Banking & Finance

Swiping changes ahead?

UnionPay’s bankcard monopoly threatened

Logos of China UnionPay are seen on bank cards in this photo illustration taken in Beijing

Clearing the field for competition

The term ‘credit card’ first appeared in an 1888 novel about America becoming a socialist utopia. In Edward Bellamy’s Looking Backward, the young Bostonian Julian West travels forward in time to the year 2000. Not surprisingly, he finds his city to be a very different place. Entertainment is made available at home through cables (Bellamy was close on that one) and everybody retires with full benefits at 45 (he was a bit off the mark there, sadly).

But perhaps the most prophetic thing in the novel is the mentions of a ‘credit card’. A full 70 years after Bellamy invented the term, it became a reality when the BankAmericard was launched in Fresno in California. In 1977 it would change its name to Visa, while in 1966 the ancestor of MasterCard was also born.

Credit cards first appeared in Beijing in 1986, but in this case with very limited usage (Bank of China’s Great Wall card could only be utilised for foreign exchange transactions).

The real explosion in usage followed the launch of China UnionPay in 2002, a central bank-driven initiative to create a robust clearing platform for card transactions nationwide. By the end of last year Chinese banks had issued 391 million credit cards with the UnionPay logo, with central bank data indicating that debt outstanding on the cards exceeded $300 billion, up 62% on 2012.

As WiC has reported previously, this fast-growing market has been looked on with competitive envy by Visa, MasterCard and American Express. None of the three has been able to issue their own cards via local banks in China unless they accept a co-branding with UnionPay, meaning that the transactions would still be processed by the Chinese entity. (The three foreign firms can only process card transactions from China if the card in question originates from overseas, which in most cases would involve tourists or business travellers swiping their cards in venues like airports or hotels.)

However, last week the three got some welcome news after it emerged that the authorities have decided to break UnionPay’s hold over domestic card processing and allow other players to apply for licences. According to the Wall Street Journal, the announcement took international card executives by surprise, albeit in a pleasant way. A spokesperson for MasterCard told the newspaper, “We look forward to the day when we can compete for domestic business in China. Open payment systems provide growth by fostering innovation”. Visa’s boss Charles Scharf was upbeat too, telling participants on an earnings call that “we look forward to seeing the specific details”.

On the other hand, Sina Finance thought that UnionPay must be “nervous” about developments. But if so, China’s card giant played down any anxiety in its public response to the liberalisation measure. One of its spokespeople said it “welcomed competition” and supported the move.

Details on what happens next are thin, mind you. Xinhua has suggested that concrete proposals for how licences will become available to new players (local and overseas) should be released by late August next year. That seems a long way off, but it is also the deadline in a WTO ruling on opening up China’s card clearing market to competition.

According to Sina Finance there are several domestic players which might like to set up rivals to UnionPay’s platform. The most prominent is Jack Ma’s Alipay which has been scrapping with UnionPay for years (it retreated, a little unwillingly, from directly confronting its state-backed rival last August when it dropped point-of-sale terminals that allowed small businesses to bypass UnionPay charges).

Sina now wonders whether Alipay will see last week’s announcement as an opportunity for revenge. But Alibaba’s Ma will have to weigh up the pros and cons of entering the business, it says, as he will know that it requires substantial spending on new infrastructure and risk control systems.

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