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A MEMBER OF THE UNIVERSITY OF HONG KONG GROUP

香 港 大 學 機 構 成 員

AMY YIP YIHONG YAO

WILL CHINA UNIONPAY EXPAND FROM A DOMESTIC MONOPOLY TO A GLOBAL PLAYER?

In the future, UnionPay will vigorously promote card issuance overseas,

bring convenient and secure services to more cardholders, and seek common

development and mutual benefits with its partners, while continuing to

expand the card acceptance network, accelerate innovation on cross-border

payment products and services, and better support Chinese cardholders for

using their cards outside China.1

-- Ge Huayong, Chairman of China UnionPay

In March 2002, UnionPay, China’s first and only bankcard association was established on the

approval of the State Council of China and China’s central bank, making domestic inter-bank

transactions and settlements possible in the country.2 In 2010, China UnionPay issued more

than 2.3 billion payment cards, with a 29.2% share of payment cards worldwide, surpassing

Visa, MasterCard and American Express, and becoming the largest player in the global

bankcard industry in terms of number of payment cards in circulation.3 In 2004, UnionPay,

not satisfied with the huge Chinese domestic market, expanded its business globally. In

November 2012, UnionPay International, supporting UnionPay’s overseas businesses and

cross-border transactions for bankcards issued in China, was established in Shanghai,

accelerating the Chinese bankcard monopoly’s globalization progress. By January 2015,

China UnionPay expanded its network to more than 150 countries and regions, and had about

400 domestic and international partners.4

1 China UnionPay News Center (19 January 2015) “China UnionPay Chairman Ge Huayong delivers speech at the Asian

Financial Forum”, http://www.unionpayintl.com/en/enaboutUpi/ennewsCenter/encompanyNews/3003072.shtml (accessed 21 March 2015). 2 Bankcards included ATM cards, debit cards, credit cards, and prepaid cards. ATM cards were linked to a bank account for cash

withdrawals and other transactions through automated teller machines (“ATM”). Debit cards were also linked to a bank

account for non-cash payment through point-of-sale (“POS”) systems. Credit cards were linked to a credit account with a pre-

approved credit limit for non-cash payment through POS systems and other on-line and off-line channels. Prepaid cards were linked to a prepaid account, in which money must be deposited before payment transactions are made. Payment cards included

debit cards, credit cards and prepaid cards. 3 Retail Banking Research (August 2011) “Banking Automation Bulletin”, http://www.rbrlondon.com/reports/b291_cards.pdf

(accessed 19 March 2015). 4 China UnionPay (2015) “Overview”, http://en.unionpay.com/comInstr/aboutUs/file_4912292.html (accessed 19 March 2015).

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This case was fully supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (UGC/IDS12/14).

© 2015 by Centennial College, a member of The University of Hong Kong group. No part of this copyrighted publication may be

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Ref.15/001C Published: 23 April 2015

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CENTENNIAL COLLEGE Page 2

Unlike other companies, which globalized to secure overseas business opportunities and

customers, UnionPay globalized its business to provide cross-border card payment services

for Chinese cardholders, often Chinese tourists visiting countries and regions overseas. It

settled these overseas transactions in RMB, China’s official currency, which was not freely

convertible. Overseas UnionPay bankcard transaction fees were much lower, for both

merchants and cardholders, than the fees of UnionPay’s rivals, generating competitive

advantage for UnionPay’s global expansion. In January 2015, nearly 40 banks and financial

institutions in more than 100 foreign countries and regions were issuing local UnionPay cards.

However, the number of overseas-issued UnionPay cards in circulation and the value of the

transactions made with these cards were much lower than those of UnionPay’s overseas

competitors, Visa and MasterCard.

China UnionPay’s globalization mainly served Chinese tourists rather than overseas

customers. What could the rationale behind this global strategy be? As a monopoly in

China’s closed bankcard market, could China UnionPay compete with Visa and MasterCard

in overseas markets and realize genuine globalization?

