AmEx May Find China Can Live Life Without It

US Express Co. is finally cracking into China market after years of trying. Now commences the hard work. AmEx got the green light on Saturday to start processing yuan payments, making it the first of three big US card companies to get access to the mainland. The license, initially approved in 2018, will give AmEx a portal to some of the world's largest spenders, pitting the firm against state-backed China UnionPay Co., which dominates the market. Currently, holders of AmEx, MasterCard Inc. and Visa Inc. cards can only use them for purchases in foreign currencies outside China or on websites outside the country.

Competition will come not only from the market-dominating UnionPay  cards, but also from mobile payment apps, where Alipay and Tencent Holdings Ltd.'s WeChat Pay are big players from Ant Financial. By contrast AmEx's partner, LianLian, is small. To top it off, China is also testing the digital yuan, another budding pay-space rival. "It used to mean you've made it in China with a foreign branded card in your pocket, but it matters little now," says Zennon Kapron, the founder of a fintech consulting company.

Another obstacle is that fees are lower in China than in the US, so businesses need to win scale to make big bucks: the card clearing fee rate for domestic banks is 0.065 percent and the rate of transaction fees varies from 0.5 to 1 percent. In the United States, issuers like AmEx charge between 1.4% and 3.5%.

AmEx and its Chinese partner will also need to persuade local banks to issue processed cards on their network, and get more merchants to accept it. AmEx continues to be used less in Asia and Europe because of the high fees it charges relative to the rivals.

Still, if AmEx plays its cards right there is money to be made. One approach that's been successful in the US offers lots of incentives. A big card firm told Kapron, the analyst, it would still be profitable, even with the thinest slice on the market. There are always spenders who like luxury cards that they can use at home and abroad, he says.

Banks could also benefit from choices beyond UnionPay, notes James Lloyd, leader of Asia-Pacific fintech at Ernst & Young LLP in Hong Kong, Germany. More competition can only be good for its merchant customers and cardholders.

Just getting to this point, to the credit of AmEx, is a step in the right direction. It was a lengthy slog. 1 Since 2006, both Visa and MasterCard have awaited access to China. In early January, AmEx cleared a crucial hurdle when regulators approved its application to open a bank-card clearing company with LianLian. MasterCard re-applied last March, raising its stake in a joint venture with NetsUnion Clearing Corp., or with Wanglian, an online payment clearing house. The progress of the Visa application, which was made without a mainland partner in July 2018, is little clarified.

Of course, the timing of all of this has a whiff of politics. As tensions between Washington and Beijing intensify in the midst of the outbreak of coronavirus, China appears to be holding up the phase one trade deal. The preliminary agreement signed in January included measures to accelerate the opening of the mainland financial markets, with specific plans to speed up approvals for AmEx, MasterCard and Visa. Beijing is picking off the low-hanging fruit by beginning with AmEx; its mainland partner also stands to benefit from any increase in business.

But with Covid-19 wreaking havoc on the economy, it will take more than the blessing of Beijing to get shopaholics back into action, over and above any revenge spending. AmEx, whose slogan is "Don't Live Without It," might find its hardest sell yet indispensable in China.