On Wednesday, the official China Securities Journal reported that Visa Inc. (V) has ruled out that from Aug 1, all its global financial institutions should stop making any international transaction through UnionPay system, China’s sole bank card processor and a co-brand of Visa itself.
Visa has gone to the extent of warning its member institutions with stipulated fines if they go ahead with UnionPay system. The company also attempts to block its transactions outside China using UnionPay system. These transactions include both ATM cash services and other card payments.
The decision was ruled out on the back of the barriers to trade in China due to political and economic factors. While China enjoys an attractive and fast-growing bank card market, its business and political policies bar foreign companies from penetrating into the Chinese market. However, government-backed UnionPay seeks to enter newer global markets to poach on the market shares of global competitors such as Visa, MasterCard Inc. (MA) and American Express Co. (AXP). These one-sided barriers have impelled Visa to take such an action.
Further, since its inception seven years ago, UnionPay has been enjoying a monopoly status in China since it is backed by the government. Moreover, UnionPay is the biggest card company globally in terms of card issuance and is second largest brand in the Asia-Pacific region in terms of transaction volume, thereby beating the oldest and globally renowned competitors, Visa and MasterCard. This has further added fuel to the fire since these companies are unable to produce the fruits of investment in such lucrative Asian economies.
On the other hand, UnionPay has been vehemently raising objection on the blockade, stating that just by being a co-brand, Visa does not hold any right to obstruct its payment systems business growth in the foreign countries. Besides, UnionPay has many more growth strategies in its pipeline for robust global expansion in the near term.
Nevertheless, the challenges faced by the U.S. card companies in tapping the lustrous and dense market in China has of late been a major issue since Visa and other card companies are now seeking greener pastures for a healthy and early revival post the global economic downturn.
Moreover, since the U.S. and U.K. were the worst affected economies, companies are now being attracted towards Asian economies due to their low penetration and potentially higher growth opportunities in the middle-level consumer class. Hence, the U.S. trade representatives are also taking active steps to help its companies enhance their access in China and other untapped markets.
Overall, although the underlying dispute is expected to take time to reach a settlement point, we believe that liberating policies and decreasing regulatory compliances in China will enhance their transactions and payments volume of Visa and other card companies, thereby increasing their potential access and share in the global market. This is particularly crucial in the current sluggish economic scenario.
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