Prepare to be underwhelmed: Mastercard makes a belated arrival in China

A version of this article was originally published by KapronAsia, a Shanghai- and Singapore-based fintech consultancy.

Reform is coming to China’s $27 trillion payments market belatedly. Very belatedly. U.S. credit card giants have been trying to crack the market for years, to no avail. The market should have been open to them by 2006, per China’s WTO commitments. But Beijing has hesitated to open its financial industry to foreign investment. It is finally signaling greater openness amidst the toughest business conditions China has faced in decades, perhaps since the beginning of economic reforms in 1978.

In mid-February, Mastercard received approval from the People’s Bank of China (PBOC) to formally establish a bank card clearing business in China. The green light for Mastercard came three weeks after Beijing and Washington signed a phase one trade deal to ease tensions in their strained economic relationship. American Express has also recently been granted approval to set up a bank card clearing business in China. Both Mastercard and Amex are working with local Chinese partners in joint ventures.

“The opening of the bank card market…is conducive to promoting the more open and international development of China’s payment and clearing services,” the PBOC said in a statement (in Chinese) on its official website, adding that the approval of Mastercard’s application is “another concrete reflection of China’s opening up of the financial industry and deepening financial supply-side reform.”

Mastercard has long had its eyes on the China market. The U.S. credit card giant set up a representative office in China in the late 1980s, when bank and credit cards were primarily used by visiting foreigners. Despite this long history, Mastercard has been unable to develop a significant footprint in China. Just like Amex and Visa, Mastercard has watched from the sidelines as Shanghai-based UnionPay grew into China’s bank card juggernaut and one of the world’s largest payments firms. UnionPay’s transaction volume hit a record high of $17.2 billion in 2018, the most recent year for which data is available.

In 2012, the World Trade Organization ruled in the U.S.’s favor in a case Washington brought against Beijing on behalf of U.S. bank card firms. The WTO’s dispute panel said Beijing had violated WTO rules with what was effectively a UnionPay monopoly — requiring all yuan-denominated payment cards issued in China to work with UnionPay’s network and be accepted by all UnionPay merchants and ATMs. In the meantime, Mastercard, Visa, and Amex could only be used for foreign currency transactions.

As far back as July 2012, Reuters noted that “WTO rulings are slow to take effect and there is no guarantee of any rapid change in the Chinese market.”

That analysis has proven to be on the mark. It has taken Beijing more than seven years to approve Amex and Mastercard’s bank card clearing businesses in China. Visa’s application is still pending.

The U.S. card giants face a steep uphill climb in a payments market dominated by local incumbents. Besides UnionPay’s preeminence in bank cards, local fintech giants Ant Financial (through its Alipay digital wallet) and WeChat Pay (owned by Tencent) process the vast majority of mobile payments in China.

With that in mind, even optimists may have to concede the glass is not half full for U.S. credit card firms in China. Perhaps one-eighth full at best would be a more accurate estimate.