October 31, 2014
China’s central government is poised to open the market for domestic card transactions to foreign banks. This would affect the card and payment monopoly that UnionPay has maintained since many years. It would also bring opportunities for card companies that were earlier shrugged by the Chinese regulators. The State Council cited that foreign companies, which would meet set criterias, would be allowed to setup their own clearing houses.
There are no current details on the timeframe under which the transition will take place. UnionPay is already facing significant competition from domestic third-party payment platforms like Alipay and this new initiative will make things more difficult for UnionPay. Foreign card companies are awaiting for relevant regulations to come up and have welcomed this recent announcement. Traditionally, foreign banks, seeking to enter Chinese market, were required to team up with UnionPay on yuan-dominated card transactions and had to route payments via UnionPay’s clearing house.
A prominent reason behind this transition could be attributed to some violations China made when it entered the World Trade Organisation back in 2001. In 2012, the WTO’s dispute panel had cited that by mandating foreign card issuers to use UnionPay’s transaction network, China had not fulfilled its commitment to opening the financial sector.
Entering the China will not be easy foreign payment card issuers. Since its inception in 2002, UnionPay has issued a massive 3.35 billion cards, making it the world’s largest card brand. Other barriers like the application process could make things more difficult for the foreign players. The transition would be a timely procedure as card issuers like Visa and MasterCard would first have to apply for a license in China.
A fact to be noted is that China’s credit cards had reached an outstanding debt of $300.9 billion by the end of 2013, as per a report by the People’s Bank of China. U.S. business groups are expressing some scepticism over this transition and are waiting for more clarifications and the new policies that are expected to be framed.
Foreign players are indeed eyeing China as a prominent market and a big opportunity. Visa is already providing training and technical advice to Chinese officials in order to build a domestic payment system. Meanwhile China’s State Council has also cited that financial institutions that provide only cross-border transaction-clearing services don’t have to setup branches in China.