Passing the Plastic: Credit Card Firms Wary of China

As China's population becomes more affluent, the opportunity to charge - a dearly beloved but occasionally troublesome economic right in the west - has raised expectations. China currently exercises a state monopoly over what is referred to as the payment card business. As in the west, it is highly profitable. Foreign governments have been pressing the Chinese government to end the monopoly and permit competition. Surprisingly, western credit card companies are not as enthusiastic about the opportunity as might be imagined. The primary reasons are that western companies have established a quiet partnership with the Chinese entities established to manage the business and do not want to offend their partners. In addition, there are a variety of business opportunities related to the credit card business in China. Aggressively seeking one may eliminate the access to other, more profitable, businesses in the future.

Dinny McMahon explains in the Wall Street Journal:


"The U.S. government is pressing China to end a state monopoly over its booming payment-card business and open it to foreign competition. One group that appears less enthusiastic about confronting that monopoly: some of the very U.S. credit-card companies that Washington's lawsuit aims to help.

The U.S. Trade Representative's Feb. 11 decision to ask the World Trade Organization for a dispute-settlement panel in its electronic-payment case against China is the culmination of a decadelong effort to crack open the local market for companies like MasterCard Inc., Visa Inc. and American Express Co.

The U.S. lawsuit targets China UnionPay Co., a nine-year-old company controlled by China's central bank that has managed to dominate the business of processing local-currency credit-card and debit-card payments in China, despite promises that China would open it up as part of its entry into the WTO. UnionPay also has been expanding internationally into markets the foreign companies dominate.

But the U.S. Trade Representative's effort has drawn almost no public backing from the U.S. card companies. Industry executives and lawyers say the companies are wary that overt support will upset UnionPay, which is their partner and sometime regulator in China. Companies fear that public criticism of the Chinese government or the companies it owns could make them vulnerable to rivals that cooperate more with the government and jeopardize their futures in a market that could have 1.1 billion credit cards by 2025, according to some industry projections.

"It's well known that China punishes whistleblowers," says Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, a Washington think tank. UnionPay didn't respond to repeated requests for comment.

To win U.S. backing for its WTO accession in 2001, China agreed to open its electronic payments market completely to foreign companies by the end of 2006. Instead, the Trade Representative says, Beijing has bolstered state control of the industry. UnionPay, which the government formed in 2002, is closely tied to the People's Bank of China from which it drew some of its top executives.

MasterCard has been expanding its efforts to woo support in China even as Washington's case proceeds. In September, less than 48 hours before the U.S. Trade Representative first launched the WTO case against China over UnionPay's monopoly, MasterCard issued a two-paragraph statement announcing a memorandum of understanding with UnionPay to "explore business cooperation." MasterCard says the agreement was unrelated to the U.S. Trade Representative effort.

In January, MasterCard became the first foreign firm to obtain arena naming rights by announcing a deal to put its name on the former Beijing Olympics basketball stadium.

Rival Visa—onetime ally of UnionPay that has more recently butted heads with the company—has been unable since last year to do any new deals in China in the one sliver of the business in which foreigners can access Chinese consumers: cards issued by Chinese banks that can be used overseas as well as in China. People familiar with the situation say they believe it is punishment for Visa's spat with UnionPay.

Foreign card-company executives have made vague calls for more openness in China. "China's payments market would benefit from having a number of players, but it is obviously not the role of the private sector to decide this," Richard Chang, Visa's top China executive, wrote in an email.

Credit and debit cards in China are issued in conjunction with banks. But UnionPay is the only company banks can partner with to issue cards denominated in Chinese yuan, and it has a near monopoly on processing card transactions in China.

Foreign firms' cards carry both their brands and UnionPay's, and the foreign companies get a cut of the fees only when those cards are used outside China. Such overseas transactions represent a fraction of the industry's total revenue in China, industry executives say.

Visa was for years the most aggressive foreign card company in China. It provided extensive training and technical support for UnionPay in the Chinese company's early years and poured millions of marketing dollars into the country. But executives eventually grew frustrated that China wasn't making good on its market-opening pledge, say people familiar with the situation.

Meanwhile, UnionPay stepped up its activity overseas, building its own international network to rival those of Visa and the others. UnionPay's cards are now accepted in more than 100 countries around the world.

Early last year, Visa jolted the industry when it threatened banks outside China that use its VisaNet network with hefty fines if they used other networks to process payments made with Visa/UnionPay co-branded cards. Visa said it was merely enforcing a longstanding policy requiring banks to use VisaNet whenever Visa cards are used outside their country of issue.