Union Pay Pushes Pause On Co-Branded Cards

The times they are a changin’ — as the People’s Bank of China has ordered local banks to stop issuing co-branded (bearing both the logo of UnionPay and a foreign card network), dual currency payment cards in mainland China, according to reports emerging this morning. The decision will effectively shut foreign card networks out of China’s $8 trillion payment card market for at least a year.

Stemming from the PBOC’s order, Chinese banks have stopped all orders for cards bearing foreign networks logos — logos like Visa’s or Mastercard’s, for example.

The co-branded cards, as issued, allowed Chinese consumers to process payments made in U.S. dollars while traveling abroad. The Visa or Mastercard logo shared some plastic real estate with the UnionPay logo on the front of the card. Within mainland China itself, UnionPay (China’s main and only issuer) has up until now been the only choice — as the PBOC-approved card network was the only firm legally capable of processing domestic payments.

Over the course of the last decade-and-a-half, dual currency cards have become fairly common among mainland Chinese consumers as they are routinely issued by China’s largest banks: the Industrial & Commercial Bank of China, China Construction Bank, Bank of Communications, Shanghai Pudong Development Bank and China Merchants Bank, to name a few. Around 240 million co-branded credit cards have been issued by Chinese banks during the past 14 years, according to data from Goldpac.

The results of the partnership have been mixed. Both sides have undoubtedly made money — as UnionPay and its international partners split the fees on international card transactions. Since UnionPay had almost no exposure on the world stage in the early 2000’s and the card networks had almost no name recognition in China during that same time period, the pair-up certainly created more transactions than there might have otherwise been.

But the partnership has at times also been uneasy — particularly as Visa and UnionPay have clashed over which company would take point on actually processing some payments. The dual-branded cards have also been connected with currency flight from China — the South China Morning Post reports have become particularly concerned of late, given that the renminbi is currently in the process of declining to an eight-year low.

“These moves appear to be part of the continuing clamp-down on capital outflows,” said Keith Pogson, a partner in EY’s financial services practice in Hong Kong.

And the world today is somewhat different than the one where the co-branded card deals were first devised 14 years ago. As of 2016, UnionPay has invested billions of U.S. dollars in growing its global acceptance and name recognition. And Visa and Mastercard both have a path to more autonomous operations in China — as the PBOC and securities regulator have mutually determined that foreign card companies can apply for licenses to clear domestic Chinese payments.

But those licenses will take a while to come through — as foreign networks face a host of regulatory challenges that experts say will take at least a year to clear. In the interim, Chinese customers will simply drop off of foreign card companies’ rolls as co-branded cards expire without the opportunity for renewal.

“The foreign companies will be affected by this . . . There will be a period where they cannot expand that business,” said David Lu, chairman of Goldpac. He also noted that the faster the card networks act, the less the effects will be felt.

When renewals become possible again, customers will no longer carry a single co-branded card — they will simply carry two cards.

According to the PBOC, about $8 trillion worth of card payments were processed in China last year — meaning access to the the Chinese market is high priority for Visa, Mastercard and American Express. But the challenges to actually setting up shop in China are expected to be myriad. The regulator has 90 days to approve applications for bank card licenses from foreign companies, according to a notice issued in June.

Gaining approval means the company has a year to launch the business and must also pass a series of reviews on internet technology and security systems. And those checks have proven hard to pass for firms that have made it that far, according to Zennon Kapron, a payments specialist and director at Shanghai-based consultancy Kapronasia.

“I get the impression that the actual licenses to operate aren’t terribly difficult to get, but getting the final approval to start operations is, as there are all these checks,” Mr Kapron said. “At this point, I would expect the earliest we would see a mainland-issued [foreign] card would be late 2017, early 2018.”

Visa declined to comment on the specifics of the situation but said that it “will comply with all government regulations.” MasterCard and UnionPay had no immediate responses.