China is increasingly realizing, unlike Russia, that being isolated in the global financial system isn’t beneficial. In the latest sign of realizing this, China announced on Monday that global bank card operators, such as Visa and MasterCard, can obtain licences to clear domestic Chinese payments.
The big card companies have been engaged in a decades long struggle to penetrate a market dominated by a powerful state-backed incumbent: UnionPay.
Prior to the announcement, which is effective immediately, all yuan payments had to be cleared through China UnionPay, a network owned by 85 mostly state-owned banks.
But a 2012 World Trade Organization ruling deemed the arrangement discriminatory against foreign payment processors, handing a victory to the United States, which had lodged the complaint.
While the victory will surely boost the fortunes of Visa and MasterCard, experts expevt foreign players to face major challenges in winning market share from UnionPay, which is used for 72 per cent of total transaction values.
“Visa and MasterCard need to build up their local infrastructure. In the past, they just operated as a sales office. They don’t really have the physical presence,” said James Chen, the former General Manager of MasterCard China. “They need to start to recruit people and buy equipment — basically build from ground zero.”
“Realistically, Visa and MasterCard are not going to be the dominant card networks in China in the near future,” agreed Tristan Hugo-Webb, associate director of global payments at Mercator Advisory.
While the card companies will make slow inroads the move is also important for China’s ambition to make the yuan the world’s reserve currency, displacing the American dollar. By tightly integrating the currency into the fabric of global payment networks, the Chinese will see more demand for yuan, boosting the value and China’s ability to conduct transactions in its home currency.