China is a payments market
with vast untapped potential. But, after a period of welcoming
co-operation with western banks and processors, the market is
proving difficult to penetrate. Chinese banks and China UnionPay
have been unwelcoming to foreign investment. Jane Cooper asks
whether this could damage the market.
Go deeper with GlobalData
With its vast
population, massive cash economy and untapped credit cards
potential, China has long been heralded as the biggest payment
cards market of the future.
Its recent growth has been
phenomenal, especially as some observers only a decade ago did not
think that China would be able to develop a healthy cards market.
Debit card usage has been booming, along with the development of
the domestic payments network China UnionPay (CUP).
For foreign players looking to get
a piece of the pie, however, the excitement has waned. The buzz
about China’s boom has passed and foreign executives who have been
trying to break into the rapidly developing market are now
beginning to sound jaded and almost defeated.
Conditions are becoming
increasingly difficult for foreign players, particularly in the
processing market, and almost impossible for those who are
attempting to go it alone without the aid of a Chinese partner or
co-operating with CUP.
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By GlobalDataExecutives of international
companies argue that there is not a level playing field in China,
and the dominance of CUP – also known as UnionPay – means that the
market is closed to foreign entrants. “The environment is becoming
much tougher,” comments Huainan Zhao, an associate professor of
finance, and China expert, at Nottingham University.
Changing
attitude
In the past, Zhao
tells Cards International, Chinese companies welcomed
their Western counterparts because they wanted to gain their
know-how. However, since the financial crisis, the view of the
international landscape has changed.
“Prior to the financial crisis,
many US firms did not focus on expanding outside their domestic
market because they thought that they were the largest market in
the world and being successful in their domestic market was
everything,” he says. “The same is happening with China now – they
do not want to do business with the outside, and they will not
invite the foreign competitors to come in.”
Observers comment that as China
grows in its self-esteem, it has even less reason to allow foreign
competition into its borders. One payments executive says that if
companies do want to do business in China, they could be asked to
hand over their technology and expertise to their Chinese partners
first.
While the door is closed on the
processing market in China, and CUP maintains its monopoly, the
Chinese network has been able to expand its international
acceptance beyond China’s borders.
International payments executives
feel aggrieved that CUP has been able to compete in the
international marketplace and develop its business, yet there has
been no reciprocity when it comes to foreign companies entering
China.
When China joined the World Trade
Organisation in 2001, it signed an agreement to open up its borders
to foreign competition and pledged to allow players in the payments
world, as well as other industries, to enter the Chinese market. So
far this has not happened and CUP remains the only processor of
payments within China. These concerns prompted the US trade
representative to file a trade complaint with the WTO in September
2010. The companies reported in the press to have initiated the
complaint were Visa, American Express, MasterCard, Discover
Financial Services and First Data. There is a high degree of
sensitivity around the issue and for this reason many industry
executives did not want to be quoted when commenting on the current
state of the
market.
CUP is China’s only domestic
payment network and foreign players are not allowed to issue, or
process, cards in Renminbi. This leaves few opportunities for
foreign companies hoping to issue, accept or process under their
own brands.
The only option for the
international networks – such as Visa, MasterCard, American Express
and Discover – has been to enter into partnerships whereby the
cards are co-branded. The major banks in China have issued a number
of dual cards that carry both the UnionPay logo alongside that of
the international acceptance brand, such as Visa. The card is
processed on the CUP network for transactions within China, but
once the cardholder travels overseas the payments are processed on
the Visa network, for example.
However, as CUP’s international
acceptance network has grown, this arrangement has been the cause
of disputes. There were reports that these co-branded cards were
being processed on CUP’s international network for transactions
outside China. Visa, to protect the transactions that should have
occurred on its international network, reportedly placed a ban on
this practice. News outlets reported that Visa threatened to fine
any bank that processed the international transactions of these
co-branded cards on the CUP network instead of Visa’s network.
Despite these difficulties,
however, and the fact that the international networks are unable to
process transactions domestically in China, the co-brand
partnerships are still a profitable venture.
The increasing number of Chinese
travellers overseas means that the co-brand deals have added a
large volume of transactions onto the Visa, MasterCard and American
Express networks.
Signing such agreements with CUP
has been the main way for networks to take a slice of the growing
market share of the growing Chinese payments industry.
Likewise, PayPal entered into a
co-operation agreement with CUP, which means that CUP cardholders
are able to use their cards where PayPal is accepted.
This opens up the payments market
to international merchants who trade on eBay, for example, and
would not be able to accept CUP transactions themselves. Through
the agreement between CUP and PayPal, those merchants are now able
to accept payments from CUP cardholders through the US-based
network.
Such agreements are common for the
international networks. In November 2010, American Express
announced that it is expanding its agreement with CUP and signed a
memorandum of understanding that would allow the companies to
“explore the expansion of their current cooperative
activities”.
