• info@groupmav.com


UnionPay just woke up to China’s e-payment bonanza — China Economic Review

An official at China UnionPay just searched “third party payment” on his computer and he’s rubbing his sleep-filled eyes in disbelief.

Between April and June, a horde of non-financial firms channeled US$196 billion (RMB1.2 trillion) via online transactions, up 10% on the first three months of the year, according to Beijing-based consultancy iResearch. China’s central bank grants UnionPay, a state-backed bank card monopoly, the right to take a cut of many of these transactions. Until now, however, many of the digital transactions are still processed under the company’s nose as if it had been sleeping.

Now the firm has woken up and will try to bring every last yuan that’s processed by a third party into its clutches, charging up to 0.55% on each transaction. But UnionPay will face resistance from market leader Alibaba Group, and its online payment company Alipay.com, which built China’s digital payment industry from scratch.

It’s big

For a sense of the value of online payments in China, one need only look at e-commerce figures. This year, the country will become the world’s most valuable market for online shopping, overtaking the US, according to consultancy Bain & Company. In 2015, Chinese are projected to spend about US$540 billion online. The majority of these transactions are paid for over internet.

Taobao and Tmall, both online shopping platforms owned by Alibaba, account for the biggest share of China’s online retail space. Alipay, the biggest third-party payment processor in the country, funnels the majority of these payments through banks and between buyers and sellers. It accounted for more than 60% of third-party payments in 2012. On a single day last November, it processed US$1.3 billion.

The figures weren’t always so high. Alibaba built its payment-processing empire out of a financial system mired in paperwork and snail-like responses from banks. At the time, financial institutions sneered at online spending.

Rude awakening

In 2004, when the platform went live on the mainland, debit cards were rare, credit cards unheard of for most customers and digital payments largely non-existent. When the foundations of the market were being laid, Alibaba even asked UnionPay to help connect customers with banks only to be denied because the state firm saw little value in the industry, a recent report from Caixin pointed out.

Alibaba was instrumental in developing the service, according to Boaz Rottenberg, managing director at Maverick China, a consulting firm that focuses on e-commerce and third-party payment. Alipay was the first online payment platform to support an escrow function for Chinese wary of paying for goods online. The company also developed multiple options for topping up payment accounts outside of banks, such as at post offices or when buying phone cards.

Since then, companies have swarmed into the market. In May 2011, the People’s Bank of China (PBoC) issued nearly 200 third-party payment licenses, finally bestowing official recognition on payments facilitated by non-financial firms. More than 250 firms are now registered with the central bank although the vast majority of the licenses are for physical prepaid cards that can only be used to pay directly for goods at one location, such as a shopping center.

Barely a handful of the registered firms constitute any real share of the payments transferred between banks and customers. Alipay and Tenpay, owned by major Chinese internet operator Tencent, made up 70% of the market alone last year. Other firms such as 99Bill and ePay have far smaller slice.

The latecomer to the market was the state and its banks.

“For years the banks were doing basically nothing. They were working on very out-dated paper-based systems. Only in recent years have they been pushing bank cards, let alone credit cards,” Rottenberg told China Economic Review. “They woke up a little late, and they realized that the future is in e-commerce. And it’s not necessarily theirs.”


The powers vested with UnionPay have made it a reluctant loser.

The company was founded in 2002 by a consortium of China’s biggest state banks. Its logo is stamped on all Chinese bank cards and the company has grown into one of the most recognized payment processors in the world. On the mainland, it rules the bank card universe. The central bank says that all card-issuing institutions in the country must process transactions through UnionPay.

Its monopoly over card transactions has been a point of contention between China and the WTO. When the country joined the organization in 2001, it promised to open its banking market to international financial institutions. Yet today companies such as MasterCard and Visa are still forced to route mainland payments through UnionPay – a requirement that many say violates WTO commitments.

Forget about any near-term liberalization. In May, PBoC stopped an independent Chinese payment processor from working with MasterCard, demonstrating UnionPay’s still-tight grip on the market.

The digital transactions processed by non-financial institutions such as Alibaba are on the fringes of UnionPay’s monopoly. Many banks have opted to insert UnionPay into online transactions routed between banks, Alipay and customers. Others partner directly with Alipay, dodging UnionPay charges.

The dual system went unquestioned until the value of third-party transactions skyrocketed over the past three years. Now that UnionPay has caught a whiff of the value of the industry, it’s looking to channel everything through its clearinghouse. In early August, the company said all offline payments must be incorporated by year-end. All online transactions must be cleared by UnionPay by June 1, 2014.
Waiting for a signal

The crackdown on the market has raised questions on the future of third-party transactions in China as well as the nature of UnionPay itself.

At the end August, Alipay shutdown its point-of-sales payment processor, an offline service, for “obvious reasons,” the company said on its microblog. While it said it would eventually resume the service, the move has been interpreted as resistance against UnionPay’s encroachment on the market.

It’s yet to be seen how Alibaba will react to the deadline for incorporating online payments, a much larger segment of the market, into UnionPay. The company did not respond to questions regarding future regulation in the country.

Landing UnionPay in the center of the market has big implications for payment processing in China. If it succeeds in bring all third-party processors under its wing, prices for end-customers will climb. For companies such as Alibaba and Tencent, this will come amid other rising costs. Rottenberg at Maverick China noted that individual banks are also looking to increase the profits earned off the top of the burgeoning e-commerce market, squeezing the already small margins at the third-party processors.

The officials at UnionPay, who have now thoroughly wiped the sleep out of their eyes, are likely watching the regulatory environment develop just as closely as Alibaba. UnionPay operates similar to a private company and isn’t vested with policy-writing power. However, its attempt to close in on the market last month would give the company the appearance of a policymaker as well as a monopoly.

PBoC will have the final word on this – hopefully sooner rather than later.

The chances of the central bank standing up for third-party processors would be an acknowledgment of the market-making value of companies such as Alibaba. Given the clampdown on MasterCard a few months ago, however, this seems unlikely.

Condoning UnionPay’s August ultimatum meanwhile would show what most industry watchers expect: That the state is determined to enrich itself on the backs of entrepreneurs no matter what the cost to the private sector.

Perhaps the most dangerous signal from the central bank is none at all, deferring de facto decision-making authority on UnionPay. If the state-run firm can stay alert, that would translate into room to swallow up other emerging segments of the financial market the moment they prove profitable.


Click here to read the original article.

Leave a Reply

Your email address will not be published. Required fields are marked *

The reCAPTCHA verification period has expired. Please reload the page.