Digital Paths to China May Prove Better than Building a Local Presence

The market for international e-commerce in China is growing much faster, and working much more smoothly, than attempts by Western companies to launch within the country.

In the past year, 35% of Chinese consumers shopped cross-border, up from 26% in the prior year, according to PayPal's research on preferences and practices of cross-border shoppers. Along with Ipsos, the payment company researched 23,000 consumers aged 18 and older in 29 markets in September and October 2015.

"The market in China for cross-border payments is huge, and it's growing fast," said Melissa O'Malley, director for global merchant and cross-border trade initiatives at PayPal.

While Ireland is the top e-commerce market for consumers shopping outside of their home country, the growth in China is of interest because of the size of the market, the country's apparent ability to shake off fluctuation in stock and currency prices, and the popularity of American goods with Chinese consumers.

"Consumers in China are driven by quality and authenticity. Price isn't even in the top considerations for people looking to buy cross-border," O'Malley said.

There was concern that the financial crisis in China would impair consumer spending on more expensive foreign goods, but thus far that has not been the case, according to PayPal's research.

Instead, the fear of counterfeit items and an attraction to "Western" brands provide substantial momentum for Chinese consumers, and thus drive transaction volume.

"You can find almost any brand in the U.S.—even non-U.S. brands," O'Malley said, noting the research found that the U.S. was the most popular destination for cross-border shopping for almost every market in the world. And U.S. consumers similarly prefer U.S. merchants; 78% of U.S. consumers shop only domestically online.

PayPal has long been bullish on China, noting in other company research that overall mobile and e-commerce is expected to grow quickly.

The new research provides fuel for China Connect, a PayPal/UnionPay joint program that helps online merchants looking to sell inside the Chinese market, providing aid for compliance and security. It also provides staggering scale for Western merchants, given there are nearly 5 billion UnionPay accounts. The partnership has attracted 13 million PayPal merchants, O'Malley said.

Alipay, an affiliate of Chinese e-commerce giant Alibaba, has a similar product that connects U.S. merchants with buyers in China.

What's proven elusive thus far is the establishment of a domestic payments market for companies outside of China. The companies that have made inroads are working with partners on the ground. Walmart is enabling payments in China via a partnership with Alipay, and Apple is cozying up to Alibaba.

But the market has proven elusive beyond that. Visa and MasterCard say it may take years and millions of dollars to build a base in China, despite the Chinese government's promises of deregulation for outside payment companies.

PayPal did not go so far as to declare that U.S. e-commerce would be the best overall opportunity to penetrate the market in China.

"I wouldn't necessarily say that it's a better way to go in the long term, but it is in the short term," said Rick Oglesby, a partner and head of product consulting and market research for Double Diamond Payments Research.

To be successful in China, PayPal will need in-market brand recognition and lots of local capabilities, such as the ability to accept locally preferred payment options, Oglesby said. "There's lots that PayPal can do now to support cross-border transactions, and in the longer term that initial foot in the door could serve as a foundation for an in-country business."