A week before Christmas, PayPal officially finished its acquisition of a Chinese licensed payment company called GoPay, a deal that began the end of September. This deal signals PayPal's official entry into China's domestic payment market, making 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 about this. Before we reach that point though, let's quickly walk through the two very different markets. The more we understand China's payment market, the better we can see the opportunities and barriers there. The more we know about PayPal's home country's payment market, the better we can analyze whether its successful experience in the states is applicable elsewhere.
First is the US retail payment market. I have identified three key characteristics:
- A cashless society yet possessing 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 provides many hard discounts and benefits. Even for foreign residents, owning a Chase Sapphire credit card is a short-term goal for many new immigrants in the states. 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 with credit card schemes and banks standing in the center. Even in the 21st century, all the fintech cool kids like PayPal and tech giants like Apple and Google remain enthusiastic about issuing credit cards. All these become barriers to the emergence of the next-generation digital payment such as mobile payments.
- Check, check and check! If we are ranking the biggest market for check, the US, for sure, is on top. Check is resilient in people's daily lives in the US. Paying a bill, renting or buying a house, paying the tax, selling a car...people cannot live without owning checks in the US even though the check is no longer being 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 populations lacking access to credit cards. According to data from the US Federal Deposit Insurance Corporation, an estimated 6.5% of households – about 8.4 million – were unbanked in the US in 2017. These underserviced customers create opportunities for mobile payments. Forrester predicts the CAGR of mobile payments in the US from 2018 to 2023 is 16.8%. But because the base number is low, the scale of mobile payment is still limited in the short-term.
In terms of China's retail payment market, there are some significant differences.
- The mobile payment market in China has scale but profit margin is extremely thin. In the early age of Alipay and WeChat Pay, payment companies lose money when providing a better payment experience. Also, their main profit source is not transaction fees but monetizing customer traffic and data insights, as well as developing more high-margin products such as 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 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 payment types 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 the tiny and cheap facial recognition POS terminals and rewarding early adopted merchants. Future payment types 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 2019, Alipay and WeChat Pay enabled foreign visitors to make mobile payments in China the same way the locals do, which signals that non-digital payments are now truly obsolete in China.
In better grasping both payment markets, there are ultimately three hurdles a new payment company and system need to overcome to succeed: to deliver a better payment alternative; drive a virtuous circle of adoption; and enable both a viable business model and collaboration across all partners.
Applying this framework to PayPal entering China, let's consider the following:
- 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 within these areas. However, there remains 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 attract some audience. The other meaning is about data security. GDPR has accelerated the data privacy protection mechanism across the globe. In China, even though 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 protects 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 the customer must buy because the alternative of not buying 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 having public transportation payment services difficult. But there is still a niche market to enter. 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 did not compete with banks in retail payment and settlement services directly but only complemented banks for only serving long tail consumers (underbanked) or small businesses. The services that Alipay provided then were favoring banks since it helped banks reach some of these customers. The same applies 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.
The last questions PayPal needs to solve involves talents. In China, payment giants and megabanks have already provided 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, it remains a question whether PayPal will give its local Chinese talents the sufficient self-decision making power.
From all these perspectives, it is predictable that PayPal's entry in China will be very challenging, requiring high continual investments in local talents and strategy.
This post was written by Analyst Meng Liu and it originally appeared here.