WTO China UnionPay Ruling Paves Way for Visa, MasterCard

September 6, 2012 Posted by China Briefing Reading Time: 3 minutes

By Yao Lu

Sept. 6 – The Dispute Settlement Mechanism of the World Trade Organization (WTO) has adopted the panel report on the United States vs. China UnionPay (CUP) Dispute, according to the WTO press release issued on August 31, 2012. China’s decision not to challenge the WTO ruling effectively brings the two year tug-of-war between the two nations to an end.

In the WTO ruling, issued in July this year, the dispute panel concluded that China breached WTO rules by maintaining CUP as a monopoly supplier for the clearing of certain types of RMB-denominated payment card transactions. China requires all payment cards issued at home to work with the CUP network and carry its logo, and further demands every merchant and ATM to accept CUP bankcards, which constitutes discrimination against foreign rivals such as Visa and MasterCard.

However, the ruling also dismissed the U.S. claim that CUP enjoys domestic monopoly status, finding that measures utilized by China do not prohibit foreign service providers from entering the Chinese market. The panel also rejected claims that a foreign service provider should be able to offer cross-border electronic payment services into China. If foreign enterprises want to set up business entities in China, they should meet the requirements set forth under China’s Schedule of Specific Commitments on Services, including having three years’ experience in operating a foreign-currency business in China and maintaining profitability for two consecutive years.

Victory for the United States?
The U.S. government has heralded the WTO ruling as a decisive victory over China. According to a statement from government officials, this ruling will support about 6,000 U.S. jobs and encourage Chinese consumers to purchase more high-quality American products, opening a market potentially worth US$1 trillion.

Moreover, as China waived its right to appeal, it now bears the obligation to gradually open its electronic payment service market and allow other financial institutions to issue bankcards dealing with RMB transactions. Undoubtedly, this ruling has paved the way for international payment companies to participate in China’s payments marketplace, and foreign financial service providers such as Visa and MasterCard are entitled to greater access into the market.

For the United States, getting China to open its electronic payment market is of great economic significance as it is a market full of potential. While many transactions in the country today are still handled through cash, credit card spending will grow from just over US$1 trillion at present to roughly US$2.5 trillion by 2025, according to MasterCard.

However, the two-year battle has bought CUP precious time to further seize a commanding market share and also explore the international market. According to the statistics from the British media, CUP has issued 2 billion bankcards worldwide so far, becoming one of the most widely-used bankcards in terms of total transactions. CUP’s success is also obvious in the international market, where the company already operates in 130 countries and regions; and now over 700 overseas merchants accept CUP bankcards for consumer items.

Therefore, some even reckon that the “long-overdue victory” for the United States represents merely a psychological comfort, while in reality the advantages of these financial intuitions have diminished significantly over the past few years. Moreover, though China has decided not to challenge the WTO ruling, it is still entitled to a “reasonable” period to bring its laws in line with WTO rules. This process may take years, giving China’s domestic financial institutions some extra time to adjust their strategy before facing the competition ahead.

The future of China’s bankcard industry
Opening up the electronic payment market to foreign rivals is not necessarily bad news for domestic bankcard institutions. For China, monopoly was never a long-term solution for their future development, whereas all-around opening up is. Opening-up can create a nurturing environment and atmosphere for the development of the industry, since it stimulates innovation and encourages competition, leading to an overall improvement of the industry and ultimately benefiting the customers.

Today, it is no surprise to find out that there are nearly 100 kinds of charges attached to a single bankcard – the culprit behind this is monopoly. A market controlled by a small number of people easily breeds corruption, with those at the top manipulating the customer and passing on unreasonable charges to them. Thus, China’s domestic bankcard industry was always expecting to eventually open up to the foreign market, but only after they had secured a commanding share. Now, China’s domestic bankcard institutions are busily exploring the international market, as the country gradually opens up the domestic market, including bankcard clearing channels to the foreign competitors, thereby realizing mutual benefit and reducing trade friction.

We cannot say that there is an absolute winner or a loser in this battle, however, for China’s bankcard institutions, facing the international competition and moderately opening up to the foreign market has always been an expected inevitability.

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