No, it is not too late for MasterCard to enter China


Image credit: MasterCard


MasterCard announced earlier today that, at last, China's central bank PBOC gave its joint venture in China the green light to set up clearing operations in China. MasterCard had submitted its application to PBOC in 2018. The next step will be to apply for a license once the preparatory work is complete. Link to the news.


What does it mean to MasterCard's business in China?


Let's first look at how MasterCard has been operating in China. Foreign credit card companies such as MasterCard and Visa have been offering credit cards for many years to Chinese. However, the card is duo-currency, RMB and USD. The card's RMB clearing has to go through UnionPay, a Chinese financial service company, which provides bank card services and a major payment network in Mainland China. UnionPay has also expanded its services globally. When the cardholder travels outside of Mainland China, such as to Hong Kong, some merchants may ask him/her which clearing avenue to choose, UnionPay or MasterCard. It means that MasterCard or VisaCard cannot handle RMB clearing within Mainland China and often they run into competition with UnionPay outside of China. Additionally, foreign credit card companies are not allowed to offer debit cards to Chinese.


Things will change once MasterCard receives the operational license. With the license, MasterCard will be able to offer its own RMB credit & debit cards in China, in addition to its USD cards. It will be competing head-to-head with UnionPay in serving Chinese on card issuance and clearing, in Mainland China and in some regions and countries outside of China.


People may wonder whether it is too late for foreign credit card companies such as MasterCard to enter China. In the past decade, China has evolved into a mobile and QR Code payment society. AliPay and WeChat Pay payment networks handled more than $37 trillion in mobile payments in 2018, according to the article "US-China trade war deal could be too late for the likes of Mastercard, American Express and Visa". Article link. Few people in China carry a credit card, checkbook or cash to pay for services, nowadays.


The argument is not entirely correct.


AliPay and WeChat Pay users' mobile accounts serve more like a wallet, in which different bank cards, credit or debit cards are stored. The mobile payment account is linked to one or more of these cards. The mobile wallet serves as a gateway connecting the front end of the mobile app with banks via credit or debit cards issued by banks.


WeChat Pay Wallet Screen Shot



According to the China Banking Association's report, by the end of 2018 Chinese banks have issued a total of 7.83 billion bank cards, of which 970 million are credit cards, an average 0.7 credit cards per person in China, and 6.86 billion debit cards, an average 4.92 debit cards/per person. Outside of China, 171 countries accept UnionPay.


Per-person credit card ownership in China is much lower than in developed countries. That implies a potentially large opportunity for MasterCard. Secondly, by issuing RMB debit cards to Chinese, MasterCard may be able to tap into some revenues which heretofore have not been available to them. According to the China Banking Association, transactions on debit cards in China totaled more than $1 trillion in 2018. In addition, MasterCard's extensive expertise in risk management and customer service along with its well-recognized global brand will help attract Chinese to apply for its card as an alternative to Chinese cards.


No, it is not too late.



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