The Chinese card landscape
The major credit card companies, VISA, Mastercard, and American Express, have long looked to break into the Chinese market. In 1987, the Bank of China issued the first Mastercard instrument in mainland China, which was also the first bank card in China. However, the RMB clearing market in China had been monopolized in the early years by the state-owned UnionPay, which was promoted by the central bank and co-sponsored by 85 Chinese banking institutions.
International card organizations initially entered China by issuing dual-label cards in collaboration with UnionPay. After UnionPay gradually reduced the issuance of dual-label cards less than a decade ago, international card organizations in China could only issue single-label cards in U.S. dollars for use outside of China.
Consistent with international card organizations, UnionPay's operations are sustained primarily by fees collected from card issuance and spending.
The global financial industry has long criticized UnionPay
For every RMB bank card bearing the UnionPay mark, UnionPay charges the issuing bank a brand management fee — for every interbank deposit and withdrawal, there is a 0.6 RMB ($0.084) handling fee from UnionPay, and for every card transaction, UnionPay receives a share of the rebate.
Criticisms of UnionPay
Caixin Weekly describes UnionPay as an "administrative monopoly," with no alternatives to choose from if its revokes a company's clearing license to enter the network. As a result, UnionPay has gained substantial approval power over the issuance of bank cards. At the same time, it has been able to set its own charging policies and revenue sharing rules without the limits of competition.
The global financial industry has long criticized UnionPay — a product of the 1993 "Golden Card Project" aimed at promoting the use of bank cards — for abusing its special position in China's financial system to promote and protect its commercial motives.
On July 16, 2012, the World Trade Organization (WTO) released a report on electronic payment disputes in China. The report found that China's practice of requiring all payment cards issued in the country to bear the UnionPay logo and all payment terminals to be connected to the UnionPay network was in violation of relevant WTO regulations. It also said that designating the state-owned company as the monopoly provider of RMB-specific transaction settlement services constituted discrimination.
China's Ministry of Commerce ultimately did not appeal the ruling, stating that "the panel report rejected some of the U.S. side's claims” and supported China's view on payment services.
By 2014, Caixin Weekly reported that the Chinese central bank was studying new rules for access to the bank card clearing market due to the effect of Internet payments effectively bypassing UnionPay. Alipay, an online payment platform established by Chinese e-commerce and tech giant Alibaba, was reportedly interested in applying for a card organization license.
Opening up to the outside world
In June 2016, the central bank officially released the Measures for the Administration of Bank Card Clearing Institutions, and China's RMB clearing market was officially opened to the outside world. This was one of the key outcomes of the eighth round of the US-China Strategic and Economic Dialogue held that year.
Business is tough
Two years later, American Express became the first bank card clearing organization to receive clearance to set up Lian Tong, a joint venture with Lianlian Digital Technology, in operation since August 2020.
Still, business is tough. According to media reports, China's card payment rates are low due to the semi-marketized nature of the sector, and most payment companies are struggling in the face of fierce competition and rising operating expenses. Visa, which has submitted an application to operate in China as a wholly foreign-owned enterprise, is still waiting for approval from the central bank.
It is worth noting that the Xi-Biden meeting, further liberalization of China's payments industry, and the start of operations of the country's newly established Central Financial Commission (CFC) appear synchronized.
Similar bodies to the CFC include the Central Committee for Comprehensively Deepening Reform and the Central Commission for Financial and Economic Affairs. All these bodies are headed by President Xi himself.
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