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A trade deal between President Trump and Chinese President Xi Jinping could finally open up the Chinese credit card market — a move that’s been long-awaited by foreign players — per South China Morning Post.
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For context, Beijing promised to allow foreign firms into its domestic electronic payments market as early as 2006 and last year, the People’s Bank of China (PBOC) opened the market to third-party electronic payment firms. But China just recently developed a two-step application process for foreign companies to receive a license to provide electronic payment services — and it won’t come without obstacles for new entrants.
Here’s what it means: Multinational firms have been waiting for the chance pursue the world’s fastest growing economy.
- The Chinese card market has historically been closed off. Late last year, American Express became the first multinational card network to gain preliminary approval from the PBOC to enter the Chinese market, but operational approval could take another year. The PBOC called the move an “important first step in liberalizing China’s clearing industry,” suggesting that other foreign card networks vying for entry would also gain approval soon after. However, that hasn’t happened yet, leaving Visa and Mastercard to continue their ongoing pursuit of the Chinese payments market.
- But the $31-trillion-dollar opportunity the market represents has kept foreign players hungry for entry.China is expected to be the largest card market globally by 2020, representing a major volume opportunity for new card network and third-party payment entrants. Further, Chinese card transactions grew nearly 12% between 2017 and 2018, even as mobile wallets like Alipay and WeChat Pay had become ubiquitous and consumers have demonstrated willingness to try new payment methods, which is promising for new players.
The bigger picture: While the opening of the market has been long-awaited, card networks will likely encounter several hurdles because of their delayed entry.
- UnionPay, the state-affiliated card network, already has a monopoly in China.UnionPay holds a more than 90% share of the Chinese card market and a 33% share of cards in circulation globally. While the majority of its business is concentrated in China, UnionPay has been building out its global merchant acceptance network, enabling it to retain volume from customers when they travel overseas. So, even if Visa gets approval, for example, it could take another two years before it begins operating, which could put it at a disadvantage as UnionPay continues to scale.
- And mobile wallets are eclipsing credit cards as the most popular payment method. Ninety-two percent of Chinese consumers use major mobile wallets Alipay or WeChat Pay as their primary payment method. That’s causing banks and card networks like UnionPay — despite its massive reach — to miss out on massive transaction volume going through mobile wallets they don’t get a cut of. Further, some analysts expect third-party platforms to earn up to 40% of China’s transaction fee revenue by 2020, which would exacerbate the threat of consumers’ preference for mobile wallets among both existing players and incoming card networks.
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