On 9 April 2015, the State Council issued its Decision on the Implementation of Market Access Administration in relation to Bank Card Clearing Institutions (the "Decision"). The Decision will become effective on 1 June 2015. Critically, the Decision is expected to end the current de facto monopoly on bank card clearing services in China and to pave the way for the opening up of this market segment to other entrants, including foreign investors.
1. BANK CARD CLEARING BUSINESS IN CHINA
Currently, the processing and clearance of all RMBdenominated payments made via bank cards and credit cards in China is performed by China UnionPay ("CUP"), a bank card association in China established in 2002 with the consent of the State Council and the approval of the Chinese central bank, the People's Bank of China (the "PBOC"). It is controlled by a consortium of mainly state-controlled banks. Given the requirement for all card issuers to process their RMB transactions through the CUP network, CUP has grown in parallel with the Chinese economy and the explosion in Chinese tourism outside its own borders in recent years to become the largest card issuer in the world, having issued more than 4.9 billion bank cards, which can be used in over 150 countries and regions. CUP ranks second in value of transactions processed to VISA ($4.6 trillion in the first half of 2013 as against CUP's US$2.5 trillion).
Meanwhile, foreign companies such as American Express Corp, MasterCard Inc. and VISA itself have been shut out of this segment of the Chinese market. They have hitherto only been able to process transactions by Chinese citizens while overseas, and have had to pay a network access fee when accepting RMB payments.
2. THE WTO DECISION
This market shut out caused the United States to file a complaint with the World Trade Organization ("WTO") that China was in violation of WTO rules requiring equal treatment for foreign credit-card and debit-card issuers in WTO member domestic electronic payments markets. The WTO ruling upheld the complaint and required China to open its bank card clearing market by August 2015.
China issued the Decision ahead of that deadline, although the Decision makes no mention of the WTO ruling. The Decision is important because it marks a significant step toward the end of the CUP de facto monopoly. Ultimately it should lead to greater competition in the bank card clearing market and better choices for Chinese consumers.
The Decision also represents a huge opportunity for foreign companies who meet the criteria. Under the Decision, qualified foreign companies can now apply for approval to engage in domestic bank card clearing services, either by setting up a greenfield Chinese legal entity or by acquiring (subject to national security review) a local bank card clearing institution. Those who do so should enjoy national treatment, as all clearing agencies will henceforth be regulated under a common set of standards, regardless of the country of origin of their investors. This will be welcome news for foreign companies anxious to enter a market, which as of the end of 2014, involved transactions with an aggregate value of USD 73 trillion.
3. SUMMARY OF THE DECISION
3.1 Structure of the Decision
The Decision is organized into three parts:
- market access criteria;
- approval procedures; and
- conduct of clearing business requirements.
3.2 Market Access Criteria
Under the Decision, various market access criteria have been prescribed in terms of registered capital, the main investors in the bank card clearing institution, clearing systems, infrastructure, management personnel and internal risk controls.
Specifically, if an entity wishes to apply to become a bank card clearing institution in China (a "Bank Card Clearing Institution"), it must be a Chinese enterprise legal person established in accordance with The People's Republic of China Company Law (the "Company Law"). It would appear that this section is meant primarily to address domestic new entrants, as it does not reference the laws or regulations governing foreign invested enterprises ("FIEs"). The Company Law primarily regulates domestic capital enterprises although it acts as a fall-back source of law where the FIE laws and regulations are silent. Foreign invested applicants are addressed in a separate section (see below), although it appears that the same qualification criteria will apply.
The applicant entity must meet the following criteria:
(a) Having registered capital of not less than RMB 1 billion;
(b) Having one or more "main capital contributors" (if only one, it must hold more than 20% of the shares; if more than one, together they must hold more than 25% of shares in aggregate), each of which must:
- have total assets of no less than RMB 2 billion or net asset of no less than RMB 500 million in the year preceding the application;
- have engaged in banking, payment or settlement and so forth for more than five consecutive years with three consecutive years of profitability;
- have no record of any serious violation of laws or regulations in the last three years; and
with respect to any other capital contributors who will hold more than 10% of the shares, such contributors must (i) have net assets of not less than RMB 200 million; (ii) have the ability to make profits on a sustained basis; (iii) enjoy a good reputation; and (iv) have no record of any serious violation of laws or regulations in the last three years;
(c) Having a standard bank card clearing system which is in line with Chinese national and industry standards;
(d) Having infrastructure and a remote disaster recovery system within China, which meets specified requirements and is capable of independently completing bank card clearing business actions;
(e) Having directors and the senior management personnel with qualifications approved by the PBOC after having obtained the consent of China Banking Regulatory Commission (the "CBRC"); and
(f) Satisfying other specified requirements, such as internal controls, risk prevention, information security and anti-money laundering.
