Entry of PayPal to boost cross-border payment services

The opening of China's payment clearing market will prompt domestic third-party payment processors to comply with international rules, bolster their capabilities to deliver cross-border payment services, and give them a better chance to contain financial risks, analysts said.

PayPal Holdings Inc, one of the biggest US digital money transfer platforms, will become the first foreign payment platform to be licensed to provide online payment services in China after its subsidiary, PayPal Information Technologies Co Ltd, received approval from the People's Bank of China, the country's central bank, to acquire a 70 percent stake in the domestic payments firm Guofubao Information Technology Co Ltd, also known as GoPay.

"One of the main reasons behind this move is to show Western countries that China is serious about opening up its financial markets, rather than only paying lip service. The level of openness will go beyond expectations of the Western media, politicians and business leaders," said Zhao Yao, deputy secretary-general of Beijing Cyber Law Society and a payment industry expert.

He expects more payment processing companies will be allowed to enter and operate in China.

"By officially introducing the world's payments giants such as PayPal to China, the People's Bank of China is hoping that domestic payment service providers will raise compliance awareness and enhance capabilities to ensure their operations fully comply with regulations through greater competition with their international counterparts. It may be more effective than simply relying on regulators and law enforcement agencies to fight against payments market irregularities," Zhao explained.

Giving PayPal the license to operate in the Chinese digital payments market will also drive domestic payment service providers and commercial banks to improve their ability to handle cross-border payments, especially in foreign currencies.

Those kinds of payments are more complicated than payments in renminbi and has higher requirements on regulatory compliance and the resource integration capability of financial institutions, according to Zhao.

As China further implements the Belt and Road Initiative, some large domestic payment processing companies have realized the importance of business expansion overseas. They will help promote the international use of the renminbi through the internationalization of payments services, he said.

Dong Ximiao, chief analyst at Zhongguancun Internet Finance Institute, wrote that steady advancement in opening the payments market will attract foreign institutions to deeply participate in the opening of China's financial sector and create a more level playing field.

He noted that opening the Chinese payment clearing market has great significance in promoting supply-side structural reform in the financial sector and boost the ability of the financial sector to serve the real economy, especially the part that produces goods and services.

Foreign payment processors will not compete head-to-head with their Chinese counterparts domestically in the short run after they enter China because the domestic payments market is already dominated by Alipay and WeChat Pay.

Instead, as a highly internationalized payments giant, PayPal may pool its resources to strongly develop cross-border payments and foster competitive differentiation while bringing the advantages of GoPay into full play at the same time, Dong wrote.