Analysis - Risk & Reward: Global Payments faces China test

BANGALORE Fri Oct 15, 2010 2:55pm BST

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BANGALORE (Reuters) - Global Payments Inc (GPN.N), in a venture with HSBC (HSBA.L), faces some daunting hurdles in its pioneering role as the first foreign credit card processor to clear transactions in China's yuan currency.

The potential rewards are high. China's credit card market is forecast to more than quadruple to 800-900 million cards by 2020, making it a world leader, according to a recent MasterCard report.

And there are 1.88 billion debit cards in circulation in the world's No.2 economy -- almost four times the number in the United States. Card transaction volumes in China topped $24 trillion (14.95 trillion pounds) last year, including cash transfers and withdrawals made with credit, debit or bank cash cards.

But, to leverage its first-mover status -- and the entry process took several years to complete -- Global Payments has to overcome regulatory, political, cultural and competitive pressures.

On the plus side, the joint venture with HSBC, Europe's biggest bank, will be working with state-backed China UnionPay, which dominates local interbank card payment services.

Atlanta-based Global Payments -- which was spun off from the former National Data Corp in 2001 and is now valued at nearly $3.4 billion -- should also pick up market share through being able to process deals in both local and Western currencies.

Merchants will be more inclined to switch to Global Payments as they will only need to deal with one Point of Sale terminal, and won't require separate terminals for different currencies.

But, reflecting the many unknowns of doing business in China, analysts estimate the venture could generate revenue of anywhere from $100 million to as much as "billions of dollars" in the long-term.

"First off, it's a psychological victory because it's the first non-Chinese company to do processing in China, and that is a non-trivial accomplishment," said James Friedman, an analyst at Susquehanna.

Asia-Pacific business contributed $107 million to Global Payments' total revenue in the year to end-May -- about 7 percent.

FIRST-MOVER

Global Payments, led by CEO Paul Garcia, could start to see some early returns from its Chinese operations later this fiscal year -- between January and May, analysts predict.

But it needs to keep up the momentum as China UnionPay and MasterCard Worldwide recently announced they planned to explore future business development.

Other rivals, including First Data, a privately held credit card processor owned by Kohlberg Kravis Roberts & Co (KKR.N), are also likely to soon be knocking on the Great Wall of China, seeking entry into the potential of the giant emerging market.

China's approval for Global Payments Asia-Pacific, the venture with HSBC, covers only Beijing, but the partners plan to expand to Shanghai and other Chinese cities soon.

The venture already provides China UnionPay (CUP) services in several centres across Asia Pacific, allowing Chinese tourists to pay for goods with their CUP cards at those merchants serviced by Global Payments.

For Global Payments, China's highly regulated business environment will provide another challenge.

"China UnionPay is not a normal company. It's a state-owned enterprise controlled by the central government and tends to make decisions based on political motivations rather than on purely economic grounds," Steven Dickinson, partner at HarrisMoure, told Reuters from Beijing.

Foreign bank card companies are barred from providing local currency services in China, and Washington has mulled complaining to the World Trade Organisation about China's treatment of U.S. electronic payment service firms such as credit card networks Visa (V.N) and MasterCard (MA.N).

"Global Payments is going to play by China UnionPay's rules, so there's no doubt the company has set up its systems so China UnionPay can get the information they want," said Wayne Johnson of Raymond James.

The political climate and ties between Beijing and Washington could also be crucial as to how the venture fares.

"You never know with China, there's all sorts of false starts in this market," said Susquehanna's Friedman.

(Reporting by Brenton Cordeiro and Supantha Mukherjee in Bangalore, Editing by Ian Geoghegan)

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