Global Card Associations

Bankcards were widely used for non-cash payments through point-of-sale (“POS”) systems

and other on-line or off-line channels, and for cash withdrawals and other transactions

through automated teller machines (“ATM”). A Retail Banking Research (“RBR”) report

predicted that the number of payment cards in circulation worldwide would reach 13.6 billion

in 2018. 5 These cards were issued by tens of thousands of banks and other financial

institutions worldwide. Inter-bank and cross-border transactions would be impossible if these

banks and financial institutions did not be linked through a small number of global bankcard

or payment-card associations. These associations established standards, allocated card number

prefixes, licensed banks and financial institutions to issue cards branded with association

names, resolved disputes, and provided information exchange networks, technical and

operational support, merchant services, centralized transaction processing, and settlement and

clearing services to their members. 6 [See Exhibit 1 for a typical transaction on a card

association’s network.] Main card associations included Visa, MasterCard, American

Express and UnionPay. Unlike Visa, MasterCard and American Express, which were

American corporations with an historical legacy of more than half a century and listed on the

New York Stock Exchange (“NYSE”), China UnionPay was a thirteen-year-old state-owned

enterprise headquartered in Shanghai.

Visa7

Established in 1958, and listed in the NYSE in 2008, Visa was a leading global payment and

technology company, linking 14,300 banks or financial institutions, 36 million merchants and

millions of customers worldwide. By March 2015, the network reached more than 200

countries and regions. By December 2014, 2.3 billion Visa cards had been issued worldwide.

In 2014, Visa processed 98.4 billion transactions with a total volume of US$7.4 trillion,

making Visa one of the best-known and most advanced payment card associations in the

world. [See Exhibit 2 for Visa’s operational performance in 2014.]

5 The Paypers (21 August 2013) “Number of cards in circulation to reach 13.6 bln by 2018”,

http://www.thepaypers.com/cards/number-of-cards-in-circulation-to-reach-13-6-bln-by-2018/752238-

23?cid=752238&sel=23&title=number-of-cards-in-circulation-to-reach-13-6-bln-by-2018&category=cards (accessed 21 March 2015). 6 In 1989, the International Organization for Standardization (“ISO”) published identification numbers for card issuers, ISO/IEC

7812. Visa card numbers started with 4; MasterCard card numbers started with 51-55; American Express card numbers started

with 34 and 37; and China UnionPay card numbers started with 62. 7 Unless otherwise referenced, this section was adapted from Visa Inc. (2015) “About Visa”

http://usa.visa.com/about-visa/index.jsp (accessed 21 March 2015).

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Visa was an American company headquartered in San Francisco, which expanded its business

globally beginning in 1974. Visa not only served Americans, but launched cards worldwide.

Locally issued Visa cards were widely used by local card holders and widely accepted by

global merchants. According to Visa’s 2014 annual report, 40% of its cards’ transaction

volume that year came from the USA, 27% from Asia Pacific and 33% from other regions of

the world.8

Soon after its establishment, China UnionPay collaborated with Visa in providing services for

Visa in China and issuing co-branded credit cards for Chinese customers. As UnionPay did

not have its own clearing network outside China early in its history, these co-branded cards

were routed through UnionPay’s RMB clearing network in China and Visa’s USD clearing

network overseas. In 2004, UnionPay established and expanded its overseas network. More

and more Chinese cardholders elected to use UnionPay’s clearing network overseas, as they

could save the 1%-2% currency conversion fee. This threatened Visa’s interests and generated

disputes between Visa and UnionPay.

MasterCard9

Established in 1966 and listed in the NYSE in 2008, MasterCard was a global payment and

technology company. Similarly to Visa, MasterCard linked banks and other financial

institutions, merchants and customers worldwide. By December 2014, 2.1 billion

MasterCard-brand cards had been issued worldwide. In 2014, MasterCard processed 11.6

billion in transactions with a total volume of US$1.2 trillion. [See Exhibit 3 for MasterCard’s

operational performance in 2014.]

MasterCard was an American company headquartered in New York, which expanded its

business globally beginning in the 1970s. Like Visa, MasterCard launched cards worldwide.

Locally issued MasterCard cards were widely used by local card holders and widely accepted

by global merchants. According to MasterCard’s 2014 Q4 results, 30 % of MasterCard’s

transaction volume that year came from the USA and 70% from other regions of the world.10

In 1987, in collaboration with the Bank of China, MasterCard launched the first ever RMB

payment card, in China. In 1988, MasterCard established offices in China and, in

collaboration with Bank of China, launched the first ever foreign-currency payment card in

the country.

Other Card Associations

Other card associations included American Express, Diner's Club, Japan Credit Bureau

(“JCB”) and China UnionPay. Unlike Visa, MasterCard and China UnionPay, which licensed

banks and other financial institutions to issue cards, American Express both launched cards

with other institutions and on its own.

