Visa makes progress in China, but still faces hurdles

• Key insights: Visa received approval from the People's Bank of China to prepare to clear card payments in the country. 
• What's at stake: China is the world's largest payment market and one that has been notoriously difficult for U.S.-based card networks to penetrate. Mastercard and American Express have clearing licenses in the country through joint ventures. 
• Forward look: Visa has up to one year to complete preparatory work before applying for a full operating license, according to TD Cowen analysts. 

After years of trying, Visa's path into China just got a little bit clearer, but there's still more work to do before the card network can clear payments in the country.

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The payments behemoth on Tuesday received approval from the People's Bank of China to begin preparations to establish a domestic card clearing business in China. It's progress, but not final approval.

"The approval of our Application to Prepare marks a significant step forward in Visa's long-standing commitment to China. We greatly appreciate the important role of the leaders of the United States and China in pursuing a constructive and strategically stable relationship between the world's largest economies," said Ryan McInerney, Visa's CEO, in a statement. Visa has been operating in China in a limited capacity for more than 40 years. 

The approval removes a longstanding regulatory overhang and represents a diplomatic and regulatory win for Visa after years of delays, according to Bryan Bergin, an analyst at TD Cowen, who noted that Visa has up to one year to complete preparatory work before applying for a full operating license. 

China is the world's largest payment market and one that has been notoriously difficult for U.S.-based card networks to penetrate. Mastercard and American Express have clearing licenses in the country through joint ventures, and Visa has been working for more than 10 years to secure a clearing license. Alipay, WeChat Pay and UnionPay are the country's largest payment providers.

But the approval is but one step in what is likely to be a long, drawn out process, according to Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods. 

"The approval allows Visa to move forward with the regulatory process, but does not permit it to begin operation," Sakhrani said in a research note. "Visa must still satisfy additional regulatory and operational requirements before receiving final approval to launch… The bigger question is whether China ultimately permits international card networks to achieve meaningful scale in a market that has historically been difficult for foreign providers to penetrate." 

Visa is looking to create a wholly-owned domestic clearing business in China, which would set it apart from Mastercard and American Express' joint ventures with Chinese companies. 

For Visa, that would mean "greater control over technology, operations, economics, and product development if it ultimately receives a full license," TD Cowen's Bergin said. "Visa could eventually clear domestic RMB transactions directly versus primarily serving cross-border spending." 

Even with a full license, Visa's road to building a meaningful business in the country will likely take time, Bergin said. 

"Building merchant acceptance, issuer relationships, and domestic transaction scale will likely take years even after receiving a license; although usage of a Visa card as the credential in a leading digital wallet is an accelerant," Bergin said. "Within China, Alipay and WeChat Pay dominate everyday payments, while UnionPay remains the primary domestic card network."