Alipay and UnionPay Battle over How Payments Are Processed; State-owned firm wants bankcard transactions routed through its system, a move experts say counters efforts to open market

09.06.2013 18:29

Alipay and UnionPay Battle over How Payments Are Processed

State-owned firm wants bankcard transactions routed through its system, a move experts say counters efforts to open market

By staff reporters Wen Xiu and Zhang Yuzhe

(Beijing) – A clash between two titans in the country’s payment industry has shed light on the worsening tension between challengers and a monopoly defending its privileges. The conflict surfaced when Alipay, the third-party payment arm of e-commerce giant Alibaba Group, said on August 27 that it will stop its offline point-of-sales (POS) service for “obvious reasons.”The firm did not say what the reasons are, but it is widely seen as a backlash against a series of moves taken from last year by state-owned China UnionPay to force Alipay and the like to route their services through the UnionPay system.

Established in 2002, UnionPay is approved and overseen by the central bank to provide clearing services for bankcard transactions. Through its wholly owned subsidiary, China UMS, UnionPay controls the lion’s share of all third-party payments, defined as those which are not directly handled by card-issuing institutions and acquiring institutions.

Alipay comes is No. 2 with unparalleled strength in the online payment sector. Like Alipay, many non-financial enterprises have partnered with individual banks to process payments, skipping UnionPay and the commission it charges.

UnionPay sees this as an infringement of its lawful interests on the grounds that all third-party payment operations are based on bankcards bearing the UnionPay brand. This means they “must play by the rules and in the system of UnionPay cards,” the firm’s president, Xu Luode, said at a forum in June.

“If UnionPay is a marketized bankcard association, requirements like this are reasonable,” but it is not, a former executive at a foreign bankcard organization said.

Almost all bankcards issued by Chinese banks are UnionPay cards. This is not a result of competition but policies protecting UnionPay’s monopoly, he said.

The central bank’s attitude on the matter, which is critical, has been ambivalent. Its regulation has been interpreted differently; both UnionPay and companies challenging its monopoly think it is on their side.

In August, UnionPay said it will get tougher on implementing previous measures, which “have not been comprehensively and effectively put to practice. A document set two deadlines. By the end of this year, all offline payment services must be integrated into the UnionPay network. The deadline for Internet payment services is July 1, 2014.

It also requires all member banks to raise their commission charges to all third-party payment companies to the same level as required by the UnionPay system.

In response, Alipay decided to quit offline payments altogether because it does not want to subject itself to UnionPay’s control, a source familiar with the struggle said.

But it will not give up as easily when it comes to the online payment sector because that is where the founder Jack Ma spent most of his time and energy nurturing the business, he said.

In 2004, UnionPay rejected Ma’s proposal to handle Internet payments forwarded by Alipay because it thought little of the market, he said. Ma had to negotiate with banks one by one to connect Alipay with their payment systems. Alipay’s online payment system now supports nearly 200 banks’ credit and debit cards.

Following Ma’s footsteps, many non-financial companies, including Tencent and Suning, have started offering consumers payment services. By the end of July, about 250 companies including two with foreign investors have been licensed by the central bank to run third-party payment business.

“Almost all of them are in the form of direct links” with individual banks, the source said.

Now that the market is flourishing, “UnionPay wants to come in between and grab what others hold dear. These third-party payment companies, having invested a huge amount of energy at significant risks when the market was young, apparently find it unacceptable,” he said.

The Red Letterhead

UnionPay has made its intention clear in an announcement issued in December. All services based on UnionPay cards run by non-financial institutions, regardless whether they route payments through the UnionPay network, must follow the rules made by UnionPay, the announcement says.

“By this logic, UnionPay will not only be the largest participant in the market for third-party payments but also replace the central bank as the de facto regulator of the market,” a senior analyst said. “This neither conforms to the trend of market economy nor falls in line with the regulators’ idea of promoting an innovative and open market.”

He is not the only one who believes that the central bank is on the side of emerging third-party payment companies.

In July, the bank published a revised regulation on processing bankcard payments. Unlike a an earlier draft, the regulation does not contain a provision that all interbank money transfers and clearing based on bankcards must be routed through a clearing institution approved by the central bank.

Because UnionPay is the only such institution, the removal of the proposal has been viewed by many competition advocates as the central bank giving acquiescence to direct connections between banks and third-party payment companies.

UnionPay, on the other hand, says it has the bank’s support because the regulation also says that the direct relation must not break the card issuing banks’ agreement with the clearing institution.

The regulation does not specify what the agreement is. According to UnionPay, it means all member institutions must send their interbank payment signal through the UnionPay network.

This is also to protect banks’ interests, UnionPay says. Based on its research, in online payments, the commission fees banks receive from non-financial third-party payment companies are on average only 0.1 percent of the transaction amount, compared with UnionPay’s 0.3 to 0.55 percent.

This means the large banks make at least 3 billion yuan less in commission fees every year, UnionPay says. It has required banks to unify their commission rates by the end of this year.

But banks seem unwilling to play along. Several months after its December announcement went unheeded, several UnionPay executives started paying personal visits to the big banks’ managers trying to force their hands on the issue, sources with knowledge of the matter said.

Banks are dragging their feet because they are worried about losing market shares by antagonizing big e-commerce companies, a source said. However, open confrontation with UnionPay is out of the question because every bank needs its approval to issue UnionPay cards.

Besides, “every one of UnionPay’s notifications comes on papers with red letterhead” which are commonly associated with official government documents, another source familiar with the organization said.

That said, some critics argue that the central bank treats UnionPay just like any other third-party payment company in the market.

UnionPay’s assumption that it can exercise administrative control over competitors is misconceived and against the regulator’s goal of developing the market, they say.

Forcing banks to raise commission charges, for example, effectively constitutes monopoly pricing, an executive of a large third-party payment institution said.

As a consequence, “either the costs are passed on to consumers, or the intermediaries give up their business because their profit margins are squeezed extremely thin.” Neither is good for the market’s development, he said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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