By March 2015, American Express was the world’s largest card issuer in terms of payment-

card transaction volume.11

8 Visa Inc. (2015) “Visa Inc. 2015 Operational Performance Data”,

http://investor.visa.com/financial-information/quarterly-earnings (accessed 24 March 2015). 9 Unless otherwise referenced, this section was adapted from MasterCard (2015) “Our Company”

http://www.mastercard.com/us/company/en (accessed 24 March 2015). 10

MasterCard (2015) “Quarterly Results”, http://investor.mastercard.com/files/doc_news/2014/4Q14-Earnings-Press-Release.pdf

(accessed 24 March 2015). 11

American Express Company (2015) “Our Company”, http://about.americanexpress.com/oc/whoweare

(accessed 24 March 2015).

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China UnionPay

Founding

Before 2002, inter-bank transaction, clearance and settlement arrangements in China were

negotiated among the banks involved. In 2012, around 85 commercial banks existed in China,

including the big four state-owned banks and second-tier commercial or city commercial

banks. 12 Inter-bank transactions among most if not all of these banks were impossible.

Different banks issued bankcards with different brands. For example, Bank of China issued

the Great Wall card, Industrial and Commercial Bank of China issued the Peony card and

China Construction Bank issued the Dragon card. Banks launched and promoted cards

independently. No card association or nation-wide, single-branded bankcard existed in China

before March 2002.

In March 2002, on the approval of the State Council of China and China's central bank,

UnionPay was founded, with the aim of establishing a united bankcard platform and network

for all Chinese banks and developing a national bankcard industry. It was China’s first and

only bankcard association.

A pivotal institution in the Chinese bankcard industry, UnionPay established and ran a nation-

wide inter-bank transaction clearing and settlement network, making inter-bank, cross-region

and even cross-border transactions possible with bankcards issued by UnionPay’s associated

banks and financial institutions. In collaboration with various commercial partners, such as

commercial banks and various merchants, China UnionPay formulated bankcard standards,

established a united Chinese bankcard brand, promoted the adoption and acceptance of

UnionPay bankcard and founded the Chinese non-cash payment market.13

Growth

In August 2003, UnionPay launched the first UnionPay card with a card-number prefix 62,

UnionPay’s card-issuer identification established by the International Organization for

Standardization. In January 2004, UnionPay POS systems were installed for Hong Kong

merchants as a first step in UnionPay’s overseas expansion. The number of UnionPay cards

issued increased rapidly beginning in 2004. In 2010, 2.3 billion UnionPay cards were issued,

and China UnionPay overtook Visa to become the largest player in the global bankcard

industry in terms of the number of cards in circulation.14 By January 2015, China UnionPay

had issued more than 4.7 billion cards. [See Exhibit 4 for the number of UnionPay cards

issued from 2004 to 2014, and Exhibit 5 for the number of cards issued by each card

association in 2010 and 2013.]15 China’s central bank disclosed that, by June 30, 2014, out of

all bankcards issued by Chinese banks and financial institutions, 4.12 billion or 91% were

ATM or debit cards, while only 422 million or 9% were credit cards.16

12

The big four state-owned commercial banks in China were Industrial and Commercial Bank of China, Bank of China, China

Construction Bank, and Agricultural Bank of China. 13

China UnionPay (2015) “Overview”, http://en.unionpay.com/comInstr/aboutUs/file_4912292.html (accessed 19 March 2015);

Jiang., X. (22 January 2015) “UnionPay bets big on innovation”, China Daily,

http://usa.chinadaily.com.cn/epaper/2015-01/22/content_19377426.htm (accessed 21 March 2015). 14

Retail Banking Research (August 2011) “Banking Automation Bulletin”, http://www.rbrlondon.com/reports/b291_cards.pdf

(accessed 19 March 2015). 15

Jiang., X. (22 January 2015) “UnionPay bets big on innovation”, China Daily,

http://usa.chinadaily.com.cn/epaper/2015-01/22/content_19377426.htm (accessed 21 March 2015). 16

Jiang, X. et al. (30 October 2014) “Bank card clearing market opened up”, ChinaDaily Asia,

http://www.chinadailyasia.com/business/2014-10/30/content_15184435.html (accessed 19 March 2015).

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A 2013 Nilsson report predicted that the number of UnionPay cards would increase by 51%

from 2012 to 2017, and reach 5.3 billion in 2017, which was 67% higher than the number of

Visa cards anticipated that year.17

Products and Services18

Like Visa and MasterCard, UnionPay licensed banks and financial institutions to issue

UnionPay payment cards, including debit, credit and prepaid cards. Unlike Visa and

MasterCard, which were payment card associations that mainly launched payment cards,

China UnionPay launched almost all types of bankcards, including ATM and payment cards.

