A week before Christmas, PayPal officially finished its acquisition of Chinese licensed payment company GoPay, a deal that has been underway since the end of September. This deal signals PayPal’s official entry into China’s domestic payment market and makes it the first foreign payment company to own the domestic payment license. I have followed both the US and China’s payment markets for a while and would like to share some analysis. Before that, though, let us quickly walk through the two very different markets. The more we understand about China’s payment market, the better we can see the opportunities and barriers there. The more we know about the payment market in PayPal’s home country, the better we can analyze whether its successful experience in the United States is applicable elsewhere.
First is the US retail payment market. I have identified three key characteristics:
- A cashless society but with the help of credit cards. Several decades ago, the cashless level in the US reached a high level compared to the rest of the world given strong credit card adoption. From the consumer perspective, a credit card is really appealing since it does give many hard discounts and benefits. Even for foreign residents, owning a Chase Sapphire credit card is a short-term goal of many new immigrants in the US; I was one of them, too. The strong credit card market has made Visa one of the top 10 companies in the world by market cap. Along with the dominance of Visa, Mastercard, and American Express in many Western countries, a sophisticated payment value chain has emerged, and credit card schemes and banks are standing in the center. Even today in the 21st century, all the fintech cool kids like PayPal and tech giants like Apple and Google are still enthusiastic about issuing credit cards. All these become barriers to the emergence of next-generation digital payment such as mobile payments.
- Check, check, and check! If we are ranking the biggest market for checks, the US is for sure the top. Checks are resilient in people’s daily lives in the US. Paying a bill, renting a house, buying a house, paying the tax, selling a car . . . people cannot live without owning checks in the US, even though they are no longer used in many European and Asian countries. The resilience of the check indicates the strong power of the legacy payment system.
- Mobile payment has space to grow but is far from taking off. Not everyone is able to apply for a credit card. Even in the US, there is still some unbanked and underbanked population without access to credit cards. According to data from the US Federal Deposit Insurance Corporation, in the US, an estimated 6.5% of households — about 8.4 million — were unbanked in 2017. An additional 18.7% (24.2 million) were underbanked. These underserviced customers create opportunities for mobile payments. Forrester predicts that the CAGR of mobile payment in the US from 2018 to 2023 will be 16.8%. But since the base number is low, the scale of mobile payment is still limited in the short term.
Then there’s the China retail payment market. There are some significant differences from the US market:
- The mobile payment market in China has scale, but the profit margin is extremely thin. In the early age of Alipay and WeChat Pay, the payment companies even lose money to provide a better payment experience, and their main profit source is not the transaction fees but monetizing the customer traffic and data insights and developing more high-margin products like lending products.
- The most successful payment companies in China are all backed by ecosystems. Alipay is backed by Alibaba’s giant ecosystems across eCommerce, retail, and technologies. WeChat Pay is backed by the social media, gaming, and technology ecosystems from Tencent. The most successful banking payment app from China Merchants Bank also owns a large banking-centered ecosystem that binds with many adjacent industry partners. A standalone payment company without an ecosystem won’t survive and thrive in China.
- Biometric-based and invisible future types of payments are gaining ground. China is further initiating more advanced payment methods such as facial recognition payment. Alipay, WeChat Pay, and UnionPay have commercialized facial recognition payments to tens of thousands of stores by providing tiny and cheap facial recognition point-of-service terminals and rewarding the early-adopted merchants. The future types of payments create new opportunities for banks to build their competitive advantage in the new era.
- Digital payment has reached the senior generation and foreign visitors. In China, the adoption rate of digital payment is high across all age groups. In early November this year, Alipay and WeChat Pay firstly enabled foreign visitors to make mobile payments in China the same way as the locals do, which signals that non-digital payments are now truly obsolete in China.
After having a better grasp over the two payment markets, we can use the framework from my colleague Jacob Morgan’s report that addresses how to make a new payment system successful to analyze the opportunities and challenges for PayPal to enter China.
There are three hurdles that a new payment company and system need to overcome to succeed: 1) to deliver a better payment alternative; 2) drive a virtuous circle of adoption; and 3) enable a viable business model and collaboration across all partners.
Applying the framework to PayPal entering China, I did the analysis as follows:
- Whether PayPal can provide a better alternative in China. The better alternative refers to a simpler, faster, safer, more controllable, cheaper, and more reliable payment service. In China, payment giants like Alipay and WeChat Pay have already delivered extremely simple, fast, cheap, and reliable payment experiences to customers. PayPal has little space to break in to these areas. However, there remain opportunities in providing a safer and more controllable payment experience. Safe has two different meanings. One is about account and money security. The emerging facial recognition payment still has some safety issues out there, and if PayPal can provide a safer but convenient payment method, it will be a prominent way to attract some audience. The other meaning behind safe is about data security. GDPR has accelerated the data privacy protection mechanism across the globe. In China, even internet giants have monetized customer data insights with low or zero costs for a long time; the situation won’t last in the next decade. We found that more than half of Chinese consumers value their data privacy and will appreciate the payment app that will protect it. The data privacy protection feature is also an area to consider.
Whether PayPal can drive adoption. It’s hard to persuade customers to change their payment habits. One of the most effective ways for a payment system to do so is with a “must-have” transaction — something that the customer must buy because the alternative of not buying it is even more inconvenient, such as public transportation ticketing services. However, in China, it is impossible for a foreign payment company to have access to the sensitive payment financial data of the mass population, which makes PayPal implementing public transportation payment services difficult. But there is still a niche market to enter. Last month, both Alipay and WeChat have enabled foreign visitors to use digital wallets to make mobile payments in China just like the locals. PayPal has opportunities here, since a lot of these foreign visitor consumers can be PayPal’s customers in another country already. If PayPal can create a one-stop payment account for these customers to enable them to make mobile payments in China, it can compete with Alipay and WeChat in a level playing field.
- Whether PayPal can build a collaborative business model that favors all partners. In the early age of Alipay, it was not competing with banks in retail payment and settlement services directly but only complementing banks for only serving the long-tail consumers (the underbanked) or small businesses. The services that Alipay provided then were favoring banks since it was a way to help banks reach some of these customers. It’s the same for PayPal. As a new entrant, it is not possible to compete with local payment companies head to head at the very beginning; it is only feasible to find the niche and underserved sectors and start small.
Another question PayPal needs to solve is about talent. In China, payment giants and mega banks have already provided the global-level compensation packages and big career platforms for local payment and fintech talents. PayPal is facing a fierce talent war with local players. Also, whether PayPal will give its local Chinese talents the sufficient self-decision-making power also remains a question.
From all these perspectives, it is predictable that PayPal’s entry in China will be a very challenging entry that will require high continual investments in local talents and strategy.
If you want to know more or have different opinions, please feel free to reach out to me or schedule an inquiry at email@example.com. I will also publish a report on the state of digital payment in the Asia Pacific region soon. You will learn more about payment innovations in China and AP and the challenges alongside. Stay tuned.