China’s Unfair and Dangerous E-Payments Policy

President Trump’s Asia trip highlighted the difficulty in reducing barriers to entry for American companies to key Chinese sectors. American innovation in the electronic payment services sector, for example, places the US’s leading finance companies on the cusp of a breakthrough into the coveted Chinese marketplace.

But, China’s unfair trading practices threaten to turn an enormous growth opportunity into a costly economic problem for US companies and a probable security problem for American consumers.

The global payment cards market now totals 14 billion cards with a billion new cards issued last year alone. The fastest growth is in the Asia-Pacific region, with China contributing disproportionately to the rise in card holders.

Visa, Mastercard, and UnionPay, a Chinese company, account for 80 percent of all cards. According to RBR’s “Global Payment Cards Data and Forecasts to 2022” study, rapid expansion of the Chinese cards market has helped UnionPay to increase its share of cards globally to 43 percent in 2016, and to extend its lead over Visa and Mastercard.

Not only have Visa and Mastercard lost global market share to UnionPay, but UnionPay is consolidating its position as market leader by exploiting Chinese access to external, including Western, markets. UnionPay is positioning itself as an alternative to Visa and Mastercard in a number of foreign markets, especially Russia and several Asia Pacific nations.

UnionPay is seeking external markets in anticipation of domestic competition from the likes of Visa and Mastercard once these American companies obtain domestic licenses to operate in China. But, UnionPay’s concerns about counteracting competition in its home market are overblown, as the Chinese government remains committed to securing the best of both worlds for Chinese payments companies.

China is the prime example of a national government seeking to slow down the global growth in the payments sector. They are doing this, principally, by erecting barriers to American companies’ prospective entries into the Chinese marketplace.

Renminbi banknotes are placed on a bank staff’s table in a bank in Lianyungang, east China’s Jiangsu province on Aug. 11, 2015. (STR/AFP/Getty Images)

The fact that China has not played by international rules regarding e-payments is well documented. China permits only a Chinese entity (i.e. UnionPay) to supply electronic payment services for payment card transactions denominated and paid in renminbi in China. Other service suppliers can only supply these services for payment card transactions paid in foreign currency. China also requires all payment card processing devices to be compatible with UnionPay’s system, and that payment cards bear UnionPay’s logo.

The US has longstanding objections to these Chinese restrictions and requirements pertaining to electronic payment services for payment card transactions and the suppliers of those services.

Following a formal American complaint filed in 2010 with the World Trade Organization, on July 16, 2012, the WTO issued its report in the dispute over Chinese measures affecting electronic payment services. The WTO required China to open up its payments industry to foreign competition.

Yet, China is still not playing by international rules. China has not yet opened her domestic market.

Allegedly, that will change. The Chinese government regulator recently announced that it will allow, belatedly, American entry into China’s payments marketplace. However, the Chinese have supplemented their apparent lowering of protectionist barriers with significant regulatory caveats.

Regulatory guidelines allowing American companies to begin the licensing process suggest the Chinese do not intend to permit “full and prompt market access” anytime soon. American companies may submit an application for a license, but they cannot begin operating in the Chinese market.

Furthermore, companies such as Visa and Mastercard will be forced to build new data centers in China. All these companies’ data processing for the Chinese marketplace must be performed domestically on the Chinese mainland.

Compliance with such onerous regulatory demands will result in a huge increase in Visa and Mastercard’s annual overheads. This increase in costs will come at the expense of new jobs for would-be additional Visa and Mastercard employees back in America.

But, China’s over-regulation of her domestic payments market is not simply an economic problem for American companies and workers. American payment companies’ unfair treatment by the Chinese could have other, far more damaging results for the American people.

For example, Mastercard’s global payments network and research operate via central switches. Once the company’s data processing center is operating in mainland China, it may be prey to cyber attacks either by, or at the behest of, the Chinese regime.

There would be enormous security concerns related to the Chinese being given the veritable keys to Mastercard’s payments kingdom. With unfettered access, the Chinese government potentially could see all of Mastercard’s customer data, including the confidential financial records of untold millions of Americans.

More formally, and ominously, the likes of Mastercard must submit to a “national security review.” This security vulnerability was heightened by the new e-commerce treaty signed this summer between China and Iran.

Hopefully, Trump administration officials impressed upon their Chinese counterparts that the payments sector, a uniquely American innovation, can be a win-win for both nations’ economies if U.S. companies are greeted by a rational Chinese regulatory environment.

Patrick Basham is founding director of the Democracy Institute, a Washington-based, politically independent research organization.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of