China UnionPay therefore called itself a bankcard association instead of a payment card

association. In collaboration with local banks, UnionPay launched RMB and HKD ATM

cards in Mainland China and Hong Kong respectively.

UnionPay also launched innovative products and services in China. These included UnionPay

IC (integrated circuit) cards, QuickPass payments through contactless merchant terminals,

mobile POS systems for small businesses connected to mobile phones, and secure e-

commerce on-line payment platforms. Operational Performance

Unlike Visa and MasterCard, which were listed companies that published annual reports,

China UnionPay was a state-owned enterprise. Financial information about UnionPay was

therefore sparse. In terms of annual payment card transaction volumes, China UnionPay

could not reach such as high a rank as was the case with the sheer number of UnionPay cards

in circulation. A 2013 Retail Banking Research (“RBR”) report found that different regions

showed significantly different numbers in terms of card usage. The report stated that although

the Asia Pacific region accounted for more than half of the cards in circulation, it contributed

only 21% of card payment transaction volumes, while North America contributed 40% and

Western Europe contributed 23%. [See Exhibit 6 for the 2013 worldwide distribution of card

payment transaction volumes by region.]

In 2014, the South China Morning Post reported that the total 2013 transaction volumes of

UnionPay cards increased 4.8% over 2012, to reach US$5.33 trillion.19 In January 2015,

China UnionPay published its 2014 inter-bank transaction data in a short news release. In

2014, inter-bank transaction volumes of UnionPay-branded bankcards reached US$6.58

trillion, a 27.3% increase over 2013.20 Inter-bank transactions included ATM withdrawals,

money transfers, and credit- and debit-card payment transactions, some of which were for

wholesale, automobile, and real-estate payments. China UnionPay did not disclose its total

2014 transaction volume in the news release. Nor were 2014 volumes by transaction or card

type disclosed.

17

Nilson (2015) “Payment Cards Worldwide 2012 vs. 2017”,

http://www.nilsonreport.com/publication_chart_and_graphs_archive.php?1=1&year=2013 (accessed 19 March 2015). 18

Unless otherwise referenced, this section was adapted from (2015) UnionPay International “Product Introduction”,

http://www.unionpayintl.com/en/enproducts/index.shtml (accessed 21 March 2015). 19

Ren, D. (22 November 2014) “UnionPay takes aim at global footprint to rival Visa, Mastercard”, South China Morning Post,

http://www.scmp.com/business/china-business/article/1645797/unionpay-takes-aim-global-footprint-rival-visa-mastercard (accessed 24 March 2015). The exchange rate of RMB to USD was 1:0.1652 on 31 December 2013. 20

News Center (27 January 2015) “Inter-bank bankcard transactions amounted to 41.1 trillion yuan in 2014”, China UnionPay,

http://www.unionpayintl.com/en/enaboutUpi/ennewsCenter/encompanyNews/3003173.shtml (accessed 24 March 2015).

The exchange rate of RMB to USD was 1:0.16 on 24 March 2015.

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China’s Closed Bankcard Clearing Market

Monopoly

China’s bankcard clearing market was closed in past decades, making UnionPay a monopoly

in China. Almost all bankcards issued in China had UnionPay’s logo. Foreign banks or card

associations were prohibited from issuing cards in China unless they added UnionPay’s logo

on their cards. [See Exhibit 7 for a list of cards with the UnionPay logo.] Almost all

bankcard transactions in China must be routed via UnionPay’s settlement network. Visa,

MasterCard and other global card association transactions were not exempted. Foreign banks

and card associations were required to pay UnionPay network access fees in order to use its

clearing and settlement network, the only such network in China.21

UnionPay had a surprisingly high rate of brand recognition in China. An AC Nielson report

showed a 100% domestic brand recognition rate for UnionPay in 2012. 22

Unique Standard

As the only bankcard association in China, UnionPay formulated a unique Chinese bankcard

standard, PBOC3.0, which defined the grammar for transmitting card data and was

incompatible with Visa’s and MasterCard’s EMV standard. On November 3, 2014, UnionPay

required that all bankcards issued in China must conform to this standard, generating barriers

and creating an obvious competitive advantage for China UnionPay in the domestic market

over its foreign competitors.23

Competition

UnionPay not only blocked foreign card associations’ business in China, but also prohibited

domestic third-party e-payment suppliers, such as Alibaba’s AliPay and Tencent’s Tenpay,

from clearing and settling payments directly with domestic banks. In recent years, e-

commerce and on-line payments boomed in China. Alibaba’s Taobao and Tmall were

China’s largest on-line retail platforms, and used AliPay to process on-line payments. An

iResearch report estimated that the gross merchandise volume of on-line payments was

