Can American Express really operate in China?

Business & Technology

The U.S.-China phase one trade deal increases the probability that Beijing will soon grant Amex final approval to launch its card-clearing business in China. However, it will be difficult for Amex to unseat entrenched incumbents.

American Express already issues cards to Chinese citizens via Chinese banks and the UnionPay card network. 2020 might be the year Amex issues its first cards directly to Chinese consumers.  

A version of this article was originally published by KapronAsia, a Shanghai- and Singapore-based fintech consultancy.

American Express has been trying to enter the China market for more than a decade. As China’s financial reform stalled, so did the U.S. card giant’s prospects in the world’s largest consumer market. But with the renewed financial opening of the last year, Amex is finally poised to start doing business in China. In early January, shortly before the phase one trade deal was signed, the People’s Bank of China (PBOC) accepted Amex’s application to begin China operations.

Good omens

That announcement came more than a year after the PBOC approved Amex to clear card payments in China. In order to meet the regulator’s requirements, Amex had to form a local joint venture, which it created with fintech firm LianLian in 2012. The tie-up has allowed LianLian to license Amex’s Serve system used for mobile payments.

The U.S.-China phase one trade deal included a pledge by China to further open its financial markets to U.S. investment. Beijing had already begun opening a number of financial services to foreign players, and the phase one deal increases the probability that Beijing will soon grant Amex final approval to launch its card-clearing business in China.

It would not be in Beijing’s interest to do otherwise. The Chinese economy is sputtering. It grew at 6.1 percent in 2019, down from 6.5 percent in 2018 and close to a 30-year low. A long-running deleveraging campaign dragged on growth, while the trade war damaged business confidence. Since most of the tariffs the U.S. has placed on China remain in place, supply chain disruptions will continue as firms shift capacity to less costly destinations.

Under that scenario, China should accelerate needed market reforms, especially in financial services. The trade war has affected the finance sector, but not dramatically. If Beijing welcomes them, U.S. credit card giants, investment banks, and other financial services firms will eagerly invest in China.

But is it too late for Amex?

Perhaps the greatest uncertainty for Amex is gauging demand for its card-clearing services from Chinese consumers. Back in 2006, when China was supposed to fully open its financial markets per the conditions of its WTO membership, the U.S. credit card giant would likely have found the market receptive.

The problem Amex faces now is that it will be difficult to unseat entrenched incumbents. The local payments juggernaut UnionPay has long dominated the traditional banking card business, while Alibaba and Tencent control the vast majority of China’s $27 trillion mobile payments business.

Ninety percent of the 8.2 billion bank cards China had in circulation at the end of September were debit cards, according to Bloomberg. Chinese consumers favor debit cards because they don’t accrue debt using them. Still, China does have 820 million credit cards in circulation. Amex must see an opportunity in that niche market, which by global standards is actually fairly sizable.

Related, from Barron’s: American Express stock is falling because of global travel fears.