Networks: UnionPay’s Play for U.S. Business

By Jane Adler

The Shanghai-based payments powerhouse has cut deals with players like Discover and FIS to boost issuance and acceptance share. Meanwhile, U.S. companies’ welcome in China isn’t so warm.

Get ready. China’s giant payments network UnionPay is about to launch its first card for American consumers, marking a further expansion into territory primarily dominated by U.S.-based card networks.

Expected to debut some time before Sept. 30, the card will be a prepaid product issued by Bancorp Inc. and managed by processor Fidelity National Information Services Inc. (FIS). FIS initially will market the reloadable card as a travel card aimed at Chinese Americans and business executives who travel to China.

But the introduction of the card raises questions about UnionPay’s possible plans to ink deals with other partners, introduce new products, and eventually become a big and serious player in the U.S. credit and debit card market.

Think it’s a good deal all the way around? Think again. While UnionPay is making inroads here, U.S. payments networks don’t have the access they’d like to the huge and growing Chinese card market because of government rules that protect UnionPay.

In fact, last year, after a U.S. complaint, the World Trade Organization (WTO) ruled that China must stop discriminating against foreign payment companies by maintaining a monopoly on cards denominated in renminbi (yuan).

While China is expected to respond soon to the WTO ruling, which originated with a complaint by Visa Inc., MasterCard Inc., and American Express Co., there’s little doubt that UnionPay is staking out its position here.

“Another global network brand is emerging,” says Gil Luria, an equity analyst at Wedbush Securities, Los Angeles. “Union Pay’s opportunity is great.”

Dropping ‘China’

UnionPay was formed in 2002 by the five biggest state-owned banks in China, though the concept of unifying various Chinese bank card networks had been introduced in the 1990s. The top managers of UnionPay are former officials of the People’s Bank of China, the nation’s central bank.

Structured as a bank card association similar to Visa and MasterCard before their respective IPOs in 2008 and 2006, UnionPay’s founding shareholders include 85 Chinese banks. At present, Shanghai-based UnionPay has about 400 domestic and overseas associate members.

Besides payments processing, UnionPay operates merchant-acquiring and online services. In July, it introduced a mobile wallet to link cards and coupons, loyalty points, and other offers.

The company’s official name, China UnionPay Co. Ltd., is often shortened to the acronym CUP, although its English-language Web site mostly uses the name UnionPay. In December, China UnionPay launched UnionPay International Co. Ltd. in an effort to bolster its global payments network.

Dropping the word “China” from the name makes UnionPay more accessible to foreign markets, according to Zilvinas Bareisis, senior analyst in the London office of research firm Celent LLC.

“They are changing the way they are positioning the brand,” he says.

Fast Expansion

A variety of reports indicate that UnionPay is growing quickly, though the numbers are hard to verify. The company doesn’t publish financial results and executives rarely grant interviews.

UnionPay’s U.S. operation has an office in Jersey City, N.J. (A representative there declined a request for an interview for this story.) Former general manager of Chase Card Services Joe Venuti is listed on the LinkedIn social network with the title of global accounts at China UnionPay. He has an office in the Philadelphia area.

(Venuti said in response to a request for an interview that he was not authorized to speak to the press. UnionPay executives in China did not respond to e-mail requests for an interview.)

Chinese banks had issued 3.5 billion bank cards in 2012, only 331 million of them being credit cards, according to figures from the People’s Bank of China quoted in March by China Daily. The English-language newspaper didn’t give transaction numbers, but said UnionPay reported they increased 46% last year. A spokesperson for Retail Banking Research, a London-based research and consulting firm, says UnionPay’s per-card payments volume is “considerably lower” than Visa and MasterCard’s.

An April 2012 report in China Business News citing data presented at the company’s shareholder meeting said UnionPay’s revenue in 2011 reached 6 billion yuan ($1 billion), with profit of 1.07 billion yuan ($174 million). Over the past four years, UnionPay’s revenue had more than tripled while profit increased almost 11-fold, according to the report.

‘Huge’ Potential

Much of UnionPay’s rapid expansion has come outside of China. Company president Xu Luode said in a 2009 interview that his goal for the card brand is worldwide acceptance, and it is indeed approaching that mark. UnionPay cards are accepted in 141 countries and regions outside of China, according to the UnionPay Web site. UnionPay also says 65 institutions in 17 overseas countries and regions have issued UnionPay cards locally.

In an interview with the state-run China Daily newspaper in March, Xu said that more than 16 million UnionPay-branded cards have been issued abroad to customers other than mainland Chinese citizens. He also was quoted as saying that the number of overseas cards will increase by 30% to 50% annually over the next three years.

About half of the credit cards currently issued by UnionPay are cobranded, though the company’s goal is to issue more single-branded UnionPay cards, Xu said in the interview. He also noted that UnionPay’s goal with its international unit is to first serve Chinese travelers and then to offer local currency-denominated cards to consumers in various countries.

Facing the chicken-and-egg question of which comes first—card acceptance or issuance—UnionPay is expanding on both fronts in the U.S.

In addition to processing transactions for the new U.S. prepaid card, Jacksonville, Fla.-based FIS plans to market the card to financial institutions through its agent network. The card is being positioned as a travel card targeted at banks that serve Chinese Americans and travelers to China since UnionPay is the only accepted card brand in China. The open-loop card will carry the UnionPay logo and can be used in the U.S. where UnionPay is accepted.

“It’s a differentiator for us,” says Jim Hutchison, general manager of prepaid solutions at FIS. “The potential is huge.”

FIS hopes to expand its relationship with UnionPay as it grows here, Hutchison adds. “We are pursuing opportunities together.” Other prepaid products might eventually include general-purpose reloadable cards, and gift and incentive cards. “We can design any kind of program that makes sense,” he says.

