18 August 2019
Logos of China UnionPay are seen on bank cards in this photo illustration taken in Beijing

UnionPay can buy time but good days are numbered

The central bank’s swoop on virtual credit cards and QR code payments last week got some people wondering. Was the sudden ban on these forms of payment the result of relentless lobbying by UnionPay {銀聯}, China’s semi-governmental domestic bank card organization and the operator of an interbank card payment platform called EFTPOS?

Third-party payment facilitators are a formidable threat to UnionPay, which got the regulatory nod back in 2002. The bitter feud between the monopolistic giant and the e-payment upstarts escalated in July when UnionPay requested all of its member banks, especially those that have had various forms of partnership with Alibaba’s Alipay and Tencent’s (00700.HK) Tenpay, to divert all online transactions through UnionPay-backed settlement channels.

Xinhua reported that banks that failed to do so faced hefty fines under UnionPay’s administrative power to regulate interbank payments. This forced Alipay to put a stop to direct EFTPOS payment services the following month.

The Economic Observer also revealed that UnionPay convened a seminar on online payments at the end of last year in what was interpreted as a subtle attempt to deliver “words before blows”, offering amnesty to third-party payment operators to bring them under the UnionPay umbrella. AliPay was a no-show.

This is a turnaround in some ways from 2005 when Alibaba chief Jack Ma {馬雲} reportedly paid a courtesy call on the then UnionPay president to propose payment cooperation. Ma was turned away and told to talk to UnionPay’s regional office in Zhejiang, Alibaba’s home base, because the transaction volume at Taobao was “too paltry” at that time. Fast forward eight years and Alipay commanded 48.7 percent of China’s total online payment volume last year. It continues to erode UnionPay’s offline monopoly while UnionPay’s share of online business is just 10 percent, according to consulting firm iResearch.

With its own e-payment unit lagging and having lost the early chance to ally with emerging stars to tap online income, UnionPay is resorting to harsher penalties to intimidate enemies and traitors. Shanghai media reported that ChinaPnR was fined 7 million yuan (US$1.13 million) last year, and a slew of other e-payment companies, including, YeePay, All In Pay, and VBill, were targeted. Bank of Shanghai was also fined 4 million yuan.

Third-party payment firms have been nipping away at UnionPay’s offline domain by installing non-UnionPay-approved EFTPOS devices at brick-and-mortar shops and processing transactions directly with their cooperating banks. UnionPay’s major income comes from charging processing fees at fixed rates, such as 1.25 percent for catering and entertainment services. E-payment firms can charge a much lower rate so it’s natural that shop owners and consumers would want to embrace payment platforms that can help trim their expenses.

UnionPay has 17 major shareholders, and the “big four” — Industrial and Commercial Bank of China (01398.HK), Bank of China (03988.HK), China Construction Bank (00939.HK) and Agricultural Bank of China (01288.HK) — rule the roost. In this sense, UnionPay and banking oligopolies will naturally work hand in glove to defend their vested interests. This explains why smaller regional banks are more likely to be hit by the fines.

The central bank’s ban may help sustain UnionPay’s status quo, for now. But there’s no doubt that with further liberalization of the financial sector — either advocated by top policymakers or brought about by e-entrants — UnionPay will have to reinvent itself to suit the new market order.

– Contact the writer at [email protected]



EJ Insight writer

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