In an effort to expand its online payment solutions in China, last week American Express Co. (AXP) (AmEx) announced its first ever collaboration with China’s largest internet service provider – Tencent Holdings Ltd. The news was reported by China’s DoNews.com. However, financial terms of the joint venture remain undisclosed.
Accordingly, the joint venture will allow AmEx to help provide cross-border purchases to Tencent’s online payment unit – Tenpay. As a result of this joint venture, Tencent’s users will be able to process their online purchase payments on the websites in the US and UK. The online payments will be made using an AmEx online shopping service – globaleshop.
The joint venture appears to complement both the parties. On the one hand, the collaboration will help Tencent’s Tenpay open up fresh opportunities for global growth. The joint venture will also boost its competitive leverage against arch rival – Alibaba Group’s Alipay – the largest online payment platform in China with more than 400 million internet users.
A Chinese report revealed that as of the second quarter of 2011, Alipay enjoys 45.5% of such third-party online payments in China, while Tenpay holds 21.2% of the Chinese market share. Hence, the joint venture attempts to be a well-fit in Tencent’s operational and competitive growth.
On the other hand, AmEx is expected to expand its eCommerce opportunities by extending its services in China and also accelerating cross-border payments. According to iResearch data, total transaction volume processed by third party payment services in China jumped substantially 95% from the year-earlier period. This provides ample optimism for tapping growth from the rapidly growing eCommerce arena.
While other global card giants are unable to penetrate successfully in Chinese eCommerce market given the stringent fiscal and monetary policies in the country, AmEx has been able to make a significant advancement. The policies in China primarily focus on putting barriers to independent operations and restricting the stake of foreign companies in Chinese holdings.
Moreover, the rules imposed by the financial overhaul reform in the US further restrict desired growth as the limit on processing fee and low interest rates on cards have ruined the revenue sources for the card companies, including AmEx, MasterCard Inc. (MA) and Visa Inc. (V). Hence, such collaborations in the growth markets and diversifying into eCommerce are crucial for AmEx in order to expand its revenue base.
Overall, we believe that the joint venture is expected to bolster the operating and competitive leverage for both Tencent and AmEx and will be a positive step for their fundamental growth.
