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As Mastercard prepares to start processing domestic transactions in China, it may be too late in a country that has mostly leap-frogged credit and debit cards in favour of mobile wallets.
The US card giant processed its first domestic transaction in China last week through a joint venture known as Mastercard NetsUnion, following more than four years of regulatory groundwork by Mastercard and its local partner, NetsUnion Clearing Corporation (NUCC).
The journey began in February 2020, when the People’s Bank of China (PBOC) granted approval for Mastercard NetsUnion to begin formal preparations to open a domestic bank card clearing institution.
The joint venture then invested in establishing standards, rules, structures and infrastructure in line with local regulatory requirements, and later obtained the required certificates for a local switch business.
Finally, in November 2023, Mastercard NetsUnion received formal approval from the PBOC and the National Administration of Financial Regulation (NAFR) to start domestic bank card clearing activity.
The approval made it possible for Chinese banks to issue and accept Mastercard-branded cards that make payments in local currency for the first time.
Processing domestic transactions opens up a new market for Mastercard, but it also puts it in direct competition with China’s dominant mobile wallets, Alipay and WeChat Pay, and its state-owned card scheme, UnionPay.
A ‘medium to long-term’ plan
It is not clear at present how many Chinese banks have agreed to issue Mastercard-branded cards for domestic use.
Vixio asked Mastercard for a full list of confirmed issuing partners, but the company declined to comment beyond what is already in the public domain.
A spokesperson pointed to the transcript of the company’s Q1 earnings call, in which CEO Michael Miebach answered several questions about the company’s China plans.
“The teams have been busy building out issuance relationships with our banking partners in China and building out the acceptance footprint,” he said then.
“We're obviously not starting from zero here — we have a strong cross-border business, so we have relationships in play to give us a heads-up.”
Last summer, Mastercard announced a new feature that allows visitors to China to make cross-border payments by binding an international credit or debit card to the Alipay or WeChat Pay app.
In the earnings call, Miebach added that Mastercard will look to use the same card binding feature with local cards to generate volume in domestic transactions.
“This is a medium to long-term opportunity,” he said. “In the short term, there's more work that we need to do to build out more acceptance and continue to get more card programs out. But we feel very encouraged about that. Our teams are very busy with that activity.”
However, it remains to be seen whether Chinese consumers will take to local card binding, due to the additional layer of friction it brings.
Zennon Kapron, founder and director of consultancy Kapronasia, said that local card binding will add additional costs that will have to be “passed on somewhere”, most likely to merchants and/or mobile wallet operators.
“I guess if your Mastercard card has rewards, you might want to do that, but that would only work for pass-through transactions,” he said.
“Both Alipay and WeChat Pay have had that for ages, i.e. if you don’t have money available in your digital wallet, the transaction will just ‘pass through’ and debit from your ordinary bank account via a linked card.
“That is just processed as a debit transaction with minimal costs, but I think a credit card transaction could add easily 0.5 percent to that.”
Closed shop
Western payments firms have tried for decades to make inroads into China’s domestic market, but strict regulations have kept them at bay in favour of homegrown rivals.
From its founding in 2002 up until 2020, China’s UnionPay had a monopoly on domestic bank card processing and clearing activity.
By 2010, UnionPay had become the largest network in the world by cards in circulation, and in 2015 it surpassed Visa for total payments value.
In 2012, however, the UnionPay monopoly was challenged when the US sued China through the World Trade Organization (WTO) and won. This ultimately forced China to open up to foreign card firms that have a local presence in China.
It was not until eight years later, however, that the PBOC granted its first approval to a Western firm, American Express (Amex), to issue cards and process transactions domestically through a joint venture.
Mastercard is therefore not the first to obtain this approval, but it is the first of the four-party schemes to do so.
Too little, too late?
Since the launch of Alipay in 2004, the trend that has defined China’s payments market has been the rapid adoption and continued dominance of mobile wallets.
Despite China’s opening up to Western payment firms, Kapron said it may be “too little, too late” for them to generate significant volume.
“A significant portion of domestic payments are processed by either Alipay or WeChat Pay, and most of the remainder by UnionPay,” he said.
“Even processing just a fraction of a percent of all the digital payment transactions in China would be incredibly profitable for Mastercard, but it will be an uphill battle to get there.”
Although Mastercard is unlikely to generate the kinds of volumes that it enjoys in the West, Kapron said China’s economy of scale should help to ensure that its regulatory investment in China does not go to waste.
“The margin on card switching for the large payment networks like Visa and Mastercard is massive,” he said. “It wouldn’t take much for them to be profitable, as their variable costs would likely be very low. So every transaction beyond a certain threshold is gravy to them.”
