Ecosystems

UnionPay’s Cashless Headache

UnionPay is facing an increasingly competitive and complicated world these days. Some question whether the card-payment network operator will be able to overcome the struggle to “remain relevant” in a market that is quickly changing — and where consumers may soon be leaving card-based payments behind entirely.

That “struggle” may not be entirely evident at first glance. As PYMNTS and most of the financial press recently reported news on, UnionPay as a card-payment network operator is growing, topping global brands Visa and Mastercard when it comes to the number of cards in circulation. According to research from RBR, at the end of 2016, more than six billion UnionPay-branded cards existed worldwide. Card-based transactions in China — where UnionPay holds a state-enforced monopoly on all card-based payments — are up 35 percent over this time a year ago.

By the numbers, things are looking pretty good for UnionPay.

But looks can be deceiving.

While UnionPay can boast an impressive 35 percent year-over-year growth, mobile payment methods — particularly Alibaba’s Alipay and WeChat Pay — have grown an estimated 85 percent during the same time period and have come to dominate the payments market in many of China’s urban areas.

“It has become the default way of life now,” said Shiv Putcha, an analyst with the research firm IDC. “Literally every business and brand in China is plugged into this ecosystem.”

And though UnionPay was once among the first to develop mobile payment QR code technology, it has largely ceded that ground to China’s two dominant mobile app payment players. Experts wonder if that ground can be gained back.

The QR Code Based the Threat from Within

In the first quarter alone, smartphone-originated QR code-based payments saw transaction growth of a staggering 113 percent according to the consulting firm iResearch. That increase carries a dollar value of about $337 million, and it was split nearly entirely by Alibaba’s Alipay and WeChat Pay, as the two firms collectively represent 94 percent of the QR code payments market.

UnionPay was slow to bring the QR code technology to market in China. Alipay (later Ant Financial) and Tencent (WeChat Pay’s parent firm) almost immediately seized on it and used it to develop a multichannel commerce tool. Development by both Tencent and Ant Financial continued even as the Chinese government briefly banned such payments in 2014 to address regulators’ safety concerns.

Their upgrade of the standard convinced regulators to lift the ban in 2016, but UnionPay had invested similarly in QR code upgrades and found itself almost irrevocably behind when the ban was lifted. By then, the fight was between Ant Financial and Tencent to capture the mobile QR code payments flag.

UnionPay did invest in NFC (near field communication)-based mobile payment services, which the firm has boosted by advertising that using NFC frees consumers of the need to unlock smartphones or open any app — and reduces the odds of compromising bank-account related information.

But NFC-based systems, like Apple Pay, have not caught on with the Chinese consumer. According to research done by China Channel, 67 percent of Chinese consumers use Alipay or WeChat Pay’s QR codes to pay in a store, while NFC-based payments like Apple Pay hover in the 0 percent range. When 4,000 Chinese consumers were asked to choose between WeChat Pay and Apple Pay, 88 percent chose WeChat — only 4 percent chose Apple.

That same survey showed that UnionPay cards do register with consumers, but at 11 percent of the market to QR mobile payments 67 percent.

But their battle is more than just the QR code. Alipay accounts are linked directly to the Chinese consumer’s bank account, bypassing the debit card directly. Funds are quite often held directly in those Alipay accounts by those consumers, since Alipay pays a better interest rate than banks.

The JD.Com Pair-Up

Obviously not willing to cede the market to Tencent and Ant Financial, UnionPay recently announced news of a partnership with online retailer JD.com in a move market watchers in China believe is aimed at gaining ground lost on QR codes.

In mid-July, UnionPay announced it would offer a touch-and-go payment service to JD.com customers, alongside the QR code-based service provided by JD Finance (JD.com’s payments wing). In return, JD.com will gain access to UnionPay’s NFC technology.

At present, JD.com represents a small sliver of the mobile payments market in China — ranked sixth with a tiny market share of 0.8 percent.

The plan, according to reports, is to attract more traffic through UnionPay’s interbank fund transfer network and to push for a wider adoption of its NFC payment technology, known as QuickPass.

“It’s all but possible for internet companies to work together with traditional financial institutions,” said Xu Ling, JD Finance deputy president. “Such a partnership will create new value and will not impede future development of the online payment market. Plus, this product complies with requirements from the regulators.”

The new UnionPay/JD.com contactless payment service is already available on iPhones and will soon be available on Android, sources at JD.com told Caixin.

UnionPay also reports that 43,800 users activated the service on the first day it was available — more than the same-day increase of Apple Pay users who hold accounts of China Merchants Bank, one of the several bank partners with Apple Pay.

And while analysts have applauded the move, many wonder if this simply will not be enough, given JD.com’s relatively small share of the Chinese mobile payments market — and the stable duopoly created by Ant Financial and Tencent.

The Global Card Networks that Want in

UnionPay has enjoyed the great advantage of being the only game in town in China. Until 2014, the likes of Visa, Mastercard and American Express were officially barred by statute in China (though Chinese consumers could have foreign credit cards for use outside China).

That year, 2014, China officially announced its intention to open up the credit card market to both local and foreign companies to appear as though it were complying with the WTO mandate to open up the market to competition. But in the last three years, not much has happened. Part of that slow roll is due to the lack of a compliance roadmap for players wishing to enter the market. A July 2017 deadline was set for said roadmap — and reports at the time indicated that Visa, American Express and Mastercard were gearing up to submit licenses to get permission to operate in China within the next few months.

Visa, it seems, may have gotten an early jump on that.

News reports in local Chinese media last week — though not yet asserted in U.S. media — indicate that Visa has already confirmed via email that they have submitted a license request to China’s central bank to operate in the Chinese payments market. Reports also indicate Visa is hopeful about tapping into the Chinese market following the approval of their application by the People’s Bank of China.

China Daily reports that Mastercard is also preparing to submit a license request.

This is, of course, the latest baby step forward in a multi-year saga that has seen U.S. card networks try — and mostly fail — to gain a legal foothold in the Chinese payments market.

Still efforts roll on — and applications are actually being submitted.

Which is likely the last thing UnionPay needs to hear these days, as mobile payments based on a technology they helped create but didn’t develop are continuing to eat their lunch domestically.

We’ll keep you posted on the disruption as it happens.

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