After forming a series of high profile partnerships with various payments service providers, China’s UnionPay International has declared its plan to challenge Visa and Mastercard’s duopoly of the U.K. card industry.
Last week, UnionPay — a subsidiary of China’s state-run card network — announced a deal with Barclaycard to enable 110,000 merchants, predominantly located across major tourist locations in the U.K., to accept UnionPay cards from this summer onwards. This follows an earlier announcement in January that UnionPay is now offering prepaid cards for both corporate and individual consumers, through a partnership with Moorwand.
UnionPay said that these deals have been driven by the increased numbers of Chinese tourists travelling independently to the U.K., rather than in organized groups, meaning there is a growing need to make UnionPay acceptance as widespread as possible. However, its spokespeople told PaymentsSource that the company is ultimately targeting the U.K. domestic economy as well.
While the alliance with Barclaycard is a significant step, many experts predict an uphill battle for UnionPay to make serious inroads into Visa and Mastercard’s market share.
“There are still questions regarding their prospects, because Visa and Mastercard have such a strong position,” said Mark Falcon, founder of Zephyre, a regulatory strategy advisory firm. “It’s interesting, but to pose a major challenge they would need to expand their merchant acceptance network beyond tourist locations. Part of that would need to be in expanding their brand in the U.K. Visa and Mastercard spend almost a third of their total operating expenses on branding and marketing, and a lot of that is to coerce merchants into accepting their cards.”
To broaden its reach, Falcon predicts that UnionPay will have to invest heavily in subsidizing both sides of the market — to get both merchants and issuers on board.
“Right now the advantage they’ve got is that they’re unregulated, so they’re not subject to the same interchange fee limits as Visa and Mastercard,” he said. “This means they can go to issuers and offer to pay a high rate of interchange, in return for issuing their cards. To cover those costs, they’d then need to charge a high fee to the merchant. But while they can get away with this in tourism sectors like luxury goods, hotels and car rental, they will have to subsidize heavily in other sectors to persuade merchants to accept their cards. From a merchant’s perspective, why should they pay a high fee for UnionPay when most customers will have Visa or Mastercard anyway?”
However, if UnionPay does start to expand, it will then become subject to interchange fee caps, which could make it harder to get further issuers on board, hampering growth. Falcon points out that these caps have already led to American Express publically exiting the European market for bank-issued cards. As an additional challenge, while commercial cards and prepaid cards represent a key part of UnionPay’s business model, this strategy may also be hindered by increasing regulation.
“Commercial cards are very profitable because the interchange fees are unregulated so UnionPay can currently pay issuers a lot for them,” Falcon said. “But there is always a threat that they will become regulated at some point. Prepaid cards are facing more regulation as well due to concerns about them being used for money laundering. This could hamper the growth of both these markets, because commercial or prepaid cards become a lot less attractive if you can only use them in a small number of merchants.”
Because of these challenges, many industry insiders are predicting that the greatest long-term threat to Visa and Mastercard in Europe will not come from UnionPay, but Chinese mobile payment giants Alipay and WeChat Pay, which have the financial muscle to enhance their growing brands internationally through major marketing deals.
Their market share within China has grown rapidly, and it is this increasing competition which has forced UnionPay to explore its options overseas.
“From what I’ve seen, it’s AliPay and WeChat Pay — more than UnionPay — that keeps Visa and Mastercard awake at night,” Falcon said. “Visa and Mastercard are still struggling to enter the Chinese market, while they fear what will happen as Alipay and WeChat Pay expand. How soon that will happen is difficult to say, but they have already expanded into some other Asian markets, and some European merchants are starting to accept payments through AliPay and WeChat Pay for the benefit of Chinese tourists.”
One key question is whether this growing competition will hold benefits for U.K. consumers. UnionPay’s spokespeople have said that their market entry will lead to more innovations, but exactly what remains to be seen.
“I’m not really convinced that it will have benefits,” Falcon said. “Visa and Mastercard haven’t really competed down the cost of card acceptance for retailers. If anything, they’ve pushed it up, and that’s then passed on to consumers through higher prices. The U.S. is another good example of this. The market is more evenly divided between Visa, Mastercard, American Express and Discover, but they all charge retailers high prices, because retailers have to effectively accept all of them. So just having more players doesn’t necessarily lead to better outcomes.”This post was originally published here