Payment Cos. Look To China As Government Eases Regulations

Payment companies forecast a major upgrade of China's corporate card market after the country's State Council announced on April 22 that foreign companies for the first time can apply to set up bank-card-clearing operations. Western card schemes like Visa and MasterCard are expected to be allowed to settle transactions in Chinese yuan, a service for which state-backed network China UnionPay has enjoyed a near monopoly. Experts say the move, a significant lurch toward liberalization, will open China to global card issuers and virtual card numbers and make traveler data consistent with global norms.

Foreign companies will be allowed to set up clearinghouse subsidiaries and apply for licenses from June 1 and operate publicly 18 months later. Payments businesses told BTN they anticipate banks will start issuing Visa and MasterCard corporate cards in yuan, and they expect other benefits, including greater acceptance of Western schemes throughout China, innovation in the Chinese corporate card market, a significant improvement in management information and the spread of virtual card payments. Potential players also expressed caution as they await from the China Banking Regulatory Commission precise details and regulations and a clearer definition of the services they will be permitted to offer.

The Global Business Travel Association forecasts China will become the largest business travel market in the world in 2016, yet it remains a difficult one for travel managers to integrate into their multinational managed programs. Domestic distribution system TravelSky Technology has a monopoly on domestic air reservations, yet, while it and UnionPay shut out Western competition in their respective sectors, neither offers data and other corporate-travel-friendly back-office processes to the same standard.

At present, Visa and MasterCard have to cobrand with UnionPay if they wish to accept yuan-denomination cards, and that means paying access fees to UnionPay for every transaction. Citi has taken a different approach since 2012, when it became the first U.S. bank to launch a corporate card product in China. It offers customers two cards—a UnionPay card for use in China and another Visa or MasterCard for international trips. Meanwhile, AirPlus International, as an issuer on the airline-owned network Universal Air Travel Plan, since 2008 has dominated business air ticket payments through Chinese travel agencies. That's thanks to the Chinese government effectively barring bank-owned competitors from competing. AirPlus achieved 92.3 percent market share of China's Billing and Settlement Plan card settlements in 2013.

In spite of their head starts over other issuers, Citi and AirPlus welcomed China's decision to liberalize, which follows a World Trade Organization ruling against the country's restrictive policies dating from 2012. "It looks like Visa and MasterCard will be able to issue locally, which will open up the market in a big way," said Deven Somaya, Citi regional wholesale cards head for treasury and trade solutions.

Somaya said his company needs to examine the fine print on numerous issues—including acceptance rules, management of payment terminals and costs—but he already sees advantages to issuing on the same network in China as in the rest of the world. "At Citi, we own the data end to end, so we can consolidate management information [from UnionPay transactions with Visa and MasterCard transactions], but it would lead to more consistent information," he said.

"This should allow a lot richer data flow back to the schemes," said Simon Barker, CEO of virtual payments technology provider Conferma. "There is no ability at the moment to control and define the data flow because it is controlled by UnionPay. Now, it should start to look like data used in the rest of the world. This news means global card issuers can finally move into China."

Barker also predicted that his own specialized corner of the corporate payments industry will benefit. "It gives us a big opportunity to globalize the virtual card number market," he said. Our discussions with AirPlus have indicated significant appetite for a solution in China." Virtual card numbers are proving a popular way to pay for travel in emerging economies where many business are not yet comfortable issuing corporate cards en masse to employees, and many of those employees do not have well-funded personal credit cards, either.

Making a similar but wider point, AirPlus China managing director Lucy Wang said, "Corporate travel managers will definitely start to enjoy a wider choice of products, which are already offered by the foreign payment networks outside of China. Bringing more innovative and diversified products into China will also encourage local card schemes to provide more innovative products. Therefore, there will be positive competition and customers will be the beneficiaries. AirPlus will also have more opportunities, and we will introduce more advanced and more convenient business travel management products to China."

Wang added that international visitors also are likely to benefit in the long run by finding more establishments willing to accept their cards. At present, there is severely limited acceptance of any network other than UnionPay other than by large merchants, such as chain hotels, in China's handful of "Tier One" cities. "The ability of foreign payment networks to process local transactions in [yuan] means processing volumes will soar tremendously in three to five years, and that will provide a bigger incentive for extending the acceptance network," Wang said.

Meanwhile, traffic in the global payments market is not all one-way. Although UnionPay for the first time will be challenged seriously in its backyard, it is making significant inroads elsewhere and learning fast from its potential domestic competitors. Approximately 4.6 billion UnionPay bank cards are in circulation, according to UnionPay, and settlements on the network totaled $6.7 trillion in 2014, thanks to acceptance by 26 million merchants in 150 countries. Only Visa and MasterCard are bigger. "China UnionPay is a massive institution, and it is growing fast outside China," said Barker. "If it keeps going the way it is going, it will start giving MasterCard and Visa a run for their money on the commercial side."

Similarly, Citi expects stiffer competition from Chinese banks thanks to the new regulations. "I would envisage local Chinese issuers starting to issue on MasterCard and Visa," said Steve Robson, Somaya's counterpart for Europe, the Middle East and Africa.

In a written statement to BTN, MasterCard said, "It's a large marketplace, and we are keen to play there, and we are encouraged by the announcement. The full requirements will only become clear when these detailed regulations are issued. But in the meantime, there are a lot of people in the company working very hard to get ready for this opportunity to take advantage of it as soon as we possibly can."

A statement from American Express said, "The State Council's new network regulations are certainly a positive development and we await further information on how these rules will be implemented."