US$2.8 trillion in 2013, and that Alipay alone contributed nearly 50% of the on-line third-

party payments that year.24 China UnionPay sensed a threat from domestic competitors, and,

in August 2013, requested that all offline payments in China be incorporated into UnionPay’s

network and that, by June 2014, all on-line payment must also be cleared and settled by the

network.25

In 2012, the World Trade Organization (“WTO”) stated that, in forcing foreign banks and

card associations to route through UnionPay’s RMB clearing and settlement network, China

was not respecting its commitment to opening its financial markets.26 In October 2013, in a

21

Li, X. (13 November 2014) “Visa, MasterCard Confront China's Stacked Deck”, Caixin Online,

http://english.caixin.com/2014-11-13/100750722.html (accessed 19 March 2015). 22

Brand Center (2015) “Introduction to UnionPay Brand”,China UnionPay,

http://www.unionpayintl.com/en/enaboutUpi/enbrandCenter/index.shtml (accessed 19 March 2015). 23

Li, X. (13 November 2014) “Visa, MasterCard Confront China's Stacked Deck”, Caixin Online,

http://english.caixin.com/2014-11-13/100750722.html (accessed 19 March 2015). 24

Tham, E. (12 November 2014) “Online threat to China's UnionPay outweighs foreign card rivals”, Reuters,

http://www.reuters.com/article/2014/11/12/us-china-banks-clearing-idUSKCN0IW2IM20141112 (accessed 24 March 2015). The exchange rate of RMB to USD was 1:0.1652 on 31 December 2013. 25

China Economic Review (16 September 2013) UnionPay just woke up to China’s e-payment bonanza,

http://www.chinaeconomicreview.com/Alibaba-Alipay-UnionPay-third-party-payment-ecommerce (accessed 24 March 2015). 26

Don, W. (25 March 2015) “UnionPay's monopoly under threat as China's card market set open”,

http://www.scmp.com/business/banking-finance/article/1628625/unionpays-monopoly-under-threat-chinas-card-market-set-

open (accessed 25 March 2015).

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Council of China meeting, top leaders said China would allow domestic and international

companies to apply to establish bankcard associations in the country if they could fulfil

government requirements.27 However, the speed, timeline, and scope of the proposed plan to

open China’s bankcard clearing market were unclear. Financial experts indicated that unclear

requirements, complicated application processes and other barriers would make it difficult for

domestic and foreign companies to enter the bankcard clearing and settlement market in

China.28

China’s Outbound Tourism

By November 2014, the annual total number of China’s outbound tourists increased around

19.5% over the previous year, peaking at 100 million, a record high.29

China was a country with extremely high tariff rates (from 10% to 100%), value-added taxes

(13% or 17%) and sales taxes (from 3% to 45%). Chinese tourists were allowed to import

goods whose value did not exceed RMB5,000 (equal to US$800) without paying tariffs when

they returned from overseas countries and regions such as North America, Europe and Hong

Kong. However customs officers seldom required Chinese tourists to pay tariffs for goods in

their luggage, even if the value of the goods exceeded RMB5,000. As a result, Chinese

tourists were keen to purchase goods, particularly luxury goods overseas and bring them to

China.

More than one hundred million Chinese tourists have travelled to Hong Kong for shopping

since 2002, the year that the Individual Visit Scheme allowing mainland Chinese residents to

visit Hong Kong individually was implemented. In recent years, western countries, such as

the USA, UK, Spain and France loosened visa requirements for Chinese tourists and

simplified visa application procedures, stimulating more and more Chinese tourists to pour

into these countries to shop. Chinese tourists were well known as the largest consumer group

for luxury goods, such as Hermès, Louis Vuitton and Burberry, making the whole Europe

luxury goods industry pay special attention to Chinese tourists, their consumption and

behaviors. A Merrill Lynch report indicated that, in 2014, 109 million Chinese tourists spent

US$164 billion overseas, and predicted that, by 2019, 174 million Chinese tourists would

spend US$164 billion.30 When Chinese tourists went overseas, they brought UnionPay cards,

the only card linked to China’s local currency, RMB, with them.

