Thursday, March 18, 2010

PayPal Partners China UnionPay to Challenge Alipay

March 17 (Bloomberg) -- PayPal Inc., the online-payments service owned by EBay Inc., will offer accounts to customers of China UnionPay in a bid to expand in a market dominated by Chinese rival Alipay.

The partnership will give customers of China UnionPay, a national electronic-payment network, the ability to make Internet purchases from Web sites overseas, San Jose, California-based EBay said today in a statement.

PayPal, the world’s largest online-payments processor besides credit-card companies such as Visa Inc., is fighting to establish itself in China, a market with almost 400 million Internet users. Alipay, a unit of Alibaba Group Holding Ltd., has 300 million users, three times as many as PayPal in China.

“If PayPal is talking about going head-to-head against Alipay and the Chinese banking consortium, that’s very difficult,” said Walter Price, a fund manager at RCM Capital Management in San Francisco. His firm oversees about $100 billion, including EBay shares. “If you’re talking about providing a service to Chinese who want to buy things outside their country, I think that’s where PayPal fits.”

PayPal also said today it will double its workforce in the Asia-Pacific region to 2,000 by the end of 2010. PayPal is trying to make inroads in China, the world’s biggest Internet market, as Google Inc. threatens to pull out.

Web Transactions

Internet transactions through services such as Alipay more than doubled to 576.6 billion yuan ($84.5 billion) last year and will reach 2.75 trillion yuan in 2013, according to Beijing- based research firm IResearch. Alipay controlled about 50 percent of the market in 2009, compared with about 21 percent for nearest rival Tenpay, offered by Internet company Tencent Holdings Ltd., IResearch said.

“We think that the e-commerce is the way of the future, and the more ways there are to pay online, the better,” Linda Kozlowski, a Hong Kong-based spokeswoman for Alibaba, said by telephone.

China UnionPay, based in Shanghai, was established in 2002 and operates the inter-bank clearing and settlement system in China.

Before today, PayPal offered Chinese consumers and businesses two types of accounts: one that allowed domestic transactions in yuan and a second that permitted purchases abroad through dual-currency credit cards. The new program allows customers with a UnionPay credit or debit card to make overseas purchases.

Cash on Delivery

Alipay acts as a middleman on purchases, holding money in an escrow account until the seller delivers the goods. That model has boosted Alipay’s popularity in China, where there’s a high level of fraud and buyers and sellers don’t fully trust each other, Price said.

Chinese consumers prefer cash and are leery of paying on the Web -- less than 40 percent of Internet users in the country are willing to provide financial information online, according to the China Internet Network Information Center. Low trust in online transactions is one of the obstacles to e-commerce growth in China, the government agency said in December.

That may give Alipay an advantage in persuading Chinese consumers to use its service, said William Smead, chief executive officer at Smead Capital Management, which oversees about $170 million, including EBay shares.

‘Natural’ Chinese Bias

“Chinese consumers will favor a local company,” said Smead, who’s based in Seattle. “There’s a natural bias for that.”

PayPal, which entered China in 2005, has about 375,000 active accounts in China, Hong Kong and Taiwan, and more than 80 million globally. The service will become more attractive to Chinese consumers because foreign businesses want payment immediately and don’t want to wait for money to be transferred from an escrow account, said Farhad Irani, head of PayPal’s business in Asia. Eventually, Chinese companies will demand the same, he said.

“There’s no doubt Alipay is the online payment of choice in domestic China at this point,” Irani said in an interview. “We believe there will be an evolution.”

EBay rose 51 cents to $26.79 yesterday in Nasdaq Stock Market trading. The shares have gained 14 percent this year.

Long-Running Rivalry

EBay and Alibaba, China’s biggest e-commerce company, have had a long-running rivalry. EBay entered China in 2002, challenging Alibaba’s auction site, In 2006, EBay’s then-CEO Meg Whitman shut down the site after its market share declined by half. EBay entered into a joint venture with Tom Online Inc.

The companies are preparing for a second clash as PayPal encroaches on Alipay’s turf. Last year, Alibaba unveiled AliExpress, an online marketplace for businesses, to tap demand for cross-border commerce. PayPal and Alibaba are also trying to work together. The companies have been in talks for about a year to make PayPal a payment option for AliExpress, according to two people with direct knowledge of the matter.

“We always keep an eye out for solutions to help our customers, but there’s no agreement at this time,” Linda Kozlowski, an Alibaba spokeswoman, said in an e-mail. PayPal spokeswoman Sara Gorman declined to comment.

By Joseph Galante

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