Visa's Push Into China

by Terry X Xie 0

By Terry Xie, Director, Mercator’s International AdvisoryService

August 1st, thesupposed deadline for Visa to require its members to treatco-branded Visa/CUP cards as Visa cards outside of China, has comeand gone. Nothing really happened, according to multiplereports.

Visa had reportedlythreatened to fine noncomplying members if they allowed theseco-branded cards to settled through CUP’s network outside China.Banks in China have been issuing co-branded cards which carry bothChina UnionPay logo and an international card network brand (i.e.Visa and MasterCard). Using BINs from international card networks(i.e. ‘4’ from Visa and ‘5’ from MasterCard, compared to the ’62’BINs from CUP), these cards are treated as CUP cards within Chinabut use Visa/MasterCard’s networks outside China. In the days whenCUP cards were not accepted outside of China, these arrangementhave worked quite well for all parties involved.

But now China UnionPay isexpanding aggressively on the international market, formingacceptance agreements with card networks, acquirers, and processorsin major markets while maintaining tight control of the market backin China. International card networks are feeling the pain andfearing that they might be excluded from benefitting from Chineseconsumers’ tremendous purchasing power, both within and outsideChina. They are reportedly trying to push and raise the issue (i.e.being excluded from the China market as card networks) to the WorldTrade Organization. And not surprisingly, they also want the otheroptions they have available.

If original reports weretrue, it appears that Visa might have reevaluated the situation andfound that too much is at stake to fight directly against ChinaUnionPay, at least for now. The rules involve too many parties indifferent countries, so it is difficult to monitor and enforce. Theother international card network MasterCard, which provides BIN forroughly half of the 50 million co-branded cards, has not takensimilar actions. Visa had since softened its stance and said thoughit still expect its members to treat those cards as Visa cardsoutside of China, there was no deadline or fineinvolved.

There are signs and hopesthat regulators might loosen the rules a little bit to allowanother card network to operate in China, in addition to CUP. Ifthat turns out to be the case. theoretically speaking,international card networks could play a role in the domesticmarket in settling transactions. But they will face tightregulations and requirements, e.g. they might need to incorporatelocally or form a JV with local partners and process thetransactions within China.

But it is still up in theair. Right now, international card networks will still need tomonitor carefully and keep weighing their options.