Foreign bank card firms fear tough China regulatory regime

By Matthew Miller and Michael Martina

BEIJING (Reuters) - China is considering imposing tough new conditions on overseas bank card providers such as Visa Inc (V.N) and MasterCard Inc (MA.N), in a potential setback to their plans to enter the country's $7 trillion card payments market, according to people familiar with discussions.

Industry sources, lawyers and U.S. business lobbies are worried that Chinese regulators will push foreign card firms to operate through a domestic consortium and may try to force them to partner with local companies and governments, reducing the amount of control they would have over their businesses and limiting their returns.

Such measures, if implemented, would be a blow to global card payment firms, which have been lobbying for more than a decade to access the world's fastest-growing cards market, projected to become the biggest by 2020.

It may also defy a 2012 World Trade Organization (WTO) ruling that found China was discriminating against U.S. credit card firms by allowing China UnionPay, a state-controlled consortium, a monopoly on all yuan payment cards issued and used in the country.

The State Council, the government's cabinet, announced in April that China would open the card market to all properly-licensed domestic and foreign businesses, a move precipitated by the 2012 WTO ruling.

But possible new conditions have been raised in discussions between card companies and domestic enterprises and municipal governments in the months since the People's Bank of China (PBOC) issued its draft implementation regulations, sources told Reuters on condition of anonymity.

Jeremie Waterman, Greater China executive director at the U.S. Chamber of Commerce, told the U.S. Trade Representative this month in testimony that any foreign card provider may be required to join a domestic consortium to get a licence, limiting their operational control.

"We hope the State Council's April decision ... will allow qualified foreign electronic payments firms to set up bank clearing operations in the near future - even as we are receiving reports that Chinese regulators may award new licences only to those foreign companies that partner with domestic companies," Waterman said.

There have also been discussions about whether to limit the number of licences granted to the foreign card companies, with the possibility that just one or two might be issued, sources said on condition of anonymity.

"The concern on the number of licences that will be issued to foreign companies is still there," one lawyer familiar with the issue told Reuters.

Industry watchers expect the PBOC's implementation regulations to be out imminently.

The PBOC declined to comment on the issue and China's Ministry of Commerce did not respond to a request for comment.

UNWRITTEN RULES

The initial qualifications that were publicly outlined by the State Council earlier this year were already seen as onerous by some legal professionals, including requirements that applicants hold 1 billion yuan ($157 million) in registered capital in a local company, and store data and infrastructure inside mainland China.

Even if the new conditions are not included in the text of the forthcoming PBOC regulations, there are concerns they could be imposed as unwritten rules.

"If you look at other sectors, they are making those kinds of demands in high-tech, automobiles, and commercial airliners. So, that general pressure for foreign companies to partner with state-owned companies is growing," said Scott Kennedy, Director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies in Washington.

Kennedy said that while lawyers would debate whether such requirements comply with China's WTO mandate, they would be inconsistent with the spirit of the 2012 ruling and Beijing's original commitment to open access to financial markets.

"I think people would read it for what it is – wanting to make sure that whatever access is given to foreign companies, the benefits still accrue to domestic companies," Kennedy said.

A spokeswoman for Visa declined to comment.

MasterCard told Reuters it "has established strong industry partnerships" in China and that open payment systems would promote growth and reduce systemic risk.

"We will continue to monitor closely and look forward to the day when we can compete for domestic business in China," the company said in a statement.

MasterCard and UnionPay signed an agreement in 2010 to issue co-branded cards that Chinese people could use when travelling overseas. [nL4N0XK5MZ]

Critics have argued China's limitations on foreign card players sought to protect the country's then nascent domestic industry from competition, allowing UnionPay unfettered access at a time of explosive growth in the interbank card market.

Currently, China requires all foreign card companies to use UnionPay's network when accepting yuan payments, effectively giving it a cut of every credit or debit card transaction.

Foreign card issuers in most other countries pay only the bank involved in the transaction because they can use their own networks.

At the same time, UnionPay has been expanding rapidly outside China as it battles MasterCard and Visa for global market share.

UnionPay is now the world's largest card brand with more than 5 billion cards issued internationally since its founding in 2002.

(Reporting by Matthew Miller and Michael Martina in BEIJING; Editing by Rachel Armstrong)