As the cards market in Asia-Pacific continues
to grow, the processing sector is undergoing numerous changes in
order to stay competitive. Nowhere is this more apparent than in
China, where processors are using various approaches in order to
strengthen their footholds in the region. Truong

One only has to look at the continued growth of the cards industry
across China and the wider Asia-Pacific region as well as the
evolution of China UnionPay (CUP) over the last few years to see
that the payments processing game in this part of the world is in a
state of flux.

China card volumesCredit
cards were introduced into the Chinese market around five years
ago, and the country has since witnessed a frantic rush on the
issuing side of the business. While the lion’s share of processing
in China – close to 85 percent – is still done in-house by the
major banks, many of the major global processors have been
increasingly active in the region through a variety of joint
ventures and partnerships.

TSYS is involved in a processing joint venture with CUP called
China UnionPay Data Services. It has recently announced that it
will be handling debit card transactions for Citibank China, and it
currently processes for around 50 other banks in the market.

According to David Duncan, managing director for TSYS’ Asia-Pacific
operations, the Citibank deal is an indication of how foreign banks
will have to approach the regulatory environment inherent in the
Chinese market, even including those such as Citibank that are
traditionally strong within the Asia-Pacific region.

First Data currently operates a data centre in China that works on
the company’s VisionPLUS processing software platform, which is
essential for domestic processing due to the Chinese data
protection laws that forbid the information from leaving their
shores. From October 2008, First Data will also be processing
transactions for two Indian banks from its China-based centre.
While a regional processing centre for Asia-Pacific would
undoubtedly support greater economies of scale, the sheer size of
the Chinese market alone makes it an attractive endeavour

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Economies of scale

According to Nigel Lee, president of First Data’s Asia-Pacific
operations, cross-regional management and the benefits of scale can
be leveraged within the region despite the necessary inefficiencies
inherent when dealing with disparate markets. Lee also cites the
scale benefits of First Data’s Australian operations.

“We have a very large switch operation in Australia,” he told CI.
“Around that asset, we are basically switching the merchant
business for multiple geographies through there. There are ways to
use assets across countries to gain scale.”

Regarding the deal to process transactions for the two Indian banks
from China, he sees First Data’s status as an independent player as
opposed to another bank as a clear advantage, and points out that
regulators in the region are slowly opening up to the idea of
cross-border activities in order to drive economies of scale and

According to Lee, something else that First Data can use within the
Asia-Pacific region is what he describes as ‘economies of skill’.
Many of the markets in question are embryonic, and often lack the
proficiency to provide the right products and take advantage of
particular opportunities that are afforded to the larger processing

“Processing has brought about a more competitive environment,
because we have enabled our clients to bring quality products to
the marketplace to compete against the larger banks,” adds

All of this begs the question of whether these dedicated processing
companies will grow to take over the business entirely from the
major banks in each country that continue to process transactions
in-house. According to Lee, the processing landscape of the future
will continue to be kaleidoscopic in nature.

“Second-tier banks all want access to the international platforms
that the larger banks run,” he explains.

“The only way they can afford access is by using a processing agent
to help them. They won’t have the cost base nor the skill set to do

Merchant acquiring

For merchant acquiring, the situation is slightly different.
Typically, laying down the POS footprint is not seen as a strategic
move by banks but instead as a necessary evil. First Data is
increasingly active in this area through its Merchant Solutions
joint venture with Standard Chartered, which was launched last

This has led to a new platform based around merchant processing as
well as a back-office located in India. For Lee, the next step for
the company is to offer these facilities to other banks.

What role the traditionally lower merchant service fees common
throughout the Asia-Pacific region will play in all of these types
of developments remains unclear. As Lee points out, in many markets
these fees have recently gone up, while a lot of the price
reduction in the past has been driven by what he sees as irrational

“It works when banks are both the issuer and acquirer, because they
offset the merchant service fees with the ‘on-us’ interchange that
comes back, but as soon as you get third-party players into the
game, then those ‘on-us’ fees aren’t available to do the offset,
and so we have to start competing on a more rational basis,” he

Additionally, lower interchange rates within the region,
particularly in China, make it increasingly difficult for issuers
to create loyalty programmes on a par with those found in the US
and Europe, which for Duncan makes the marketplace a lot more
competitive for the banks.