Company Global Strategy31

Executives and scholars recognized that strategy was neither a plan nor an action, but a

combination of both, a stance in line with the “strategy as integration” school. Scholars also

agreed that a comprehensive strategic SWOT analysis, which analyzes a company’s

“Strengths, Weaknesses, Opportunities and Threats” in the context of its business

environment, could enable the company to understand itself and its competitors better and

27

Jiang, X. et al. (30 October 2014) “Bank card clearing market opened up”, ChinaDaily Asia,

http://www.chinadailyasia.com/business/2014-10/30/content_15184435.html (accessed 19 March 2015). 28

Don, W. (25 March 2015) “UnionPay's monopoly under threat as China's card market set open”,

http://www.scmp.com/business/banking-finance/article/1628625/unionpays-monopoly-under-threat-chinas-card-market-set- open (accessed 25 March 2015). 29

Travel China Guide (2015) “China Outbound Tourism in 2014”,

http://www.travelchinaguide.com/tourism/2014statistics/outbound.htm (accessed 19 March 2015). 30

RT network (11 March 2015) “174 million Chinese tourists to spend record $264bn by 2019”,

http://rt.com/business/239741-china-tourists-shopping-europe (accessed 24 March 2015). 31

Unless otherwise referenced, this section was adapted from Mike W. Peng (2014) Global Strategy 3rd edition, Cengage

Learning: Independence, Kenucky, and Anil K. Gupta et al. (2008) The Quest for Global Dominance: Transforming Global

Presence into Global Competitive Advantage 2nd edition, John Wiley & Sons: Hoboken, New Jersey.

Will China Unionpay Expand from a Domestic Monopoly to a Global Player (Ref.: 15/001C)

CENTENNIAL COLLEGE Page 8

formulate a path linking its current status to its goals. [See Exhibit 8: The Essence of

Strategy.]

Once a company has formulated its strategy, how should the firm behave? The answer lay in

understanding the three crucial perspectives of the strategy tripod: the industry-based,

resource-based and institution-based views. The industry-based view, which concentrated on

external factors such as Opportunities and Threats, held that strategic analysis should identify

competitive factors affecting an industry. The resource-based view emphasized internal

factors such as Strengths and Weaknesses and held that company-specific capabilities

determined that company’s success or failure. In more recent years, an institution-based view

appeared to explain why company strategies differed. The institution-based view claimed that

a company must examine the formal and informal rules affecting its strategy. When a

company decided to go to secure shares in the global market, it should evaluate the three

crucial perspectives of the strategy tripod to make strategic decisions on where, when and

how to do so. [See Exhibit 9 for a comprehensive model of foreign market entries.]

Professor Mike W. Peng defined global strategy, in his book of the same name, as the strategy

of a company with a world-wide business that produced and distributed products and services

globally. An international strategy made sure a company could compete successfully in the

global market.

Professor Anil K. Gupta et al., in their book The Quest for Global Dominance, identified five

factors that could explain how and why a company should consider global expansion and

could formulate a global strategy. The five factors were: opportunities for growth; efficient

value-chain management; access to global knowledge, global customer acquisition; and

global competitors. [See Exhibit 10 for the five globalization imperatives.] When a company

launched a globalization strategy, it must decide upon both a choice of products and a choice

of markets. [See Exhibit 11 for a framework for choice of products and Exhibit 12 for a

framework for choice of markets.]

China UnionPay’s Globalization32

UnionPay’s network reached Hong Kong and the USA in 2004 and 2005 respectively, and

reached Australia and Japan in 2006. This Chinese monopoly never stopped extending its

network, which by January 2015 had reached more than 150 countries and regions. [See

Exhibit 13 for China UnionPay’s global network in 2015.]

On November 30, 2012, Mr. Han Zheng, Mayor of Shanghai, gave a speech at the ceremony

celebrating the founding of UnionPay International in that city.

In the past 10 years, China UnionPay extended its services from Shanghai to

the whole country, and gradually to the world with broadly-recognized

accomplishments. The establishment of UnionPay International is a strategic

step adapting to the globalization trend of China’s financial services, and

another significant achievement of China’s fast growing bankcard industry.33

-- Mr. Han Zheng, Mayor of Shanghai

32

Unless otherwise referenced, this section was adapted from (2015) UnionPay International “About UnionPay International”,

http://www.unionpayintl.com/en/index.shtml (accessed 21 March 2015). 33

News Center (30 November 2012)“The Establishment of UnionPay International by China UnionPay for Globalization

Acceleration”, http://www.unionpayintl.com/en/enaboutUpi/ennewsCenter/encompanyNews/220390.shtml

(accessed 19 March 2015).

