FINANCE: PayPal Edges Closer to China with UnionPay Tie-Up

Bottom line: A new global tie-up between UnionPay and PayPal could auger another alliance by the end of the year that would allow the US company to launch a domestic electronic payments service in China by the end of this year.

PayPal in tie-up with UnionPay

In what must certainly be one of the slowest marches to China of all time, US electronic payments giant PayPal (Nasdaq: PYPL) has just formed a tie-up with UnionPay, operator of China’s largest electronic transactions settlement network. On reading the headline I thought that PayPal had finally cracked the market for domestic transactions in China, following more than a decade of trying to enter the lucrative business. But it turns out the new tie-up only covers cross-border transactions and is mostly for UnionPay’s benefit, meaning PayPal is still being locked out of the domestic China market.

Market watchers including myself will inevitably interpret the latest tie-up as showing that PayPal is inching ever closer to its ultimate goal of a license to offer electronic payment services for domestic transactions in China. Apple (Nasdaq: AAPL) became the first foreign company to offer such services earlier this year using its Apple Pay, and was followed a short time later by South Korea’s Samsung (Seoul: 005930). Both of those companies also offered their new service through tie-ups with UnionPay.

But while Apple’s and Samsung’s services are limited to users of their smartphones, services from electronic payment specialists like PayPal, Visa (NYSE: V) and MasterCard (NYSE: MA) could find a much bigger audience. That’s because they’re not tied to any particular gadget, and instead could be offered to any of China’s more than 700 million Internet users and even larger numbers of people who shop at traditional retail stores.

Perhaps due to the wider potential for their business, Beijing has been dragging its feet about allowing the big global payments companies into the domestic market. But signals this year have indicated Visa, MasterCard and perhaps American Express (NYSE: AXP) may finally receive permission to enter by the end of this year. (previous post) This latest signal from PayPal indicates it may also receive such a license.

UnionPay in Europe

According to the latest reports, PayPal, which was spun off a year ago from online auctions giant eBay (Nasdaq: EBAY), has just announced the tie-up that will allow access to its Braintree platform to UnionPay. (English article) This particular announcement looks targeted at Chinese shoppers in Europe, a market where UnionPay hasn’t traditionally been very strong and PayPal has a much larger presence.

UnionPay has been making a big push to expand globally over the last 5 years, with a major focus of that effort on the US. (previous post) It said earlier this month that its cards, which function similarly to debit and credit cards from MasterCard and Visa, are now accepted at nearly all US ATMs, and can be used by 80 percent of US merchants. But I can personally attest that the company’s cards are far less widely accepted in Europe, except for in cities like London and Paris that are the most popular among Chinese travelers.

PayPal’s own attempts to enter the China market date back more than a decade, when it first tried to piggyback on eBay’s own China business. But eBay later pulled out of China after losing a bloody war with the more aggressive Alibaba (NYSE: BABA), leaving PayPal to chart its own course in the market. PayPal was never allowed to offer domestic transaction services anyhow, and the current market is dominated by domestic players including UnionPay, as well as Alibaba’s Alipay affiliate and similar services from social networking giant Tencent (HKEx: 700).

I’ve followed PayPal quite regularly over the years, and it has occasionally said it believes it may soon be allowed to offer domestic services, but then fails to make any progress. This time could finally be different, however, since Beijing is under pressure to open the market to foreigners under its global commitments to the World Trade Organization (WTO). Accordingly, this new announcement could indicate that PayPal may finally soon receive its long-awaited China business license, and could launch a domestic service in partnership with UnionPay perhaps by the end of this year.

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