The hottest commodity now in China is surely third party payment service license. It is the key for any Chinese company who wants to expand into financial services. Vipshop Holdings (NYSE:VIPS) bought a payment service company last month. According to two Chinese press reports, Vipshop paid up to 400 million yuan ($58.91 million), mainly for the license. Vipshop can thus start a new business that has a huge upward potential based on its expanding women customer base.
As early as April, there were already Chinese press reports that Vipshop, whose core business is flash sale of branded products, had been negotiating with Pui Fu Technology (Pui Fu) of eastern Zhejiang province for a possible acquisition. Vipshop had never responded on this rumor. But now the rumor was confirmed.
Vipshop Now Owns Pui Fu Which Reportedly Holds An Internet Payment Service License
According to the records of State Administration of Industry and Commerce (NYSE:SAIC), the owner of Pui Fu was changed on September 28 to Guangzhou Vipshop Network Technology Co. Ltd. (VNT) According to 21 st Century Economic Reports (21jingji.com), VNT has already got approval from People’s Bank ofChina on ownership change.
Pui Fu was founded in June 2011 with a registered capital of 100 million yuan. Its business included internet payment, express payment as well as consigned collection and payment. Pui Fu was awarded a third party internet payment license in 2012 which expires on June 26, 2017, according to 21jingji.com.
VIPS is reported to have paid up to $59 million through acquisition to get a third party internet payment service license. Source: China Daily
Chinese news website Sina.com quoted sources saying that VNT paid 400 million yuan to acquire Pui Fu, without telling which kind of license the latter held. 21jingji.com, on the other hand, said VNT paid 330 million ($48.6 million) for Pui Fu, together with an internet payment service license.
According to my online research, VNT is a company specializing in providing payment service. It is a wholly-owned indirect subsidiary of VIPS. The company has not yet responded to my enquiry.
A third party payment license involves six kinds of financial services: settlement with banks on purchases using credit cards, internet payment, mobile payment, TV payment, fixed-line telephone payment as well as debit card issuance and transactions. Those licenses authorized mobile payment, credit card transaction clearing as well as internet payment are in hottest demand and can get the highest price.
According to Sina.com, those licenses only authorized for internet payment service have an asking price between 250 million and 300 million yuan. Those “complete licenses” that serve whole China and cover all six services have an asking price between 400 million and 480 million yuan. 21jingji.com said some of them have asked for over 500 million yuan.
Giant Groups Rush To Acquire Third Party Payment Service License
Vipshop is the fourth big group in recent months to get a third party payment license through acquisition, according to Sina.com. Late September, O2O group Meituan.com completed acquisition of qiandai.com. Earlier, Guangzhou-based conglomerate Evergrande Group reportedly paid 570 million to acquire of Guangxi Province-based Set To Pay Ltd. At about the same time, Guangdong Province-based appliance giant Midea completed a 300 million yuan acquisition for Shenzhen-based China To Pay Ltd. The prices were reported by Sina.com.
Getting a third party payment license has been a strategic priority for all Chinese internet giants. For example, Baidu (NASDAQ:BIDU), Alibaba (NYSE:BABA), Tencent (OTCPK:TCEHY) and JD.com (NASDAQ:JD) were among the earlier ones getting the license. They are followed by Huawei, Xiaomi, Wanda, Suning and Gome. The last two are major appliance retailers.
Previously, Chinese enterprises were unlikely to get into financial service sector. Benefited from the speedy development of internet finance, enterprises of different sectors have the chance of diversifying themselves into financial services. Third party payment is both the stepping stone and a core business in the new finance sector. That is why third party payment license is so hot in demand.
Foundation For Building Diversified Financial Services.
For ecommerce companies, having a third party payment license means they can form a close operation cycle, thus further improving the ecommerce ecosystem. By handling transactions between merchants and users, payment companies get huge amount of transaction data that help them to open new value-added services such as internet marketing and company credit information.
Third Party payment service is also becoming a standard feature for any large enterprises as it provides double advantages-internally the enterprise can form a cash pool. Externally it can prevent leakage of user and transaction data.
A bigger attraction is that companies can develop all other financial services based on the third party payment operation. For example, Alipay, an associate company of Alibaba specialized in payment service, has developed into the $60 billion Ant Financial Group providing additional services like wealth management, private bank for small business, company credit information and cloud computing for financial enterprises.
Vipshop has a large (in US standard) and fast expanding customer base for its new payment service. The company reported in August that its active customers jumped 62% in the second quarter this year from a year ago to 23 million. The number of orders handled during the quarter also rose 54% to 69 million.
The company also reported it added more than 8.2 million new customers in the first quarter, a 50% rise from a year ago. Among new customers, young people had an increasing proportion. They have smaller order size compared with existing more mature users, but they are more internet and mobile focused and more likely to embrace Vipshop’s new payment service.
Third party payment licenses are in hot demand also because they will be scarcer. According to data gathered by Sina.com, People’s Bank of China has issued 270 licenses in 8 batches since the first batch was awarded in June 2011. Last year, three of them were revoked due to violations. Hence, only 267 licenses are outstanding.
Central Bank Suspends New License; License Renewal Delayed By 3 Months
The central bank has not issued any new license since March last year. It recently stated clearly that in principle it would not issue any new license for a period of time.
That does not mean those existing licenses are safe as the central bank has tightened scrutiny on the licensees’ performance. Recently, the first batch of licensees finally breathed a sigh of relief after all their licenses renewed following 3 months of delay.
Chinese internet market research company Analysys pointed out that all first batch of licenses get renewed showed the central bank’s tolerance on the licensee performance. More likely the central bank dares not give the market too much impact by not renewing any license. However, the bare fact that the license renewal has been delayed by three months indicates the central bank is now more prudent in license issuance and renewal.
Conclusion: Huge Upward Potential For VIPS’ Financial Services
China’s third party payment license is getting scarcer as no new issuance is in sight and that some existing licenses may be revoked. The price of those remain available would jump further, especially those licensees who have started less business and have a”clean” history will be more favored by potential buyers.
In view of this, Vipshop’s acquisition of a third party payment license is timely. Whether Vipshop can fully develop the potential of its payment service business or not depends on its development strategy, especially its market positioning.
According to my previous article, Chinese third party payment market is dominated by the Alipay and Wechat Pay-the former has about 800 million existing and potential users while the latter has 600 million. It is apparent that their memberships are highly overlapped as China has a population of 1.37 billion. Regarding payment transactions handled, Alipay has a market share of 63.4 % while WeChat Pay gets 23%.
In addition, don’t forget Baidu , JD.com and other on-and-offline giants like Huawei, Xiaomi, Wanda (the flagship company of China’s richest man Wang Jianlin) as well as the top two appliance sellers Suning and Gome.
Hence, with its 23 million active users, Vipshop can only share a small slice of China’s third party payment service market. Besides, it is safe to say that many Vipshop users already use Alipay and/or WeChat Pay services. Vipshop has to explore a niche market for its financial services, not aiming at general customers.
What is the potential value for Vipshop’s third-party payment service? Assume it paid 400 million yuan ($58.91 million) to get the Pui Fu license. With its 23 million active users, the license price per active user is $2.56.
In contrast, Ant Finance, the parent company of Alipay recently was valued at $60 billion. Divided by its 600 million existing and potential users, the value per user is $100. Hence, Vipshop’s payment service has a huge upward potential.
Judging from the content of its official website, most active customers of Vipshop should be Chinese women of above-average purchasing power. Hence, providing its female customers with personal private banking services may be a good direction for Vipshop.
Disclosure: I am/we are long JD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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