China Awards First Foreign E-Payment License, PayPal Waits

Jul.16.14 | About: eBay Inc. (EBAY)

PayPal watches as China licenses first foreign e-payments firm

China has issued so many electronic payment licenses by now that I mostly ignore the steady stream of announcements about new licensees, who now number more than 250. I was getting ready to ignore the latest report of a new batch of such licenses, when my attention was attracted by a news bit deeper in the story saying the fifth batch of awards included the long-anticipated first license for a foreign-backed company. The move looks promising for a number of foreign companies that have been waiting impatiently for years to enter the market, led by eBay's (NASDAQ:EBAY) PayPal online payments unit.

I've written quite a few times about PayPal, whose officials are regularly optimistic that they will soon receive a China license to offer domestic electronic payment services. The value of such a license grows with each passing year, as e-commerce in China grows at lightning speed and is on track to surpass the US to become the world's largest market.

And yet despite its repeated optimism, PayPal and other electronic payment giants like MasterCard (NYSE:MA) and Visa (NYSE:V) have had to sit on the sidelines and watch as China's central bank made 4 previous rounds of license awards. Some 269 companies can now offer such services since awards began in 2011, and all are domestic firms.

But the prohibition on foreign participation has now been lifted with word that a foreign-backed firm was among the 19 companies to receive a license in the 5th round of awards. (Chinese article) The new licensee is a company called Beijing Chanjet, which is 75 percent owned by foreign backed software maker Ufida.

The development looks like a positive step for the big foreign players, though it's a bit unclear why such a relatively unknown name was chosen as the first foreign-backed licensee. I suspect Chanjet has strong connections with the central government, and perhaps its status as a joint venture rather than a fully-owned foreign firm helped it to win the landmark award.

Looking more broadly at the bigger players, PayPal has said repeatedly over the last 3 years that it wants to enter the market and that it was cautiously optimistic that it would receive a license soon. It made the latest such proclamation about a year ago, when eBay CEO John Donahoe said he was seeing "encouraging signs" that led him to predict his company could soon become the first foreign firm to win a third-party payments license for China.

China's regulators are famous for moving notoriously slow, especially in sensitive areas like financial services. In this case, the regulator is almost certainly trying to give domestic players as much head start as possible before opening the market to foreign competition. Perhaps the central bank thinks 3 years is sufficient lead time for such a head start, which seems reasonable.

If all that is true, the question once again arises of whether PayPal and other major foreign financial services firms might finally be allowed into the market later this year. The answer could well be "yes," though I suspect that development will have to wait until the end of the year when the next round of licenses may come.

If and when PayPal finally gets its license, it could find a potent partner in the business with leading Internet firm Tencent (OTCPK:TCEHY). eBay and Tencent formed a partnership last year in the e-commerce space, centered on online clothing seller Xiu.com.

Since then, Tencent has shown a strong preference for forming major strategic alliances, and then spinning off businesses outside its core social networking services (SNS) to those partners. If the same pattern holds true, perhaps we could see a major tie-up between Tencent and eBay in electronic payments, which perhaps could pool PayPal's name with Tencent's existing Tenpay e-payments service.

Bottom line: PayPal could finally get its long-awaited electronic payment license for China by the end of this year, following the new first license award to a foreign-backed company.

Disclosure: None

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