Visa Gains Ground in China With This Key Preliminary Approval. What It Means for the Stock.

Visa stock rises after receiving preliminary approval from China’s central bank to process bank card clearing in the country. (Dreamstime)

Key Points

• Visa receives preliminary approval from China’s central bank to start setting up a local currency payment processing network.
• The approval allows Visa to build local partnerships and develop the software needed to process bank card clearing in China.
• Visa must complete a preparatory phase and submit a formal application to Chinese regulators to obtain a final business license.

Visa got the green light from China’s central bank to prepare setting up a domestic bank card clearing network inside the country. Though still early, it could offer a meaningful growth opportunity for Visa in the long run.

The approval isn’t a full launch license yet, but rather a preliminary approval, Visa said in a statement Tuesday. The move will allow the credit card giant, which has conducted business in China for about 40 years, to foster local partnerships, secure legal compliance, and develop its software needed to process bank card clearing in China.

Following the announcement, Visa stock rose 1.6% to $395.42 in premarket trading. Shares have risen 13% this year as of the close of trading Monday,. Meanwhile, the S&P 500 has gained nearly 14% this year.

Historically, domestic bank card clearing in mainland China has been dominated by the state-backed network China UnionPay. That meant that international Visa cards issued in China were primarily used for foreign travel or cross-border purchases. When it came to paying for local meals or groceries in yuan inside China, international card networks were kept out of the loop.

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Securing preliminary approval represents a huge step toward accessing one of the world’s largest consumer payment markets. For Visa, capturing even a tiny fraction of China’s total transaction volume could translate into billions of dollars in new processing volume.

Not to mention, the move could open up an entirely new revenue stream. Before, Visa’s revenue in China was limited to cross-border transactions, such as Chinese tourists traveling abroad or foreign tourists spending inside China. Now, Visa will be able to tap into everyday transactions made within mainland China.

Once the preparatory phase is completed, Visa must submit a formal application to the People’s Bank of China and regulators for a final bank card clearing business license before it can process any domestic yuan transactions.

Visa isn’t the first to venture into China. Rivals like Mastercard and American Express have already established local clearing partnerships in China. Visa’s approval, however, could level the playing field with its peers, preventing Mastercard and American Express from sweeping up market share uncontested.

Shares of American Express gained 0.8%, while Mastercard stock rose 0.4%.

Wall Street has remained quite bullish on Visa stock. Of the 43 analysts polled by FactSet, 88% recommend buying the shares while 9% rate it as Hold.

Write to Mariapaula Gonzalez at mariapaula.gonzalez@barrons.com

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