SHANGHAI - Chinese bank card operator UnionPay, which may soon have to defend its near monopoly against Visa and MasterCard, faces a much bigger threat from online payment providers such as Alipay, and is upgrading its systems to meet the danger.
Shored up by a raft of protectionist measures, the state-backed company has grown in just over a decade from an unknown name to a true heavyweight, commanding 50.6 per cent of all the global cards in circulation in 2013, according to the Nilson Report statistics newsletter.
China said last month it would open its credit card market to foreign players following a World Trade Organisation ruling in 2012 that it discriminated against US card firms.
The prize for the foreign companies would be access to what is projected to become the biggest card market in the world by 2020. Transactions were already around 32 trillion yuan (S$6.73 trillion) in China in 2013, according to data from the People's Bank of China.
But analysts say the obstacles to a successful foreign invasion of UnionPay's dominant card position are considerable, as UnionPay charges merchants much lower rates than the Western card companies - as low as 0.04 per cent, compared with MasterCard's 0.60-1.85 per cent in Britain for certain cards. "The low rates in China will make entry by foreign players extremely difficult as business cases will not stack up, based on the lower rates," said James McKeogh, a partner in consulting at KPMG China.
A more immediate and perilous threat comes from online payment firms like Alipay, a unit of giant e-commerce company Alibaba, which already dominates a parallel and growing payment universe that rivals the traditional card set-up.
In less than three years, Alipay has grown to control nearly half of China's online third-party payment market, tapping the hundreds of millions of Chinese still without a credit card. That market commanded gross merchandise volume of 17.2 trillion yuan (US$2.8 trillion) in 2013, according to estimates from iResearch.
UnionPay, on the other hand, commands a mere 11.9 per cent of that market and faces competition from over 250 new online providers that have been awarded licences from Beijing as it aims to stimulate consumer demand.
Alibaba told Bloomberg on Wednesday it was open to working with eBay Inc's PayPal to expand its payment options, a plan that could magnify Alipay's reach and put further pressure on UnionPay.