GUEST POST – Foreign Credit Cards Take New Swipe At China
Bottom line: China’s acceptance of applications for bank card clearing services from foreign firms marks a positive step for Visa and MasterCard, but it could still be years before such services become reality.
By Lu Jin
Many people traveling to China may have experienced an embarrassing moment as they got stuck at the cashier in a local shop after having their foreign bank-issued credit card rejected. Anyone who has experienced such embarrassment knows that what happened next is they need to run around in desperate search for an ATM machine or simply forget about the purchase.
That situation is expected to change, or at least there is real hope now.
Following an October 29 meeting of China’s State Council, the country’s cabinet, it was announced that “qualified domestic and foreign firms” can apply to set up bank card clearing operations in China. (English article) This comes as a piece of slightly surprising good news for international credit card companies such as Visa (NYSE: V) and Mastercard (NYSE: MA) since once effective, it will allow competition in a Chinese credit card now dominated by the current near monopoly of China’s UnionPay.
Actually, at present, even when international travelers or anyone does manage to pay in China using a credit card issued by a foreign bank, the transactions by swiping the Visa, MasterCard or any other cards are mostly settled through UnionPay’s channels instead of directly with the card company. It’s just that people aren’t aware of it.
The new move by the Chinese government is part of a long, long anticipated effort to open up China’s financial sector. As early as the early 1990s, the central government was hinting at financial sector reforms. But due to the many big hurdles and complicated environment, both domestically and internationally, the matter didn’t make it to top of the agenda for years. Some of the major obstacles included the inconvertibility of the Chinese currency and UnionPay’s dominating position in China.
The latest move comes 2 years after the World Trade Organization (WTO) ruled that UnionPay was running an illegal monopoly that unfairly locked out domestic and foreign rivals, and ordered China to remedy the situation (previous post) While the new State Council decision looks like a step in that direction, it may be far too early for the banks, local vendors, and international travelers to feel excited just yet
First, it can take a long time for the government’s new moves like this to become reality. The State Council announcement was more significant in direction-setting than in implementation, and it didn’t set out a timeline or provide further details. So the speed and scope of any move to open up China’s credit card market is still uncertain. Also bearing in mind the upcoming APEC Beijing meeting this week which will focus on inter-connectivity between economies and China’s obligation to open the renminbi transfer market by August 25, 2015, according to WTO ruling, this move is a significant step forward in the preparation of that milestone, even if it seems symbolic at present.
In reality, even when the new initiative is effective and in place, there is still a long way to go for international credit card organizations to really benefit in China. According to experts, their relatively higher costs, and their lack of familiarity and connections with smaller vendors and local banks are all major hurdles. But nonetheless, the new announcement is a very positive and a welcome step towards a more open and transparent credit card settling process, and more broadly a more open financial sector in China in the long term.
Lu Jin is a public affairs and strategic communications consultant at Fortune China Public Relations in Beijing. He can be reached at jin.lu@outlook.com or via LinkedIn at http://cn.linkedin.com/pub/lu-jin/18/a77/a84/.
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