Card Sharks

Chinese consumers are being built up as the potential saviors of a global economy still in decline. Even how they pay their bills matters. Having been effectively locked out of China’s yuan-toting consumer boom since 2002, American credit card companies are now attempting to lead the charge, finally gaining on China’s sole domestic competitor, China UnionPay.

On July 16, a World Trade Organization settlement panel report ruled in favor of the US on key issues regarding Chinese access to the electronic payment service (EPS) market. The WTO panel accepted the US definition, which classifies EPS as transactions using payment cards (mainly credit and debit cards) and travelers checks as an area where China has made a concrete, though conditional, commitment to allow access to foreign companies.

The WTO ruling declared that China’s current restrictions on foreign card issuers(banks), terminal equipment (POS, ATM, etc.), acquiring institutions (banks acquiring payment card transactions) are “inconsistent”with China’s “stated commitments.”

As more than US$1 trillion in credit or debit transactions is electronically processed in China each year, “the US stands to gain 6,000 jobs related to EPS,” according to the US Trade Representative Office(USTR) statement after the WTO report was published.

The WTO ruling is a direct challenge to China’s existing card scheme, China UnionPay. The USTR’s victory at the WTO has now paved the way for greater market access in China for US giants Visa and MasterCard. These companies do not issue cards, but deal with card transactions.

Although China’s Ministry of Commerce expressed “reservations” towards the ruling in an official statement, it did not appeal, indicating a begrudging acceptance. The WTO panel declared to accept the report on August 31 and urged China to take measures on conformity. Its effective monopoly now under threat, China UnionPay will now have to rely on more than government backing to retain market dominance.

Quick Uptake

By 1993, all of China’s Big Five Stateowned banks had issued MasterCard or Visa-branded cards, facilitated foreign currency-denominated transactions and promoted plastic over cash. Chinese banks also issued yuan-denominated cards, leaving the country’s wealthier consumers with myriad options in their wallets, all of which were restricted to certain types of transaction. Merchants had to install various POS for Great Wall, Phoenix or Dragon cards, and cardholders wanting to withdraw cash from an ATM would have to scour entire districts for the ATM that matched their card. China UnionPay, which made all yuandenominated bank cards inter-operational, was finally established in 2002.

Without a domestic alternative, global market leader Visa became mentor to Chi- na UnionPay, loaning various experts to the company’s Shanghai headquarters. Yuan-and-foreign currency dual-transaction cards mushroomed in China, with UnionPay handling yuan and leaving foreign currency to Visa, MasterCard and other foreign players including Japan’s JCB. This period of largely unrestricted growth and cooperation is widely seen as a golden age. Inevitably, both sides launched attempts to encroach on the other’s turf.

Throughout this period, UnionPay, boosted by aggressive spending by Chinese abroad, has strengthened its foothold in the overseas market, formerly the exclusive playground of its foreign competitors. Currently, merchants and banks in 130 countries and regions, thirsty for Chinese consumers, accept UnionPay cards as a payment method. Joining hands with their local counterparts and banks on the overseas markets, UnionPay cards are issued in a growing number of countries, reflecting China’s expanding financial clout.

In South Korea, for example, 2.8 million cards bearing the UnionPay logo are currently in circulation. Under a partnership with LINK, the dominant British ATM operator, UnionPay card holders can withdraw sterling at most UK ATMs.

Recently, tens of thousands of retailers in the US, France, Singapore, Australia and other countries have begun to offer discounts and free gifts to customers who choose to pay for goods with UnionPay. Many high-end boutiques in Europe and North America have installed separate terminals just for processing UnionPay transactions, offering their big-spending Chinese customers the option of Chinese yuan card payments for their foreign currency transactions.

Visa, though having had its business boosted by “increased numbers of Chinese traveling abroad and growing numbers of foreign visitors traveling to China,” according to its 2011 annual report, has been kept out of the yuan-denominated market by Chinese government restrictions. However, this is the marketplace, the fastest-growing and potentially largest on earth, and Visa has been eyeing it for years. In 2010, however, the company was toppled from its position as world leader by UnionPay in terms of the number of cards in circulation, although Visa has retained a significant edge in terms of transaction value, according to the London-based Retail Banking Research (RBR). This fast rise is more attributable to UnionPay’s virtual monopoly over yuan-denominated transactions than the company’s business practices.

Chinese shoppers abroad find it far cheaper to use their UnionPay cards, which allow them to bypass Visa or MasterCard charges of one to two percent of the transaction amount. Flush with success, UnionPay began lobbying Chinese regulators to prohibit the issuance of any non-UnionPay branded credit or debit cards by banks in China. Since 2011, a new UnionPay card standard which is incompatible with either Visa or MasterCard has been installed in both POS and ATMs in China, with both companies powerless to intervene.

Being on the receiving end of such antimarket finagling evidently jars with corporations like Visa and MasterCard, despite the fact that these companies themselves are frequently accused of skewing the markets in their favor. In July, the same month that saw the publication of the WTO ruling against China, Visa, MasterCard and other major financial institutions had to agree to pay out billions of dollars in anti-trust settlements with European and US retailers who had sued over high interchange fees.

New Era

The WTO ruling, while a major slap on the wrist for Chinese financial regulators, did not endorse US government claims that China UnionPay has an “across-the-board monopoly” on yuan-backed EPS in China. The panel did, however, acknowledge that China’s policy “modifies the conditions of competition in favor of CUP” by requiring that all parties involved in card transactions in China join the UnionPay network, with all yuan-denominated payment cards required by regulators to carry the UnionPay logo. All terminal equipment and acquiring institutions must also be UnionPay-compatible, while there is no official requirement to accept Visa or MasterCard.

In effect, this has bestowed quasi-administrative powers upon UnionPay. Without domestic competitors, the company can effectively determine card issuance require-ments along with trading standards for the Chinese market. This position has also allowed UnionPay, along with major banks, to unilaterally determine transaction fees, leading to protests from retailers, recently caterers, who have complained that such fees are unfairly high.

Meanwhile, foreign banks can only have yuan-denominated credit or debit cards issued through a Chinese partner, meaning they also have to deal directly with UnionPay. Recently, Citibank, the world’s foremost card issuer, became the first international bank to launch its own-branded yuan-denominated Chinese credit card. The flipside of the new cards bear the UnionPay logo.

The recent WTO ruling means that China’s EPS card payment market will have to be liberalized. However, with no time limit set by the WTO, such liberalization is likely to be tortuous, given the special interests involved.

In August, RBR predicted that Chinese regulators would likely attempt to slow the opening-up process, simultaneously launching a “competitor” to UnionPay, splitting the market and further hurting foreign companies’chances of making significant inroads if and when the Chinese market is made accessible.

Some have argued against the WTO ruling infringes on China’s national security, claiming that foreign-issued bank cards could potentially deliver the details of user transactions into the hands of the issuer’s host government. Professor Guo Tianyong, director of the banking research center at the Central University of Finance and Economics, has urged a cautious opening of the market to foreign firms based on this theory.

Other analysts have rejected such concerns as scaremongering, arguing that card issuers have access to far less sensitive information than, say, banks.

The switch from paper to plastic played a key role in the consumer revolution in Europe and the US. However, this revolution was carried out with a rigorous application of market principles and was supported by non-discriminatory regulation. Unless China’s biggest banks, and UnionPay in particular, can play by global rules, Chinese consumers may yet find themselves out in the cold.