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Aimed at supporting UnionPay’s expansion and international business, UnionPay

International offered high-standard and secure cross-border payment services and solutions

with low service and clearing fees to UnionPay cardholders and merchants worldwide. [See

Exhibit 14 for UnionPay’s competitive service and transaction fees.]

Intending to enhance cardholders’ status and privileges, on November 19, 2014, UnionPay

International announced a campaign that enabled UnionPay cardholders to enjoy up to a 15%

discount in twenty touristic cities and ten resort islands, including Hong Kong, Shanghai,

Tokyo, Singapore, New York, London and Paris, when they used UnionPay cards for

shopping, dining and other tourist-related transactions. On March 20, 2015, UnionPay

International launched a new privilege program that enabled its cardholders to enjoy 5%

discounts and convenient shopping experiences at eighty duty-free retailers in 70 airports

worldwide. 34 Similar promotions were conducted all year round. [See Exhibit 15 for

promotions for UnionPay cardholders.] In 2007, in collaboration with Global Blue and

Fintrax Group, the world’s leading global duty-free shopping networks providing tax refund

services to overseas tourists, UnionPay allowed its cardholders to receive tax refunds more

conveniently and cost-efficiently via its network, UnionPay waived commission fees and

converted tax refunds into cardholders’ settlement currencies, RMB in particular.35

We go to places where Chinese tourists go and we want to offer the services

they need abroad. Chinese travelers have become more sophisticated and

they look for quality services, which prompts us to work harder.36

-- Cai Jianbo, executive vice-president of UnionPay

In collaboration with more than 60 global banks and financial institutions, UnionPay

International created bilateral values and benefits through a win-win membership scheme,

expanding UnionPay’s global network and accelerating its global business growth. In

collaboration with more than 100 overseas banks and financial institutions in more than 40

countries and regions, such as Hong Kong, Singapore, Japan, Russia, the UK and the USA,

UnionPay launched overseas-issued UnionPay cards in local currencies. UnionPay cards

became the first choice for Chinese residents and overseas Chinese.

Unfortunately, UnionPay cards issued overseas could only be used for traditional card

payment transactions through POS systems. On-line payments through overseas-issued

UnionPay cards were impossible until late 2014, and the adoption and acceptance of overseas

UnionPay cards for on-line payments were extremely limited even in March 2015. By

September 2014, China UnionPay issued 33 million cards outside mainland China and

planned to reach significantly higher numbers in the coming three years.37 The 33 million

cards accounted for around 0.7% of the total number of UnionPay cards issued, meaning that

more than 99% of UnionPay cards were issued in China.

34

China UnionPay News Center (20 March 2015) “UnionPay International joins hands with 80 airport duty free shops to expand

cardholder privileges”, http://www.unionpayintl.com/en/enaboutUpi/ennewsCenter/encompanyNews/3004113.shtml

(accessed 24 March 2015). 35

China UnionPay Global Service (2015) “UnionPay Card Overseas Tax Refund Service”,

http://www.unionpayintl.com/en/enserviceCenter/englobalService/entaxRefund/index.shtml (accessed 24 March 2015). 36

Ren, D. (22 November 2014) “UnionPay takes aim at global footprint to rival Visa, Mastercard”, South China Morning Post,

http://www.scmp.com/business/china-business/article/1645797/unionpay-takes-aim-global-footprint-rival-visa-mastercard (accessed 24 March 2015). 37

Ren, D. (22 November 2014) “UnionPay takes aim at global footprint to rival Visa, Mastercard”, South China Morning Post,

http://www.scmp.com/business/china-business/article/1645797/unionpay-takes-aim-global-footprint-rival-visa-mastercard

(accessed 24 March 2015).

