CUP Losing its Monopoly in China?

by Terry X Xie 0

Recently there has been some market chatter thatChina UnionPay’s monopoly in the domestic payment card market inChina might be ending soon.

CUP’s monopoly in China has long been under attack, not just fromoutside but also from within China. Major issuers are not happybecause they are stuck with the lower IF revenues of CUP cards,and, though in theory they own shares in CUP, in reality they havelittle say in what CUP should be up to. Consumers have beencomplaining about the lack of transparency in settingtransaction-related fees and calling for more competition. What ismore, a breakdown of CUP’s national network just two weeks prior tothe most important holiday and shopping season in China (theChinese New Year) also fueled consumer unhappiness with CUP. Andwhile there have been intentions from within China to compete withCUP, so far none has been successful. In fact, none has made theirintent public!

And certainly there is the pressure from the internationalcommunity. The U.S. has filed a complaint with the WTO, claimingthat China violates its WTO obligations by giving CUP the monopolypower in China. On March 25, 2011, a panel was established by theWTO per U.S. request. Meanwhile, Australia, the European Union,Guatemala, Japan, and Korea reserved their third-party rights (astatus that allow them to directly participate in disputeproceedings, e.g. deliver written and oral testimony). The panelhas nine months to reach a conclusion, so we should expect a resultby the end of January 2012.

With that said, so far there have not been any hints from theregulator (i.e. the central bank) that they are going to changethis situation any time soon. The central bank is under a certainamount of pressure from the public and the international community,but so far has not changed its position. There have always beensome behind-the-scene discussions between the CUP and the centralbank regarding this. And I think most people (including CUP and thePBOC) realize that this situation is not going to last forever.What the CUP (and the PBOC) has been doing is trying to delay andprolong the process of change, as much as they can, while they can.It is reasonable to assume that we might start to see some changesin the foreseeable future. But, my guess is that there will be along way to go before international networks like MC and Visa canreally compete with CUP on a relatively fair basis -even if theyare willing to and permitted to open local processing centers inChina to keep all the transactions and information within thecountry.