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Home » Daily Briefing » Opportunity beckons for card

Opportunity beckons for Western card schemes - but with serious challenges in tow

Today's announcement that China will open up its domestic market to non-Chinese payment processors will be welcomed by Visa and Mastercard, who will be expected to be the main beneficiaries. However, it is worth pointing out that this move had already been announced in 2016, and today's announcement smacks of political point-scoring from President Trump.

However, having said this, today's announcement is not insignificant, as it carries the blessing of the Chinese authorities. More concretely, it is almost a year since the initial announcement was made, which was the minimum amount of time required for non-Chinese card associations to prepare a business plan.

Foreign companies must hold a licence and must adhere to the country's national security and cyber security standards to commence operations in China. Moreover, the applicant must hold $144.8 million in registered capital in a Chinese company.

Visa and Mastercard are holding their cards close to their chest, but it would appear that neither has yet been granted a licence. However, obtaining a licence is the easy part of the equation: meeting the security and cyber standards involved is far more difficult.

It is easy to see why the international networks would like to crack the Chinese nut. Data from the forthcoming Lafferty Asia-Pacific cards market report — drawn from Lafferty's World Cards Intelligence (WCI) data — shows that, going by credit card billed volume, China dominates the regional market:

_Apac_Design c

Encouragingly for potential payment processors, the proportion of Chinese credit card billed volume that takes place at the POS is quite high: approximately 93 percent in 2016.

Comparing APAC to the other regions covered by Lafferty, APAC overtook North America to become the global leader by credit card billed volume in 2014:

_Credit Card Billed Volumen_Design c

This is a considerable achievement, considering how ingrained the use of credit cards is in the United States and Canada. However, looking at the number of credit cards in the Chinese market, there is still ample room for growth in China:

_Credit Cards_Design d

From looking at the graph above, it is easy to understand why Visa and Mastercard are so eager to enter the Chinese market: the more mature North American and Western European regions have reached saturation point, while other regions are underdeveloped or lack scale. APAC, on the other hand (particularly China), exceeds or rivals North America by all important credit card metrics, and is still at an early stage of development.

It will be difficult for the international networks to crack the Chinese market. UnionPay has established a stranglehold in its domestic sphere, and it is unlikely that either of the international networks will be able to gain more than a fraction of the Chinese market in the medium-term. This is due to a myriad of factors including linguistic and cultural reasons, difficulties achieving scale, very low profit per credit card and a potential lack of acceptance infrastructure.

To complicate matters, Chinese banks have recently decided not to renew co-branded (UnionPay branding with either Visa or Mastercard) cards, on the basis that such cards were being used to skirt capital controls. This erodes the toehold that the international card associations have in the Chinese market.

Further compounding the challenge, UnionPay has been busy establishing acceptance partnerships outside of China, diminishing the importance of cooperation between the Chinese and the American networks. One final word of warning to Visa and Mastercard: the popularity of alternative payment methods in China — particularly Alipay and Tencent — means that UnionPay is likely to face a greater challenge from alternative methods of payment in its domestic market than from Visa or Mastercard. Having said this, the opening up of the Chinese market is an opportunity that Visa and Mastercard cannot afford to decline, or for that matter, to foul up.

For further information contact

Patrick Houlihan
Senior Research Analyst
E: patrick.houlihan@lafferty.com
T: +353 (0) 87 332 3503

or

Ronan Lynch
Director, Global Knowledge Centre
E: ronan.lynch@lafferty.com
T: +353 (0) 87 782 8594

World Cards Intelligence (WCI) is an online resource providing critical market and competitor
intelligence on payment cards, e-money, acquiring/processing, retail banking and consumer
lending. Covering 72 countries, this provides clients with access to in-depth reports and interactive
databases with the information needed to undertake comparative benchmarking and make
informed decisions.

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