Does PayPal stand a chance to succeed in China?
PayPal is becoming the first foreign company to access a limited resource in China - payment licences - by acquiring a controlling stake in Chinese payments group Gopay. Gopay has licences in web, mobile and cross-border payments.
A company that provides online payment services must obtain a licence to legally conduct transactions in China.
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Over the past three years, China’s central bank has barely issued any new licence as part of a crackdown on online financial scam. Chinese authorities’ approval of PayPal’s takeover bid in September is a sign that Beijing is serious in opening the digital payment sector, which is seen as a sensitive field, to foreign investors.
But it is one thing that authorities have granted PayPal more freedom to do business in China, it is another whether the American payment company will thrive in the country.
Mobile payments
China represents the world’s most sophisticated third-party payments market. Data from PwC show that 86 per cent of China’s population is using mobile payments, far above 67-per cent in Thailand which has the world’s No.2 mobile payments penetration rate. China’s domestic market has for years been dominated by Tencent through WeChat Pay and Alibaba via Alipay.
The two players together hold more than 90 per cent of the market share. Frankly, in a mature market where users are too accustomed to using the two platforms to scan, swipe and pay, i is difficult for PayPal to claim a significant market share in the short run.
For instance, WeChat Pay and Alipay charge most merchants in China a fee of 0.6 per cent of the transaction amount.
By contrast, PayPal has a fee of more than four per cent for retailers outside the United States. Whether to lower its fees so as to win the heart of Chinese merchants will be a tough choice for PayPal.
PayPal’s strength is that it is more internationalised than Alipay and WeChat Pay. It is available in more than 200 markets around the world and it allows consumers and merchants to receive money in more than 100 currencies.
By comparison, Alipay covers less than 60 markets, and WeChat Pay covers less than 50. Both Alipay and WeChat Pay currently support less than 20 currencies. With that in mind, it seems a pragmatic approach for PayPal is to focus on offering cross-border payment services to Chinese users.
Online shopping
In 2018, more than 100 million Chinese consumers purchased goods from overseas through online shopping platforms. In this particular market, Tmall and Kaola, two online marketplaces owned by Alibaba, currently hold a total of around 53 per cent of the market share, according to Chinese consultancy iiMedia Research.
Tencent owns stakes in a few of the platforms that hold the rest of the market share. But in general, Alibaba and Tencent have less grip on China’s cross-border e-commerce, in comparison with the landscape in the country’s domestic third-party payments market.
On top of that, there are huge growth potentials in China’s cross-border e-commerce. Last year, this sector expanded 50 per cent, compared with an 8.5 per cent growth in China’s overall e-commerce.
Global consultancy Accenture expects China’s cross-border business-to-business e-commerce to make up more than half of the global transactions in this realm by 2020, so China’s expanding cross-border e-commerce is an opportunity that PayPal must grasp.
PayPal
China’s growing export of tourists is another opportunity for PayPal. More than seven million Chinese tourists travelled abroad during the country’s 2019 National Day holiday alone.
These people on average spent 2,500 yuan (over US$350)- overseas through mobile payment, an upsurge of 14 per cent from the same holiday in 2018, according to Alibaba’s research.
However, the fact that PayPal has more international resources than Alipay and WeChat Pay is not a guarantee that its cross-border payment services will necessarily attract a lot of Chinese users.
A notable shortcoming of PayPal is that it doesn’t have enough data on China’s market. Alipay has more than 900 million Chinese users, and WeChat has over one billion users in China.
By comparison, PayPal’s global user base is only less than 300 million, not to mention its users in China. Under the assistance of the huge amount of data generated from users’ activities, Alipay and WeChat Pay tend to understand Chinese users better than others.
So PayPal may find it challenging to rival with the two platforms in terms of reacting to any change in user habit quickly and effectively.
When some American tech firms went into China, they were too confident that their practices and standards, which had been universally successful in many other markets, would conquer China as well.
As a result, they were slow to localise so as to better serve Chinese customers. Such a mindset has failed to work in China.
eBay, PayPal’s former parent company and its leading source of transaction volumes, entered China in 2003 by acquiring a Chinese online auction site. Over a couple years after that, eBay was engaged in a fierce battle with Alibaba’s Taobao in China’s nascent online sales market at the time.
Taobao, which was something not so many people had heard of back then, turned out to be much more user friendly and eventually declared victory.
Due to a lack of understanding of the Chinese market, eBay withdrew from China in 2006 after losing a large number of users to Taobao.
Apple Pay is another example where an American tech standard has failed to win market share in China. Teaming up with China UnionPay, the country’s only bank-card issuer, Apple Pay entered China’s mobile payments market in a high-profile manner in 2016.
But over the years, Apple Pay has never been a mainstream way of payment among the country’s iPhone users. Its near-field communication technology requires merchants to install expensive facilities before they can charge money.
By comparison, WeChat Pay and Alipay’s QR code model represents a much lower threshold, as well as a lower cost, on the part of merchants, so it is not strange that many cashiers in China don’t even know how to use Apple Pay to charge money.
As PayPal gets ready to offer payment services in China, it needs to learn the lessons of its former parent and Apple Pay.
The writer is a current affairs reporter and columnist with China Media Group.