How Will American Express Benefit From Chinese Clearing License?

by Trefis Team
American Express Company
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American Express (NYSE:AXP) received approval from the People’s Bank of China in November 2018 on its application for a bank card clearing license in a joint venture with a domestic firm, LianLian Group. The joint venture, Express Technology Services Co., Ltd has received one year of prep time to set up the network and then apply again to PBC to begin operations. This makes American Express the first American company to enter the Chinese payment industry, which has historically been dominated by the state-backed UnionPay.

American Express processed over $1 trillion of payments volume in 2018, making it the third-largest player in the American market after Visa and Mastercard, which processed $8.2 trillion and $4.3 trillion, respectively. In China, UnionPay is the dominant payment processor, and processed payments volume of $15 trillion in 2018. UnionPay’s dominance may be challenged by American Express (and potentially others) in the coming years.

We have a price estimate for American Express of $110 per share, which is about in line with the current market price. You can view our interactive dashboard on American Express’ Revenue Growth to modify key drivers and gauge the impact of changes on the stock price, and see more of our Financial Services company data here.

World Trade Organization: U.S. – China Electronic Payment Dispute

In 2010, the U.S. communicated to the WTO about market access restrictions imposed by China in the payments industry. As a result, in 2012, the Dispute Settlement Body of WTO adopted a Panel report on China – Certain Measures Affecting Electronic Payment Services (WT/DS413/R). In 2013, China presented a status report on the WTO’s recommendations, buying time to build a regulatory framework and work with the U.S. for a resolution. As a result, in 2015 China agreed to open the card market to foreign businesses and bring in regulations. The Chinese market has still generally been inaccessible to foreign players due to the lack of defined regulatory framework, but with the announcement by the People’s Bank of China in 2018, which allows qualified enterprises to apply for payment licenses, large players such as Visa, Mastercard, and American Express hope to get access in the near term. However, the ongoing trade dispute between the U.S. and China could have a near-term impact on these efforts.

How Will This Impact American Express’ Stock?

American Express generally targets customers in the premium space, offering benefits such as discounts, cash back, and reward programs in order to differentiate itself. With the increasing wealth of Chinese citizens and a corresponding increase in consumption, Amex could potentially capture a decent share of the Chinese payments industry over the long run.

With the preparatory phase expected to be over by the end of this year, we expect American Express to see a solid benefit when it starts catering to its first set of Chinese customers. In 2017, LianLian Pay reported payments volume of $300 billion, which is much lower than American Express’ volumes. If Amex is able to increase its volumes by around 25% over the long run (over our current forecasts), its valuation would see an upside of over 10%.

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