“It has forced them to get creative in order to navigate within
that environment, and you have seen some really innovative things
in order to get around that,” he says, citing the example of group
incentives and loyalty schemes offered by China Merchants

The credit crunch and the subsequent loss of capitalisation within
many banks have also forced the hand of many institutions to start
imposing fees and the like to make merchants profitable once

South Korea is proving to be the major exception to this trend, as
it operates an entirely ‘on-us’ system with a three-party model
where the banks act as both issuer and acquirers. The result has
been relatively high merchant service fees compared to other
markets. It seems likely that these will be reduced over the next
few years, with help from the government.

Payments in China

The 2008 Beijing Olympics were to be the catalyst for sweeping
developments within the Chinese payments sphere, with the growth in
merchant acceptance predicted by some to have significant long-term

However, while card acceptance in some of the country’s major
cities saw a healthy increase in volume leading up to this period,
First Data found that across the country as a whole merchant
acceptance had only increased by 4 percent compared to 18 months
ago, and remains incredibly low when compared to the overall number
of merchants in China.

Similarly, Duncan believes that the potential impact of the
Olympics on the cards business across China was always

Acceptance is high along the more developed cities on the east
coast of the country, but this tails off significantly the further
one travels inland towards the more rural areas.

The other key challenge for non-cash payments growth can be loosely
seen by examining the evolving role of CUP.

Over the last two to three years, it has morphed from primarily a
technical project to harmonise the dozen or so switchers across the
country into a fully-fledged domestic card scheme. Visa and
MasterCard are still forbidden from settling domestic renminbi
credit transactions.

Something else worth bearing in mind is the unique dynamics
surrounding the acquiring business model in China. This sphere of
the payments environment is dominated by acquiring service
providers such as CUP subsidiary UnionPay Merchant Services (UMS)
and SAND that the banks utilise as a means of getting involved in
acquiring without the initial outlay of investment that would
otherwise be required.

“These companies are small, they are aggressive, and they are
actively growing the acquiring environment,” says Duncan.

The main driver of scale in China is the domestic market, and not
the wealthy jet-setting sector, so the aim of CUP has been both to
convince banks to issue their cards and increase the overall
footprint of merchant acceptance.

According to Lee, what the market will most likely see is a trend
towards the licensing of these independent deployers and acquirers
in order to drive this further.

Growth and challenges across Asia-Pacific

The economic and cultural diversity of the Asia-Pacific region
perhaps dictates that it is next to impossible to identify any key
growth drivers for the region as a whole.

In India, there is a distinct lack of a domestic debit network thus
far, and it will most likely be credit that will drive
profitability within the industry. However, the importance of a
corresponding merchant network to meet and service any growth in
card numbers will be crucial.

Meanwhile, the development of Islamic banking will have a
significant effect on card numbers in certain countries such as

Although Lee believes that prepaid will be a growth driver in
countries such as China and India through a variety of usages such
as payroll and a means of servicing the underbanked, he sees issues
surrounding the value structure as well as the challenge of how to
top up the cards themselves in the more rural areas.

China card habitsThe
other potential growth area for the payments industry in the region
is ATMs. The cash-centric nature of many Asian markets is firmly
ingrained, something that is further compounded by the branch
networks of many banks remaining sparse or simply

The solution to this in many cases would be an ATM network where
the machines act as a service point for customers to pay utility
bills and the like, rather than just as a cash dispenser.
Additionally, Lee sees POS terminals being used for similar
purposes, as in many areas they will be the only interface with the
bank that is available.

In order to tackle the diversity of the region, TSYS has broken up
its Asia-Pacific operations to focus separately on Japan, China and

The company holds a majority stake in Japanese payments
authorisation and processing gateway GP Net, which brings TSYS
almost 20 percent market share, and has a hand in processing for
Toyota Finance and a handful of stored value clients. TSYS also
holds several licensing agreements with ICICI and UTI in

Duncan sees south-east Asia as slightly more difficult to gauge,
with the market dynamics differing greatly among the fledgling
global payments economies there.

This is compounded by the presence of numerous well-entrenched
competitors such as Atos, Global Payments and First Data.

“Processing as a business model is still challenged,” he

“There are still some concept issues about the value of processing
and outsourcing as opposed to keeping things in-house, even with
some of the smaller banks.”

Many of the concerns of banks regarding outsourced processing
relate to the relinquishing of control. However, Duncan remains
positive about these markets.

TSYS currently has several licensing agreements in Vietnam and
Malaysia, and continues to look at building processing operations
in these countries, something he describes as a ‘natural evolution’
for them as their economies begin to develop further in