Throughout the 1980s and 1990s payment network consolidation in the US and Europe, resulted in a world with only 3 global credit card brands – Visa, MasterCard and American Express, supported by a host of regional/ local debit solutions. However, the desire to avoid the dominance of US brands and expand their domestic card markets, has driven players in China, India and Europe to contemplate their own competitive card schemes to compete with the global dominance of Visa, Mastercard and American Express.
China Union Pay (CUP) is the domestic card association of China, following the model of bank-led associations like Visa and MasterCard. Started in 2002, CUP was designed to create China’s first ATM, EFTPOS network, and create a domestic credit card scheme in a country that only recently recognized the importance of extending the purchasing power of its citizens. This card scheme emerged purposefully as part of the government’s attempt to liberalize the Chinese banking sector to encourage growth. As a result, CUP is closely aligned with the Chinese government, and operates under the approval of China’s Central Bank (People’s Bank of China). Not surprisingly, CUP has an effective monopoly on payments in China, and controls which banks can issue CUP cards. To date approximately 10 foreign banks – including Citibank, HSBC, and Standard Charter have been given permission to issue cards in China, under tight supervision by CUP. CUP maintains sole authority over merchant acquiring and no international player has yet been allowed to acquire Chinese merchants.
Most CUP credit cards are also affiliated with either American Express, MasterCard or Visa, and can be used abroad and processed via those payment networks. CUP Debit Cards, however, can only be used in the UnionPay network and a few other networks that have signed contracts with UnionPay. While China UnionPay cards are making inroads outside China, they are not widely accepted, but can be used in limited locations in twenty countries outside China. Overall China UnionPay has proven incredibly successful at jump-starting the Chinese cards market, and keeping most of that lucrative market under the influence of domestic financial institutions.
India’s large middle class, favorable business climate and growth prospects have attracted interest from payments players across the globe. Recognizing the attractiveness of their market and the relative immaturity of domestic players, the government of India is driving the development of an IndiaPay, a domestic payment scheme meant to vide an attractive Indian payment alternative to consumers and businesses and provide a vehicle for Indian banks to remain competitive in the Indian market. This concept, developed with the support of the Reserve Bank of India and the National Payments Corporation of India (NPCI) drew significant inspiration from the success of China Union Pay. Expected to be operational by 2012, the goal of the new network would be to handle all domestic transactions, leaving cross border payments in the hands of Visa and MasterCard.
The European Central Bank also saw the advantages of creating a pan-European card scheme to rival Visa and MasterCard in Europe, particularly in the debit processing arena, where domestic debit and ATM networks were fragmented by country across Europe. So as part of the Payment Service Directive associated with the Single European Payments Area (SEPA), the European Central Bank called for development of a third card scheme to foster competition and efficiency. To date, three separate solutions have emerged with plans to offer a pan-European debit alternative to Visa and MasterCard. Euro Alliance of Payment Schemes (EAPS), Monnet, and the merchant-focused PayFair network all seek to provide Europeans with a debit alternative in the Euro Zone.
In 2005-2006 a pan-European consortium came together to discuss a single Euro payment area for debit. This consortium evolved into EAPS in 2007. The EAPS benefits from a SEPA ruling that requires that processing and network (“scheme”) activities be unbundled, so key stakeholders can make decisions about processing that are decoupled from the card scheme.
The development of each of these 3rd scheme has been slowed by the financial crisis of the last several years, but still is moving forward. Ultimately, however, the success of these schemes, other than CUP, remains uncertain given the established dominance of Visa and MasterCard. In addition, in Europe, where there is an established cards market and strong existing ties between the participating banks and Visa and MasterCard, many question whether the banks that already work with Visa and MasterCard will be willing to make incremental investments in any 3rd scheme, given capital constraints and competing priorities. And for IndiaPay, the open question is whether a start-up scheme can gain the momentum of a CUP, without the heavy-handed (and often anti-competitive) tactics used in establishing CUPs leadership in the 2000s.
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Filed Under: Payments, Economics, two-sided market