MasterCard And Visa Might Have Trouble Competing In The Chinese Card Clearing Market
China recently opened its doors to foreign credit card players by allowing them to set up card clearing services in the country. These players, including Visa (NYSE:V) and MasterCard (NYSE:MA), have historically been kept out of the Chinese card clearing market – which has been largely controlled by China UnionPay (CUP) – and have mostly been paying network fees to CUP for piggybacking on its network while accepting payments in yuan. The opening of the Chinese card clearing market follows a complaint the U.S. filed with the World Trade Organization (WTO) in 2012. The U.S. argued that, per WTO rules, member countries of the organization should treat foreign credit and debit card issuers on par with domestic issuers. Now, foreign firms can apply to the Chinese central bank for a license to operate in the card clearing business, though the commencement of operations is likely some time away. [1]
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Growing Chinese Consumption Presents a Huge Opportunity
China UnionPay currently holds a virtual monopoly on the processing and clearing of credit and debit card payments made in yuan. Global transactions for UnionPay were around $6.5 trillion (41.1 trillion yuan) in 2014, 27% over the previous year’s number.
The Chinese economy has primarily been dependent on manufacturing and real estate in recent years. However, as both sectors have seen slowing growth in the country, China is betting on consumption to lead the next phase of growth. The government has been taking measures to bring about this change through its monetary policy. In an attempt to shore up growth, it lowered interest rates [2] for a fifth time in nine months.
Currently, consumption comprises around 36% of China’s Gross Domestic Product (GDP). With a growing urban population, and the percentage of middle class rising, it is expected to increase to 50% of the GDP by 2030. According to the National Bureau of Statistics, retail sales witnessed 12% year over year growth in 2014, with online sales growing at around 50%. [3]
How Much Incremental Revenue Will It Add?
According to China’s central bank, the country had around 4.9 billion bank cards at the end of 2014, with total credit and debit card transactions valued at 42.3 trillion yuan ($6.8 trillion). Assuming that card spending in China increases by 10% each year, by 2017 the total purchase volume would reach $9 trillion.
Our existing revenue estimates for 2017 for MasterCard and Visa stand at $16 billion and $19 billion, respectively. If MasterCard and Visa together manage to capture just 1% of the Chinese market in 2017, then both companies could add about $45 billion each to their payment volumes, pushing revenues up by 1.5%-2% over our current 2017 estimates.
With China’s licensing requirements, it is likely that foreign credit card companies would not be able to start operations until the second half of 2016. It will be interesting to see how Visa and MasterCard attempt to take market share away from UnionPay, in a market it has maintained a monopoly in for over a decade.
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