Visa and China Union Pay: An Update on Their Struggle

Once upon a time, China Union Pay (“CUP”) was a department of the People’s Bank of China and needed help in establishing and maintaining a bank-card payment network in China. Visa provided CUP with this assistance, and CUP, together with various Chinese banks, became members of Visa. The first draft of CUP’s rules bore an uncanny resemblance to Visa’s, and the first bank card issued in China was a Visa card issued by the Bank of China.

CUP and Visa also divided their responsibilities in a manner that, at the time, appeared to serve both. All renminbi (“RMB”)-denominated Visa bank-card payments within China have been processed by CUP, while all non-RMB-denominated Visa bank-card payments, even on cards issued in China, have been processed by Visa. All 52.9 million Visa bank cards issued in China (as of March 2009) are co-branded with CUP, amounting to approximately 30% of all bank cards issued in China. The remaining cards include non-co-branded CUP cards as well as cards co-branded by CUP with other payment network providers.

Then came the day – in 2007 -- that CUP attempted to establish its own network outside China, and the previously harmonious CUP/Visa relationship began to show strain. CUP offered to process RMB-denominated payments made in Hong Kong, Macau, South East Asia, Australia, the EU and the US, using bank-cards issued in China. These cards included those cards with primary account numbers (“PANs”) starting with “4”, “62” and others. CUP’s network grew rapidly, in part because CUP charged merchant fees that were 15-20% lower than Visa’s. Moreover, Chinese cardholders did not need to pay incremental currency exchange fees in using the CUP’s network to make purchases offshore. (For example, assume that a cardholder uses a CUP/Visa co-branded card, issued by a Chinese bank, in Hong Kong to purchase an item priced in Hong Kong dollars. If the payment is processed through CUP’s network, the cardholder is charged in RMB using the exchange rate on the day of purchase. If the payment is processed through Visa’s network, the cardholder is charged in US dollars, but must settle with the issuing bank in RMB. Thus, the Visa option would entail two currency conversions, while the CUP option would involve one.) In this way, while confining Visa to non-RMB-denominated payments within China, CUP penetrated Visa’s network abroad. Friends thus became rivals.

Visa responded in several ways. First, it claimed that the Chinese government was not fulfilling its commitment to the World Trade Organization (WTO) that, within five years after joining the WTO, China would remove customer-based and location-based restrictions on properly licensed foreign financial institutions’ operation of RMB-denominated businesses in China. To date, notwithstanding this alleged commitment, China has not permitted foreign financial institutions to settle RMB bank-card payments, and has permitted CUP to monopolize that market. A US-brought WTO case on this matter remains pending.

Second, Visa pointed out that PANs starting with “4” are registered by Visa with the International Organization for Standardization. Taking the position that these cards are subject to Visa rules, Visa alerted its members outside China not to process payments from Visa-CUP co-branded bank cards using CUP’s network; such processing, in contravention of the alert, could trigger penalties under Visa’s rules. CUP responded that, since the co-branded bank cards were certified by both Visa and CUP without any apparent geographic restrictions, Visa had no right to deprive the merchants and the consumers of their right to select which payment network they wanted to use. At the same time, CUP has accelerated its offshore expansion for its bank cards starting with “62,” a PAN that Visa does not claim to have registered.

Third, Visa had hoped that Chinese law would permit foreign investment in payment processing businesses, so that Visa could compete with CUP in China. However, to date, Chinese law does not permit such investments.

The medium-term outlook for the CUP/Visa struggle is uncertain. In China, Visa bank-card holders and potential bank-card holders are reconsidering whether they should switch to the CUP’s sole-branded bank cards or non-Visa co-branded bank cards. Abroad, however, Visa’s members may be limiting their processing of 4-PAN cards.

In the longer term, however, the struggle has slowed the growth of Visa in China, facilitated the growth of Visa’s competitors there, and encouraged CUP to rely on its 62-PAN cards both at home and abroad. Thus, the longer term outlook may favor CUP.