The decision to open up Chinese bank card payment clearing market, which came into effect on June 1, 2015, follows, to a certain extent, a complaint the U.S. filed with the World Trade Organization in 2012. The U.S. argued that, per WTO rules, member countries of the organization should treat foreign credit and debit card issuers on par with domestic issuers and therefore required the Chinese government to open up the market for “bank clearing services” to foreign and domestically-invested companies incorporated in PRC. In addition, the PBOC will allow banks in China to issue Visa and MasterCard payment cards independently of UnionPay.
The recent decision aims to improve China’s bank clearing services by putting an end to China UnionPay’s de facto monopoly in processing RMB-based cards. However, newer investors in the China payments space, such as Visa and MasterCard, will continue to face significant challenges before they start competing in the $6.7 trillion market.
Some 5 billion UnionPay bank cards were issued in China as of 2014. Despite the fact that as of June 1st, the central bank began accepting applications from foreign and domestic entities to set up competing clearing networks, payments made using those credit and debit cards still must go and will go, for an indefinite time period through UnionPay. China seems to be taking two steps forward and one step back. UnionPay is the main reason for that.
So what is UnionPay?
- UnionPay is the largest and the ONLY domestic card scheme in China with 4.9 billion cards issued in 2014
- UnionPay is an acquirer (via China UMS subsidiary)
- UnionPay has a de facto monopoly over processing RMB-based cards
- UnionPay is the only player allowed to settle domestic payment card transactions in China
- Starting from Q1 2014, domestic third-party payment processors were forced to connect with CUP’s (China UnionPay) network system in order to process bank cards with a CUP logo
- By switching transactions to CUP, card-issuing banks pay CUP a network fee even though they use their own bank cards and process through third party payment processors
Current Situation of U.S. Credit Card Companies in China
As of June 1st the situation of U.S. credit card firms such as Visa and MasterCard in China was supposed to change, but paradoxically it will continue for longer than expected.
- According to Chinese laws, foreign credit card companies must co-brand with China UnionPay
- There were 150 million dual-badged UnionPay and MC/VISA/AMEX issued at the end of 2011
- Foreign bank card firms can’t do business in China without working through the UnionPay network and paying its network access fees
- All Visa and MasterCard cards issued in China must be cleared in U.S. dollars rather than RMB
Any domestic transaction done using VISA/MC/AMEX will be settled by UnionPay, while any international transaction would either be settled by UnionPay or by the international issuer.
What Does the Future Hold?
What does the future hold for U.S. credit card firms in China in light of the decision to open up its bank card clearing services?
In late 2014, after announcing it was opening access to foreign players, the PBOC announced in November a separate rule which created major headaches for Visa and MasterCard. From 2015, all bank cards issued in China must conform to the PBOC 3.0 standards. PBOC 3.0 standards are incompatible with the EMV standards adopted years ago by Visa and MasterCard.
To meet the new payments standards, Visa and MasterCard would have to change the way they produce their cards, potentially at an enormous cost. These new standards, announced by the Chinese central bank, give UnionPay an even bigger advantage over foreign bank card companies and appear to be another government delaying tactic in blocking Visa and MasterCard from entering the Chinese clearing market.