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Now boasting the world’s largest number of cards in issue, the Chinese payments market continues to experience massive growth. Global payment providers are understandably keen to get in on the action. Domestic scheme UnionPay continues to hold a lock on the market due to regulatory backing from the People’s Bank of China. China’s latest move to mandate PBOC 3.0 card requirements rather than EMV is a blow for foreign players, but will likely only prove a delaying tactic.

Two steps forward, one step back

In 2012, the US won its case at the World Trade Organization, brought on behalf of Visa and MasterCard, that China unfairly discriminated against foreign payment processors as the country mandated that all renminbi transactions are processed through UnionPay’s network.

Although partnerships were formed, and dual badging was common, relations between the schemes fell to dramatic lows as foreign players were locked out of the domestic market, and the schemes tried to retaliate on Chinese transactions outside the country.

In late 2014 China announced it would comply with the rulings and allow foreign payment processors to enter the Chinese market for renminbi transactions. Many foreign firms viewed this as a victory in the long-running legal battle over access to China’s payments market. Some believed the announcement meant that Visa and MasterCard would enter the market by 2016.

However, in late 2014, after announcing it was opening access to foreign players, the People’s Bank of China announced that all smart chip enabled cards (that is, nearly all cards being issued) must comply with PBOC 3.0 specifications – the standard used by UnionPay.

PBOC 3.0 acts as a standard for smart card architecture and is similar to – but not compliant with – more global EMV standards due to differing encryption methods. These standards also dictate technical specifications for ATMs and points of sale. For Visa and MasterCard, while their cards would be compatible using the mag stripe, EMV would not be compatible; it would require significant development to adapt their technology and business practices to operate in China.

Although this undoubtedly will cause issues for the schemes and delay their entrance into China, the overall potential benefit of entering the Chinese market in terms of growth opportunities will likely outweigh these considerations. Furthermore, UnionPay is a core member of EMVco, which operates EMV specifications. The two technologies are fundamentally not very different, so there is likely a middle ground to be found and a means to co-operate in the future. With growing numbers of outbound spending by Chinese consumers, and significant amounts of inbound transactions, it is likely the Chinese market will open up, but it won’t be a smooth ride getting there.


Further reading

“The opportunity presented by Russia’s new payment system is a mixed bagIT0003-000607 (May 2014)

Payments innovation needs to go global for true disruptionIT0059-000009 (April 2015)

2015 Trends to Watch: Payments, IT0003-000628 (November 2014)


Gilles Ubaghs, Senior Analyst, Financial Services Technology

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