Prepaid cards are enough for FIS to chew on for the moment, and the processor isn’t pursuing broader credit and debit card business with UnionPay, according to Hutchison, who adds that FIS does not have an exclusive relationship with the company.

“You’ll see other processors get into this over time,” he notes, adding that FIS plans to make the most of its position as the first U.S. company to manage a card program for UnionPay.

‘The Ship Has Sailed’

Meanwhile, UnionPay continues its battle for acceptance by U.S. merchants. The network has been gradually lining up processors and merchant acquirers, and quiet pressure from U.S.-based card networks not to do business with UnionPay seems to have ebbed, sources say.

“The ship has sailed,” says Jim Kelly, chief executive of EVO Payments International LLC, an expansion-minded independent sales organization based in Melville, N.Y. “UnionPay is here.”

EVO is formalizing a contract with UnionPay that will support the company in the U.S. and Europe and also provide EVO access to UnionPay’s Asian markets. Kelly expects the deal to be signed this year.

“We have a good relationship with UnionPay,” notes Kelly, who was president in 2007 of merchant processor Global Payments Inc. when it launched a reciprocal arrangement giving UnionPay access to Canada and Global Payments entrée to China.

With its push here, UnionPay initially is targeting cities where Chinese tend to travel, including San Francisco and New York, sources say. But wider acceptance of UnionPay cards also gives the company the foothold it needs to potentially issue cards here.

“They are making steady progress,” notes Eric Grover, principal at Intrepid Ventures, a card consultancy in Minden, Nev. that does business abroad. “But it’s a slow slog.”

PIN Partners

Thanks to a 2005 deal with Discover Financial Services, UnionPay cardholders can make purchases at Discover-accepting merchants in the U.S., though sources say retailers aren’t always aware that they can take the cards.

UnionPay PIN-debit cards are accepted in the U.S. via the Discover-owned Pulse network and at Pulse ATMs. In China, Discover cards are accepted at merchants and ATMs via UnionPay. (Discover declined to provide transaction volumes for this story.)

The new UnionPay prepaid card runs on the Discover network in the U.S. Discover also recently introduced the UnionPay Online Payments service, allowing Chinese shoppers to make online purchases at participating Discover merchants in the U.S.

The big merchant acquirer Elavon, a subsidiary of U.S. Bancorp, signed an agreement with UnionPay in 2011 to enable acceptance of UnionPay credit and debit cards at Elavon merchants in the U.S. and Europe. Elavon serves more than 1.2 million merchants in North America, Europe and Brazil.

Also in 2011, the NYCE Payments Network, a PIN-based debit network owned by FIS, signed a deal with UnionPay to allow reciprocal access to ATMs in both networks.

Leading payment processor First Data Corp.’s international division and UnionPay in 2007 launched a joint-service capability that provides Chinese visitors access to cash via First Data’s ATM network, Cashcard, the largest ATM network in Australia.

In addition, the companies have reached an agreement to expand their relationship to promote the acceptance of UnionPay cards in markets outside of China.

‘Not Optimistic’

While UnionPay is making headway here, the same can’t be said for American payments companies hoping to gain access to fast-growing China.

China’s consumer-lending market has grown at an average of 29% annually from 2005 to 2010 and it’s expected to increase at 24% a year through 2015, according to an August 2011 report by the Boston Consulting Group. Receivables from consumer credit cards—such cards became widely available only in the early 2000s—could rise 40% annually to reach 2.5 trillion yuan in 2015, according to the report.

EBay Inc.’s PayPal online-payments subsidiary hopes to tap into China’s e-commerce market, forecast at $322 billion in sales this year. In 2010, UnionPay announced that its cardholders could use PayPal to shop online at retailers outside of China.

But PayPal has been waiting several years for a decision from Chinese authorities to approve a third-party license agreement to operate in the country. The Chinese e-commerce processing market is dominated by a domestic company, AliPay.

In June, eBay chief executive John Donahoe, speaking at the Reuters Global Technology Summit, said he sees “encouraging signs” from Chinese authorities, but that approval could take anywhere from three months to five years.

Other efforts to crack the Chinese market have moved slowly. In 2012, the WTO ruled that China must stop discriminating against foreign payment networks. China requires foreign card issuers, including Citigroup Inc., the first Western bank to issue a single-branded credit card in China, to use UnionPay’s network for yuan-based transactions. Chinese ATMs and merchants must also use UnionPay’s network.

But the WTO decision did not specify what action should be taken and it’s up to Chinese officials to interpret the ruling. That interpretation was expected at the end of July, according to Chinese state media, but hadn’t come as of early August.

A hint of how much Chinese officials will open the market came in June, when it was discovered that the Chinese central bank ordered that EPayLinks, an online payment platform, stop issuing yuan-denominated credit cards in partnership with MasterCard.

“This is a clear signal that they intend to drag their feet,” says consultant Grover. “All the foreign networks have tried to play nice over the last decade and got nothing for it.” He adds: “In the near term, I’m not optimistic.”

UnionPay At a Glance

World Headquarters: Shanghai, China.

Top executives: Su Ning, chairman; Xu Luode, president; Cai Jianbo, chief executive, UnionPay International Co.

U.S. office: Jersey City, N.J.

Bank cards, 2012: 3.5 billion.

Change in charge volume, 2012: +46%.

Revenue, 2011: $1 billion.

U.S.-based partner acceptance network: Discover.

U.S. prepaid card program manager/processor: Fidelity National Information Services (FIS).

U.S. prepaid card issuer: Bancorp Inc.

Source: News reports, Digital Transactions