The conflict between Visa and China UnionPay (CUP) has come to a head as the international market share of Visa's Chinese rival continues to expand and begins to threatens the global credit card company's profits both in China and abroad.

According to China National Radio, as of August 1, Visa will forbid banks that are members of its global network from using the CUP settlement channel when processing transactions outside mainland China involving credit cards carrying the Visa logo.

Those members who do not use the Visa settlement channel will be subject to a 50,000 US dollar fine for the first month and also face a 25,000 US dollar fine for each subsequent month that they fail to adhere to the rule.

The move will mean that CUP cardholders will be forced to pay extra brokerage fees when buying goods or withdrawing money in foreign countries.

According to the director of Visa's Beijing office, this rule has existed since 2007, though she was unable to reveal details on when exactly it would be brought into effect.

The Economic Observer reported on similar moves being proposed by Visa in September last year.

Another employee of Visa explained that Visa had already registered its BIN (Banking Identification Number) - which begins with "4" - with the ISO (International Standards Organization), which means, if cardholders choose to use BIN dual-currency cards beginning with "4," they are agreeing to use the Visa settlement network to manage the payment.

Dual-currency cards allow holders to pay for goods or withdraw money through either the settlement network established by CUP when in China, or that of Visa when in foreign countries.

China UnionPay argues that "cardholders have the right to choose which settlement channel they use when they are abroad".

Currently, China forbids foreign countries from issuing credit cards which are denominated in RMB.

At the end of March, the three major global credit card companies, Visa, American Express and MasterCard, pushed the American government to urge China to open up its credit card market to foreign competition. The companies estimated that there was the potential for a 997.8 billion yuan credit card market in the country.

Meanwhile, China UnionPay has expanded its settlement network to 90 foreign countries and areas. They accept not only cards with the China UnionPay logo but also those that display both the Visa and UnionPay logos.

Credit cards beginning with "62," which carry the China UnionPay logo, have been widely issued both at home and abroad.

A Visa representative said, "Visa has never, nor will ever 'block' China UnionPay. Its standard cards beginning with 62 may freely choose its own settlement channels globally. We are only regulating the business within our own scope so as to ensure the VISA cardholders may enjoy the safe, convenient and reliable payment services we provide."

Experts say the conflict between Visa and China UnionPay had existed for a long time and that at the core of the dispute is a divergence of business interest.

Consumers who use cards which simply display a China UnionPay logo will not only be exempted from brokerage fees but also will enjoy various services provided by China UnionPay.

However, if they choose to use Visa's settlement channel, they will be required to pay a currency transaction fee of 1 to 2 percent of the total amount they have paid or withdrawn.

Guo Tianyong, director of the Central Financial and Economic University's banking research center, said, since the Chinese bank card market has been monopolized by CUP, it was difficult for Visa to engage in business here.

The main source of income for Visa has come from the dual-currency credit cards used in foreign countries. But now, with China UnionPay developing so fast, Visa's China profits have been affected.

After being locked-out of the Chinese market, Visa intends to "fight back."

Guo went on to say that, while China's credit card companies were expanding abroad, we should also moderately open the market of settlement business at home so as to benefit both parties, intensify international cooperation and reduce international frictions. Besides, he said, it would hurt the sustainable development of the Chinese market if CUP was allowed to become a monopoly player.

To enter foreign market, China UnionPay has been cooperating with foreign banks. By taking advantage of their settlement networks, CUP is able to provide settlement services for their cardholders travelling or doing business abroad.

For example, in Britain, its partner is RBS WorldPay, Europe's largest and the world's third largest settlement service provider.

According to an analyst who prefers to remain anonymous, as the world's largest credit card network, if Visa does block China UnionPay, it will be a heavy blow to the CUP's efforts to break into the international market and its global settlement service will shrink dramatically.

It is predicted that if MasterCard and other international settlement service providers follow suit, CUP's efforts to internationalize will be dealt a severe blow.

In a report on the proposed ban, National Business Daily quote an un-named Fudan University professor who specializes in online banking saying that, "It is acceptable for Visa to require its partner banks to use its own settlement channels as often as possible, but its attempts to fine those banks who refuse to follow its rule ... make it a malicious act of unfair competition."

According to the China Tourism Academy's Annual Report of China Outbound Tourism Development 2009/2010, outbound Chinese tourists are likely to exceed 54 million in 2010

Links and Sources
Economic Observer: Visa銀聯(lián)矛盾升級(jí) (Chinese)
Economic Observer: 銀聯(lián)遭遇Visa海外“封堵”(Chinese)
Economic Observer: China UnionPay's Northeast Asia Plan (Chinese)
China Securities Journal: Visa銀聯(lián) 昔日伙伴今朝“反目”(Chinese)
National Business Daily: 銀聯(lián)回?fù)鬡isa“封殺”：持卡人有選擇權(quán) (Chinese)
China National Radio: VISA或?qū)⒎舛裸y聯(lián)境外通道 境外消費(fèi)成本大增 (Chinese)
Wall Street Journal: Visa Slaps Chinese Firm With Ban
People's Daily: Chinese consumers caught in crossfire of Visa, UnionPay disputes
China Tourism Academy: Annual Report of China Outbound Tourism Development 2009/2010

This article was edited by Paul Pennay