template for how cross border payment companies can enter the tough, but lucrative China market.
- China is a very tough market to enter for cross border payments companies, but for those who can crack the puzzle, it can also be very lucrative
- Before jumping in, one should have a clear view of: 1. market competition, 2. customer segment, 3. value proposition, 4. distribution, 5. and regulation
My previous article, international payment paint points and solution, has explained that cross border payment is ripe for disruption despite current advances. Today we will look at the biggest market for cross border payment, China. Having worked in fintech in both China and USA, I have been asked on how should foreign payment companies enter China? In this article we will look into: why China, my analysis framework, the challenges, and template for go to market strategy for foreign payment companies.
First, why China? In short, it’s the biggest market for cross-border payment. China is the largest in cross-border remittance if counting both inbound and outbound.
China is also the largest in cross-border B2B payments as the factory of the world.
The analysis framework I typically use to answer “how should payment company enter China?” is:
- market competition
- customer segments
- value proposition
For payment, China is a very competitive market. the domestic payment is dominated by 2 tech giant Alipay and Wechat pay. These 2 account for more than 90% of the payment in China. International payments is also very competitive. However, there still are opportunities in partnership and pockets that hasn’t been fully explored yet. For example, Flywire found such pocket in tuition payment for Chinese students studying abroad. In general, understanding market competition is an important first step to formulate market entry strategy.
It’s important for cross border payment companies to find the right segment for product market fit. To break down cross border payment, first there is inbound vs outbound (sending money in vs sending money out). To start, companies should focus on one direction, then focus on a specific use case that has true pain points. The use case may be an industry, specific country, or particular user demographics.
For the next step, we need to make sure the customer segment is best matched to our products’ value proposition. Basically, our product needs to be one of, if not the best, solution to the pain points identified. Foreign new entrants should definitely leverage its brand and international network, but that’s not going to be enough. Unless the market is still fairly new and unsaturated, a new entrant providing similar functions or value proposition to incumbent is a hard sell.
Unless you are a very well known international brand, customer acquisition cost is expensive especially for financial. Because getting potential customers to trust you is hard. Getting users to abandon their existing offerings (muscle memory switch) , and to try yours is even harder. This is why instead of going direct to market, most of the foreign payment companies partner with local companies for distribution.
One of the major barrier to entry in finance is regulation. China is definitely not one of the more open countries in terms of granting financial license to foreign companies, especially in payments. This is another reason why foreign companies often partner with local companies.
Why so challenging?
So, why is China so hard to enter for foreign payment companies?
First, it’s hard to find a market segment without much competition. And even harder to find a value proposition in highly commoditized digital world.
Second, the incumbent fintech payment disruptor in China has done a great job and established near dominant market position. Alipay and Wechat pay process ~90% of the payments in China. Each has more than ~700 million users in their eco-system. It’s easier for them to roll out new functions with near 0 customer acquisition cost.
Third, China’s regulation is protective of local industries and weary of granting license to outsiders especially in finance.
That said, there is still opportunities. You have to look harder and have the right market entry strategy.
Market Entry Template
After apply my framework for initial analysis, I use this template to further drill down and help payment companies formulate their China entry strategy. For the purpose of this article, I have modified the template to be a bit more generic:
First, the focus should be on cross border payments. As mentioned above, the dominance of Alipay and Wechat pay makes the local market hard for local payment companies to enter, let alone foreign ones.
Second, identify the area to establish value proposition, for cross border payments, we can further divide by inbound vs outbound. As a general rule of thumb, I typically recommend companies to focus on inbound for the following reason: (Obviously this will be different for each company）
- The inbound market is much larger. For remittance it was ~$60 billion inbound vs $15 billion outbound based on 2019 data.
- Foreign companies are more likely to leverage their existing resources from their current operation. My assumption is that these companies are well established in their home country or countries.
- I view inbound as a bridge to establish the brand with people of the country (China in this case) and establish local partnership without spending the cost and efforts of a full physical operation in China.
- The success of inbound can then help pave the way to set up outbound, which is a lot more complicated in regulation, operation, marketing, and partnership.
Within inbound, I would further break down on business focus. For example, remittance vs cross-border online seller as the customers for both are different. In remittance, I would focus on specific countries as inbound remittance to China is mostly composed of the following 4 countries: Australia, Singapore, USA, Canada. It’s better that there is a match between these countries to the companies’ existing footprint as we need to leverage every existing resources.
The next step is to confirm our value add service / product. The rule of thumb is speed, transparency, cost, ease of access. As a new entrant, our solution needs to stand out in at least one of the 4 area compared to incumbents.
Last, is distribution and marketing. Can we find an unique distribution channel for our customer segment? For example, perhaps the best way to reach Chinese who sends money home is through University master programs’ Chinese student clubs and specific Chinese in X country discussion groups.
As for outbound, note the outbound market is much smaller, and much harder to set up due to regulation, so know why you are going after it.
The Chinese government has limit on outbound remittance of $50,000 annually. However, recently the government has started to relax the rule starting for those who qualify as QDII (qualified domestic individual investor). So, expect outbound remittance to increase. In addition, there has been exceptions for education, travel, and B2B payment.
Aside from the regulatory issue, pockets of opportunities exit. For example, when I was looking at the space back in 2018, the travel space was a red sea (competitive with many sharks fighting for the pie), but not so much for the education space. There was a clear winner in the space Flywire, but its fee is high. The other choice was going through the bank, which is still costly and not the most convenient.
Another area foreign companies can look at is how to partner with locals. I don’t recommend the typical US digital banking model where the foreign company uses the license of an existing local financial institution. Let’s just call this the direct to C model. There is high probability of regulation issue here, but more fundamentally it’s just hard to see foreign new entrants having competitive advantage over locals in customer acquisition.
Instead, consider partner with the local banks by enabling a specific tech architecture stack. For example, focus on netting in cross border payments. For the banks, netting means cheaper and faster foreign exchange transaction. For the foreign new entrant, the service provides liquidity to its inbound business, which means cheaper and faster process for its inbound business.
Obviously, there are exceptions and my examples may not be valid. The key is look for creative, innovative, value-creation way to partner.
China is a tough market to enter, tougher for finance, and even tougher for payments. However, for the ones who are able to crack the puzzle, the reward will more than compensate the efforts. Otherwise, companies like Paypal wouldn’t have waited for nearly 20 years for its license. And the good new is that there are a number of payment companies who have done it. From Western Union, Paypal, to more recently Payoneer and Airwallex. In the following articles, I will do a deep dive on some of those companies to get a better view of how these companies are able to crack the China puzzle.