PayPal Inc. has agreed to offer accounts to customers of China UnionPay in a bid to expand in a market dominated by a Chinese rival, Alipay.
The partnership will allow customers of China UnionPay, China's national electronic-payments network, to make purchases at Web sites based in other countries, PayPal said Wednesday.
PayPal, a unit of eBay Inc., is the world's largest online-payments processor besides credit card companies such as Visa Inc., and is fighting to establish itself in China, which has nearly 400 million Internet users. Alipay, a unit of Alibaba Group Holding Ltd. of Hong Kong, has 300 million users, three times as many as PayPal in China.
"There's no doubt Alipay is the online payment of choice in domestic China at this point," said Farhad Irani, the head of PayPal's business in Asia. "We believe there will be an evolution."
But PayPal faces stiff competition from its entrenched rival.
"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 Wednesday that it plans to double its work force in the Asia-Pacific region to 2,000 by yearend.
Previously, PayPal offered Chinese consumers and businesses two types of accounts: one that allowed domestic transactions in yuan and one that allowed purchases abroad through dual-currency credit cards. The new program lets customers with a UnionPay credit or debit card make overseas purchases.
Alibaba's model differs from PayPal's in that Alibaba 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 fraud is rampant and buyers and sellers do not completely trust one another, Price said.
Chinese consumers prefer cash and are leery of paying on the Web — less than 40% 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, the chief executive of Smead Capital Management, which oversees about $170 million, including eBay shares.
"Chinese consumers will favor a local company," Smead said. "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, Irani said. Eventually, Chinese companies will demand the same, he predicted.
Alibaba spokeswoman Linda Kozlowski said "we think that the e-commerce is the way of the future, and the more ways there are to pay online, the better."