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China to open bank cards to foreign competition

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Financial Times, 31/10/14
Gabriel Wildau in Shanghai
China will allow foreign companies to clear electronic payments in its domestic market, its cabinet said on Thursday, opening the door for Visa and MasterCard to compete with the dominant state-owned champion.
The World Trade Organisation ruled in 2012 that China unfairly discriminated against foreign electronic payment processors who wanted to process renminbi transactions, handing a victory to the US, which brought the complaint.
Central bank rules require all payment cards – including debit and credit cards – to clear renminbi transactions through China UnionPay, a clearing network owned by 85 mostly state-owned banks. But in a statement, the State Council signalled a cautious shift.
“In order to expand financial openness, promote innovative development of the domestic bank card and payment markets . . . foreign and domestically invested enterprises that meet requirements can all apply to establish bank card settlement organisations,” the State Council said, without referencing the WTO ruling.
Many Chinese banks issue credit cards bearing the UnionPay logo alongside either Visa, MasterCard or American Express. UnionPay clears renminbi payments made with these cards, while the other systems are used for foreign currency payments.
“One era ends, a new era begins. Opening up the payment clearing market is not only a WTO requirement, it’s also the necessary next step for an industry that has developed up to a certain point,” said Tang Bing, chief executive of Yeepay.com, a Beijing-based payment processor.
Still, the extent to which foreign companies will be able to compete with UnionPay depends on implementation. In China’s policy making process, the State Council issues broad guidelines, leaving specific agencies to follow up with specific regulations. Even after the WTO ruling, the People’s Bank of China last year blocked a local online payment platform from issuing renminbi-settled credit cards in partnership with MasterCard.
“If the policy can be smoothly and quickly implemented, it’s great for the industry. Merchants and users can expect higher quality and more diversified payment clearing service,” said Mr Tang.
The market potential for foreign companies is enormous. Chinese consumers long favoured cash transactions, but that has changed in recent years. UnionPay bank card transactions hit Rmb21.8trn ($3.6tn) in 2012, up 37 per cent from 2011, and had issued more than 3.5bn cards.
Still, UnionPay will remain a formidable competitor. Founded in 2002, its chairman until Thursday was Su Ning, a former central bank vice governor. But on the same day that the cabinet announced the policy, UnionPay’s website quietly changed the list of its senior executives, replacing Mr Su’s name with Ge Huayong, another former central banker and recently UnionPay’s vice-chairman.
UnionPay did not respond to a request for comment on Thursday.
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