BANKING: UnionPay Takes on Visa, MasterCard in US

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Bottom line: UnionPay’s move into the dollar-denominated US credit card market looks smart strategically, but is likely to fail due to clumsy execution and fierce competition from Visa and MasterCard. 

UnionPay issues first US credit cards

Watch out, Visa (NYSE: V) and MasterCard (NYSE: MA). China’s UnionPay is taking on this global pair of credit card giants on their home turf, with word that the Chinese company will launch its first US-based card in partnership with ICBC (NYSE: 1398; Shanghai: 601398), China’s biggest bank.

Of course I’m being just a bit facetious here, since UnionPay’s first-ever US credit card will have to overcome huge obstacles to ever become a serious rival to local cards from Visa, MasterCard or American Express (NYSE: AXP). But I have to at least commend UnionPay for taking the offensive, since it’s likely to face a major assault on its own home turf later this year when Beijing finally opens the Chinese credit card market to foreigners.

The bigger story is that UnionPay has used a longtime monopoly for credit and debit card services in its home China market to build up a strong organization that has been going global for the last 5 or 6 years. But to date, most cards bearing the UnionPay logo are issued in China and denominated in the country’s currency, the yuan.

Thanks to UnionPay’s global push, cards bearing the UnionPay logo are now accepted at thousands of stores, hotels, restaurants and ATMs around the world, mostly catering to Chinese traveling abroad. But this latest move shows that UnionPay also wants to cultivate local cardholders in the many markets where it operates, which is what it’s doing in the lucrative but extremely competitive US.

According to the latest reports, the newly launched card is the first-ever for UnionPay in the US, and is being issued in partnership with the US branch of ICBC. (English article; Chinese article) It’s not too surprising to see ICBC assisting in this particular move, since UnionPay was set up by China’s major banks like ICBC in 2002 to facilitate the movement of money between major Chinese lenders. (previous post)

The 2 sides say the new cards will target people who travel frequently between China and the US, and will offer a rebate of 1 percent on all transactions. Acknowledging the limited appeal of a UnionPay credit card in the US, ICBC said its US branch will also issue new credit cards under the far more widespread Visa name.

Who’s the Audience?

Frankly speaking, I can’t see any real audience for these new cards. Anyone who travels frequently between the US and China probably already has a yuan-denominated UnionPay card issued by a Chinese bank and would use that when making purchases in China. And anyone who lives or works in the US would probably have one or more local Visa or MasterCards, since they are accepted by nearly all merchants and ATMs in the country.

Of course UnionPay will need to begin somewhere if it someday hopes to challenge Visa and MasterCard as a global credit card brand, so I can’t fault the company for trying. But if it really wants to succeed, it will need to come up with some better angles for attracting customers. Those could include finding more global banking partners like Citigroup (NYSE: C) and HSBC (HKEx: 5; London: HSBA), who might be enticed to form such alliances to further their own goals of growing in China.

At the end of the day, I really don’t hold out too much long-term hope for UnionPay in general due to its state-run background and looming competition in its home market. That competition is coming not only from Visa and MasterCard, but also from emerging homegrown rivals like Ant Financial’s Alipay and Tencent (HKEx: 700). UnionPay has a decade head-start on all of those companies, but its slow moving nature and reliance on state support mean it will have difficulty competing over the longer term.

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