Exactly what this will entail, and
what business opportunities would hopefully emerge from such an
agreement, was not revealed. Some industry observers, however,
remain pessimistic about the ability of any foreign company to
operate freely on its own terms in the Chinese market. What the
agreement could mean for Amex is an increase in transaction volumes
on its network outside of China.
When asked to comment on American
Express’ challenges in operating in China, a spokeswoman for the
company responded: “American Express operates a partnership model
in China – we have been able to grow our card and prepaid business
through partnering with local banks. Our business has grown in line
with our expectations.”
MasterCard signed a memorandum of
understanding with CUP in September 2010, with a similarly vague
intention of establishing a “mutually beneficial relationship”.
Ling Hai, MasterCard Worldwide’s
division president for Greater China, elaborated on MasterCard’s
business in the market.
“China is an emerging market. For
many businesses in China, market entry can be challenging.
MasterCard established itself in China over 20 years ago and we
were the first to launch a payment card in China. Since then,
MasterCard has been building its brand and reach in China.
MasterCard’s business advantage is innovation. The penetration of
electronic payment is still relatively low and cash is widely
used,” says Hai.
“In a broader context, the biggest
battle for us is actually against cash. The opportunity ahead is to
demonstrate the benefits of using a card – the speed, the
convenience and the security. Consumers are increasingly
recognising the value, both locally and overseas, hence the payment
card market is growing rapidly,” he adds.
These comments reflect the
potential of the Chinese market and how even the debit card market
has not yet fully developed, let alone the credit card market.
For this reason, foreign companies
are keen to get into the market and grow their share, but for now
they are hindered from competing on a level playing field because
of the dominance of CUP. For now, the only way companies can
compete in the Chinese market is by entering into cooperation
agreements with CUP.
The processor’s
position
The international networks are able
to operate in the market because cards are issued on their network
– albeit only for international transactions – through the existing
issuing banks in China. For companies, such as processors hoping to
enter the market without such partnerships, it is much harder to
break into and compete in the payments space.
Gaining a licence to operate has
been an uphill struggle for processors, and industry experts
comment that it is almost impossible for a processor to do it alone
without the support of a Chinese company.
Entry into the Chinese market has
been very much based on building relationships over a number of
years with local payments executives, and many expats are left
frustrated by their years of effort and the lack of progress they
have made in advancing in the Chinese domestic market.
CUP is the only processor in the
market, despite a number of discussions of how the market could be
opened up to allow foreign processors to compete freely and process
domestic payments in China.
CUP was established in 2002 by the
Chinese central bank as a means to establish a unified interbank
network. With this, heritage has effectively been state-sponsored
which has thus made it difficult for international companies to
compete.
Technology
trouble
While the domestic processing
market remains closed to outsiders, the cards market in China is in
danger of becoming stagnant in terms of the development of its
technology.
One executive says the
infrastructure is lacking in sophistication and there is not the
established internet protocol (IP) processing infrastructure that
would be found in other markets. One large international retailer,
for example, had to build its own processing network before it was
able to accept payments in China, whereas in other markets it would
plug into an existing infrastructure.
The processing technology is in
danger of not being developed if there is no pressure from
competitors to make things better. The same executive adds that the
systems that have been built are not necessarily the best and most
effective, but rather the cheapest and the quickest to put in
place.
Professor Zhao says that CUP has no
incentive to innovate if there is no competition. Many in the
industry comment that competition would only improve the market by
bringing better payments infrastructure, new investment in
technologies, and giving merchants and consumers in China a
choice.
For companies still trying to crack
the Chinese market, their attentions have focused on other ways to
build a profitable business in the region. Acquiring processors,
for example, may find more opportunities in focusing on regional
retailers who have large outlets throughout Asia, as well as China.
This way the processor has access to the Chinese market, and is
able to monitor developments in the country, without relying on
that market for all of its revenue and future business.
Even for those who are able to
enter the processing market in China, there are some doubts about
how successful such players would be in building a profitable
business.
At the moment, the vast majority of
transactions are made on debit cards, but the margins on these
payments are likely to decrease, comment observers. If interchange
rates on the cards continue to come down, it will become difficult
for those players to compete in the market, even if they are able
to gain access to the Chinese payments industry.
The international networks continue
to see revenue come from their existing co-brand agreements,
allowing them to get a share of transactions from Chinese
travellers making payments overseas. However, those transactions
could be threatened as CUP continues to build its international
acceptance network, which could outpace the growth of its US-based
rivals.
While the disputes and disagreements about the status of CUP
rage on, there are varying degrees of optimism – and cynicism –
about whether the situation will improve for the international
players in China. Many are hopeful about the opportunities that
could be developed, while others are more negative and jaded about
the opportunities for them in the rapidly developing market.