The concern with (f) is that given the open-ended nature of the (as yet unspecified) requirements, these might include gating items that would delay or even worse prevent market access by foreign or domestic applicants. Any delaying factors are a concern, particularly given that CUP has a huge market positioning head start over new entrants. The fact that CUP is ultimately majority owned by the Chinese state and the implementing rules are issued by another arm of the Chinese state (which appears to have only opened up the market in response to the WTO ruling) raises the question of whether these rules will, when issued, give rise to a true playing field for all market participants. However, it is too early to say at present whether this will be an issue: the main safeguard against this happening is the need to comply with the WTO ruling.
3.3 Approval Procedures
The Decision divides the whole approval process into two phases, each with a concrete timeframe within which regulators must review and approve or reject the application. This division into phases is not new: it is the standard establishment procedure in relation to the formation of many CBRC-regulated financial industry entities like banks.
The first phase involves approval to begin the preparatory phase. The PBOC is the approval body, but it has to consult with and obtain the consent of the CBRC. This formulation is repeated throughout the Decision. This in itself raises the perennial issue in China of cooperation between regulators: in this case the situation is further complicated by the often competitive and tense 'parent and child' relationship between PBOC; CBRC was essentially carved out of the PBOC as a standalone independent financial institution regulator in 2003, leaving PBOC with a mix of central banking and industry regulatory roles with the potential for overlap and conflicts with CBRC (e.g. PBOC acts as the central bank but also issues online payment licenses which allow non-banks like TenPay or AliPay to compete directly with the traditional business of the banks). The PBOC has 90 days' from acceptance of the application to decide whether or not to approve the application. If approved, the applicant can start the preparatory phase. The Decision requires the preparatory work to be completed within one year from approval. During the preparatory phase, the applicant is not permitted to engage in bank card clearing business.
The second phase involves approval to commence business. The application for approval can only be submitted after the preparatory phase has been completed. Similar to the first phase above, the PBOC is the approval authority, but it has to consult with and obtain consent from CBRC, and PBOC has 90 days' from the acceptance of the application to decide whether or not to approve an application. If after having obtained CBRC consent the application is approved, PBOC will issue a Bank Card Clearing Business Permit ("Bank Card Clearing Permit") to the applicant. The approved applicant has six months to officially commence its bank card clearing business.
3.4 Conduct of Business Requirements
The Decision also sets out conduct of business requirements for approved Bank Card Clearing Institutions. For example, an approved Bank Card Clearing Institution must use its own or its capital contributor's bank card clearing brand when engaging in bank card clearing business. In addition, business between Bank Card Clearing Institutions and domestic card issuers or card acquirers must be handled through domestic bank card clearing infrastructure, and fund settlement must be completed within China. This may prove problematic for some international card structures that have existing overseas processing hubs and infrastructure.
The Decision imposes certain restrictions on transfer of both business-related data and personal financial information. Bank Card Clearing Institutions must keep confidential any information they obtain in the course of engaging in bank card clearing business. Save as otherwise provided by laws and regulations, they must not provide such information to others without the authorization of the parties concerned. Furthermore, in language quite reminiscent of the controversial draft PRC Anti-terrorism Law, personal financial information collected within China must be stored, processed and analysed within China, except for information used for handling bank card cross-border transactions and in relation to which authorization is obtained from the parties concerned. These requirements may seem onerous, but their impact is likely to be limited in practice, given the carve-out where consent is obtained from the data subject. This is in line with recent developments in data protection law in China where the central tenet remains consent to disclosure from the data subject.
3.5 Regulations of Foreign Bank Card Clearing Institutions
The Decision divides foreign bank card clearing institutions into those that need to establish an entity and obtain a Bank Card Clearing Permit and those that, in principle, do not. Those that provide bank card clearing service to parties within China must establish an FIE within China and obtain a Bank Card Clearing Permit. Those that only provide bank card clearing services for cross-border transactions in foreign currency, on the other hand, are not required to establish a bank card institution in China in principle, but they must report their business developments/circumstances to the PBOC and the CBRC. This last part is a concern in the sense that it seems to bring foreign bank card clearing institutions which are only involved in clearing foreign currency cross-border transactions within China's regulatory ambit.
This hard-won opening of the market for domestic bank card clearing business is clearly one of the most significant developments in the financial services sector in China in recent years. It would appear to be almost inevitable that the major global players will seek to establish competitors to CUP in the coming months. It will be a steep hill to climb to get even close to the incumbent, which has built a strong brand with overseas reach, but given the expanded spending power of the burgeoning middle class in China (who may carry brand loyalty over into international purchases as they spend more and more time overseas), this has to rate as a hugely attractive market. As with all apparent 'breakthroughs' in China, the proof of the pudding will be in the eating, which in this case will be in the form of the implementing rules to be issued as trailed in the Decision. Ultimately, however, the beneficiary of this development will be the Chinese consumer, who will benefit from a more competitive market environment with an inevitable knock-on effect on service levels, fees and pricing, which remain high on the list of concerns and complaints from consumers using bank cards in China.