On 29 October 2014, the State Council decided to open the bank-card clearing business to both domestic and foreign investors in an effort to expand the opening up in financial sector, to promote payment innovation and to optimize consumption environment.
"All qualified domestic and overseas enterprises can file applications for setting up bank-card clearing institutions in China," according to a statement of the State Council. The statement also released that foreign institutions that only provide cross-border transaction clearing services don’t need to set up institutions in China.
At present, China UnionPay (CUP) is the only bank-card clearing institution in China. The State Council’s decision may end up CUP’s dominance in the Chinese market.
US – China EPS Dispute
In fact, the United States has been urged the Chinese government to open the bank cards clearing market through the World Trade Organization (WTO). In September 2010, the United States filed a complaint to WTO Dispute Settlement Body (DSB), alleging that certain restrictions and requirements maintained by China pertaining to electronic payment services (EPS) for payment card transactions constitute impermissible market access restrictions or national treatment limitations on foreign suppliers of the services. A panel was established by the DSB and the panel report was adopted by DBS on 31 August 2012.
- The panel rejected the United States’ claim on the basis of insufficient evidence that China maintains CUP as an across-the-board monopoly supplier for the processing of all domestic RMB payment card transactions.
- However, the panel concluded that China maintains CUP as a monopoly supplier for the clearing of certain types of RMB-denominated payment card transactions, because only CUP may clear RMB denominated transactions involving RMB payment cards issued in China and used in Hong Kong or Macao, or RMB cards issued in Hong Kong or Macao and used in China, which is inconsistently with GATS Art. XVI:2(a).
- The Panel also find that some of the relevant requirements in respect of Unionpay cards in a series of PBOC regulations are each inconsistent with China’s national treatment obligations under Art. XVII.
Neither China nor U.S. appealed. On 28 June 2013, People’s Bank of China (PBOC) abolished five regulations in relation to the UnionPay requirements.
Recent Developments of EPS in China
According to PBOC statistics, bank cards transaction amount in 2013 reached over RMB 420 trillion yuan and other electronic payment (including payment using internet, telecom, mobile devices) amounts over RMB 1000 trillion yuan. As of end of June, there are over 4.5 billion banks cards in China, most of which are UnionPay cards.
In 2011, PBOC starts to grant license to non-bank EPS providers according to the Regulation on Payment Services of Non-financial Intuitions and its implementation rules issued in late 2010. As of today, there are some 250 non-bank EPS providers in China.
In July 2013, PBOC released Regulation on Bank Cards Acquiring Services, which became effective immediately upon release. According to this new regulation, acquiring institutions are not necessarily required to settle the transaction through CUP, which means that bank cards transactions may be cleared without CUP.
The growing services of non-bank EPS providers bring a potential challenge to CUP. In 2013, several non-bank EPS providers were fined by CUP according to CUP Membership Agreements for their activities of using wrong transactions code. Some banks were also fined by CUP for breaching CUP Membership Agreements.
At the same time, Chinese internet giants such as Alibaba and Tencent have been innovative and pioneered online payments using QR codes or virtual credit cards in smartphone. However, these two EPS methods have been suspended by an order of PBOC in March 2014, because PBOC is not convinced of the protection of personal data and funds as well as client identifications.
Qualification on Bank Cards Clearing Business and Timeline for Opening Up
The State Council’s statement did not give any details on investors’ qualification, nor set out a timeline for open up of the bank card clearing market.
It was reported that PBOC had submitted to the State Council a draft regulation on bank cards clearing, including qualifications of clearing institutions, clearing rules, standard of bank cards, etc. But this draft has not been released to the public for consultation. Promulgation of this regulation is a process of balancing interest of major stakeholders, which we think will take time.
Some media reported that the deadline for the opening up will be the end of August 2015 according to certain commitment that China has made to WTO. However, we have not found any legal document that indicates this deadline. So it is unclear when the opening up will come.
The State Council’s decision indicates China’s further opening up of financial markets in China. But how this decision will be implemented, which needs to be assessed, is more important than the decision itself.