’t have many fresh markets to enter.
Meanwhile, China’s payments market — which previously remained closed to foreign payment providers — is still growing. During last quarter’s conference call with analysts, Paypal CEO Dan Schulman stated: “China is the world’s largest e-commerce market. I think there is something like 500 million online shoppers and they’re going to drive something like $2 trillion of online sales this year, which is more than 50% of global online retail.”
PayPal already holds partnerships with Alibaba’s AliExpress, which lets overseas shoppers buy products from Chinese merchants, and UnionPay, China’s dominant interbank network and card-services platform. Schulman noted that the GoPay acquisition would enable it to “expand upon” those relationships and “forge new partnerships with China’s financial institutions and technology platforms.”
Schulman noted that instead of going head-to-head against WeChat Pay and AliPay, PayPal would initially focus on cross-border transactions. In other words, it might make it easier for foreign shoppers to buy goods from Chinese marketplaces.
Why PayPal faces a tough uphill battle
Eighty-six percent of Chinese consumers used WeChat Pay at the end of 2018, according to an Ipsos survey, 71% used AliPay, and 64% regularly used both services. That duopoly doesn’t leave much room for competitors, and the ongoing ecosystem war between Tencent and Alibaba — which spans across brick-and-mortar stores and apps — makes it a two-horse race.
Tencent and AliPay are also expanding overseas. Tencent had already expanded WeChat Pay into nearly 50 markets outside of mainland China at the end of 2018 and can process payments in 16 different currencies. AliPay reaches about 70 overseas markets and processes payments in 14 different currencies.
Tencent and AliPay initially expanded their payment services overseas to serve Chinese travelers, and neither platform supported international credit cards. That made life tough for foreign visitors in China, since WeChat Pay and AliPay are the default payment options for retailers, public transportation, and other services.
In response, Tencent and AliPay opened their platforms to international credit cards in 2019. That shift also makes it easier for overseas merchants to directly sell products to Chinese shoppers, and makes it even tougher for PayPal to carve out a defensible niche between the two market leaders.
PayPal also faces competition from traditional credit cards
PayPal’s expansion into China seems built on the idea that it’s inconvenient for Chinese and overseas consumers to make cross-border payments. Yet Tencent and AliPay are already lowering those barriers, and China already opened up its card clearance market to international credit cards in 2015.
The central bank cleared American Express to process yuan-denominated payments via a joint venture with Lianlian Pay in late 2018, but the network hasn’t started operating yet. Mastercard and Visa are also seeking similar licenses. Those developments suggest that overseas shoppers can easily use international credit cards within China in the near future.
The bottom line
China’s central bank likely approved PayPal’s GoPay takeover because it knew it wouldn’t disrupt its digital payments market. GoPay is a tiny player in a cutthroat market, and even PayPal’s cross-border support won’t help it effectively compete against Tencent and AliPay.
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