FINANCE: UnionPay Defends At Home, Challenges Abroad
Bottom line: UnionPay will see its market share stagnate or even start to decline at home as it faces new competition in the next 3 years, while it’s likely to see sharp growth in its overseas expansion.
The coming year could be a groundbreaking one for the important but low-profile business of providing financial settlement services in China, now dominated by bank card issuer UnionPay. Such services allow banks and companies to transfer money back and forth between each other electronically, facilitating things like credit and debit card purchases and letting people withdraw cash from other banks’ ATMs besides their own.
While UnionPay has dominated the sector for domestic transaction settlement service for the last decade, its state-granted monopoly will officially end this year as China complies with a WTO ruling in response to complaints from global leaders MasterCard (NYSE: MA) and Visa (NYSE: V). At the same time, UnionPay is getting challenged by homegrown domestic players led by e-commerce giant Alibaba (NYSE: BABA), whose financial arm is also pushing into the business.
All of this comes as UnionPay itself pushes ahead with a major global expansion, which could also gain momentum in the next few years ahead as it caters to the growing number of Chinese businesses and travelers going abroad.
I’ve written for years about UnionPay, but always without extremely deep knowledge of this relatively secretive company that was formed in 2002 as part of a government move to boost financial connectivity between the nation’s many banks and businesses. Among other things, I’ve predicted periodically that UnionPay, which is jointly owned by a large group of Chinese banks, might hold an IPO soon to finance its expansion and capitalize on investor demand for financial stocks.
But it seems that discussion of such an IPO has never been publicly discussed by UnionPay, which I learned after meeting with some of its officials as the company tries to become more open and transparent. Of course that doesn’t mean there isn’t any IPO plan at all, though it does seem like capital raising isn’t a major priority at the moment for UnionPay, as it focuses on new competition at home and expansion abroad.
The domestic front should provide some lively action for UnionPay, as it faces the new challenges from both international and domestic players eager to get a piece of the lucrative market. After years of complaints at being excluded from offering domestic services in China, Visa, MasterCard and others are finally being allowed into the market and are likely to start offering domestic settlement services later this year.
UnionPay probably doesn’t have to worry too much just yet, since Chinese law will limit the foreign companies to offering services in foreign currencies for the next 3 years, before they can finally offer service in China’s local currency, the yuan, around 2018. That should give UnionPay plenty of time to take preventative moves to try and protect its position once it faces real competition from the foreign companies.
Meantime, the threat from private sector players looks mostly limited right now to Alibaba, but could easily grow if Beijing lets the situation develop naturally and other aggressive private companies like Tencent (HKEx: 700) and JD.com (Nasdaq: JD) sense a market opportunity. Frankly speaking, this kind of competition is exactly what the market needs, though some degree of regulation is also probably necessary to make sure the situation doesn’t become too chaotic.
Finally there’s the international piece to UnionPay’s story, which is one area that probably has Visa and MasterCard watching closely. UnionPay’s cards are currently accepted in 148 countries, and its international operation has issued 33 million cards outside China. I was also surprised to learn the company is reportedly the largest foreign credit card issuer in South Korea, reflecting its rapid expansion into markets that are popular with the fast growing number of outbound Chinese businesses and tourists.
At the end of the day, the next few years will be transformative ones for UnionPay, as it faces unprecedented challenges at home and also seeks to challenge the current global dominance of peers like MasterCard and Visa. As to an IPO, I still wouldn’t be surprised to see something within the next 3 years by the parent company or one of its units, probably in Hong Kong, as it seeks to raise its global profile and fund its international drive.
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