After years of trying, American Express Co. is finally cracking into the China market. Now the hard work begins.

On Saturday, AmEx got the green light to start processing yuan payments, making it the first of the big three U.S. card companies to get access to the mainland. The license, initially approved in 2018, gives AmEx a portal to some of the world’s biggest spenders, and will pit the company 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 foreign-currency payments outside China or on overseas websites.  

Competition will come not just from UnionPay cards, which dominate the market, but also mobile-payment apps, where Ant Financial’s Alipay and Tencent Holdings Ltd.’s WeChat Pay are big players. AmEx’s partner, LianLian, is tiny by comparison. To top it off, China is also testing out the digital yuan, another budding rival in the payment space. “Having a foreign branded card in your wallet used to mean you have made it in China, but now matters little,” says Zennon Kapron, the founder of a fintech consulting firm.

Another challenge is that fees in China are lower than in the U.S., so companies need to win scale to make the big bucks: The card-clearing fee rate is 0.065% for domestic banks and the acquiring fee rate ranges from 0.5% to 1%. In the U.S., issuers like AmEx charge between 1.4% and 3.5%. 

AmEx and its Chinese partner will also have to convince local banks to issue cards processed on their network, and get more merchants to accept them. Because of the high fees it charges compared with rivals, AmEx tends to be used less in Asia and Europe. 

Still, there is money to be made if AmEx plays its cards right. One strategy that’s worked in the U.S. is offering plenty of rewards. A large card firm told Kapron, the consultant, that even with the thinnest slice of the market, it would still be profitable. There will always be spenders who like premium cards they can use at home and overseas, he says.

Banks, too, could benefit from choice beyond UnionPay, notes James Lloyd, Asia-Pacific fintech leader at Ernst & Young LLP in Hong Kong. More competition can only be a good thing for their merchant clients and cardholders.

To AmEx’s credit, just getting to this point is a step in the right direction. It’s been a long slog.(2) Both Visa and MasterCard have been waiting since 2006 to gain access to China.  AmEx cleared a key hurdle in early January when regulators accepted its application to start a bank-card clearing business with LianLian. Last March, MasterCard refiled its application, raising its stake in a joint venture with NetsUnion Clearing Corp., or Wanglian, a clearing house for online payments. There’s little clarity on the progress of Visa’s application, which was made in July 2018 without a mainland partner. 

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

But with Covid-19 wreaking havoc on the economy, it’s going to take more than Beijing’s blessing to get shopaholics back in force, beyond some revenge spending. AmEx, whose slogan is “Don’t Live Life Without It,” may find becoming indispensable in China its toughest sell yet. 

(1) In 2012, the World Trade Organization ruled in favor of a U.S. claim that argued foreign payment providers should have been given access to the domestic clearing market in 2001, when China acceded to the WTO.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

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