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Although UnionPay’s overseas transactions grew at the astonishing rate of 30% in 2012, by

March 2014 UnionPay’s overseas revenue accounted for only 5% of this Chinese giant’s

total.38

Looking Forward

On January 19, 2015 Ge Huayong, Chairman of China UnionPay, gave a speech at the Asian

Financial Forum in Hong Kong. In his speech, Ge expressed China UnionPay’s ambition to

advance business innovation and expand the Chinese monopoly’s business globally. Ge said

that by broadening its payment services and enhancing its global influence, China UnionPay

would offer, both in China and overseas, more products and services with better quality and

higher standards to its partners, cardholders and merchants and thereby realize the vision of a

“Global Network.”39

What could the rationale behind China UnionPay’s global strategy, which focused on serving

Chinese cardholders who traveled overseas instead of serving overseas customers, be? As a

monopoly that had evolved in China’s closed bankcard market, could China UnionPay

compete with Visa and MasterCard in overseas markets and achieve genuine globalization?

Suggested Student Questions

1. Summarize China UnionPay’s evolution, its operations and its unique globalization

strategy.

2. Compare China UnionPay’s operations and globalization strategy with those of Visa and

MasterCard.

3. Why are China UnionPay’s operations and globalization strategy different from those of

its global counterparts?

4. What challenges face UnionPay and what competitive advantages does it have in China

and the global bankcard market? Perform a UnionPay SWOT analysis.

5. Can UnionPay, a monopoly in China, compete globally and achieve genuine globalization?

38

Bill Tarrant (11 March 2014) “Coming to a store near you: UnionPay, the world's biggest bankcard”, Reuters,

http://www.reuters.com/article/2014/03/12/us-china-unionpay-expansion-idUSBREA2B00Q20140312 (accessed 19 March 2015). 39

News Center (19 January 2015)“China UnionPay Chairman Ge Huayong delivers speech at the Asian Financial Forum”,

China UnionPay, http://www.unionpayintl.com/en/enaboutUpi/ennewsCenter/encompanyNews/3003072.shtml

(accessed 21 March 2015).

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EXHIBIT 1: A TYPICAL TRANSACTION ON A CARD ASSOCIATION’S NETWORK

Source: Adapted from Visa Inc. (28 January 2015) “Annual Report (2014)”,

http://investor.visa.com/files/doc_downloads/annual%20meeting/2014/817762_BMK1.pdf

(accessed 24 March 2015)

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EXHIBIT 2: VISA’S OPERATIONAL PERFORMANCE IN 2014

Transactions Volume

Source: Visa Inc. (2015) “Visa Inc. 2015 Operational Performance Data”,

http://investor.visa.com/financial-information/quarterly-earnings (accessed 24 March 2015)

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EXHIBIT 3: MASTERCARD’S OPERATIONAL PERFORMANCE IN 2014

Transactions Volume40

Source: MasterCard (2015) “Quarterly Results”,

http://investor.mastercard.com/files/doc_news/2014/4Q14-Earnings-Press-Release.pdf (accessed

24 March 2015)

40

GDV meant Gross Dollar Value, which was comparable to Visa’s total volume in operational performance data in exhibit 1.

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EXHIBIT 4: THE NUMBER OF UNIONPAY CARDS ISSUED FROM 2004 TO 2014

Source: Adapted from UnionPay (2015) “中国银联的成立和发展 (The Establishment and

Development of China UnionPay)”,

http://corporate.unionpay.com/wangluozhanting/zhongguoyhk/file_112371686.html (accessed 24

March 2015)

0.01 0.086 0.232 0.538

0.91 1.3

1.79 2.35

3.01

3.93

4.7

0

1

2

3

4

5

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Number of UnionPay Card Issuance (billion)

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EXHIBIT 5: THE NUMBER OF CARDS ISSUED BY EACH CARD ASSOCIATION IN 2010 AND 2013

Source: Adapted from Retail Banking Research (2010) “Banking Automation Bulletin” and

Retail Banking Research (2014) “Global Payment Cards Data and Forecasts”

UnionPay, 29.2%

Visa, 28.6%

MasterCard, 20.0%

Private lable, 10.0%

Domestic, 9.6%

American Express, 1.1%

JCB, 0.8% Discover/

Dinners Club, 0.9%

Number of Payment Cards by Brand (2010)

UnionPay, 38.0%

Visa, 24.0%

MasterCard, 18.0%

Private lable, 7.9%

Domestic, 9.8%

American Express, 0.9%

JCB, 0.7% Discover/

Dinners Club, 0.9%

Number of Payment Cards by Brand (2013)

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EXHIBIT 6: THE 2013 WORLDWIDE DISTRIBUTION OF CARD PAYMENT TRANSACTION VOLUMES BY REGION

Source: Adapted from ATM Marketplace (13 October 2014) “Global card payment volume tops

200B in 2013”, http://www.atmmarketplace.com/news/global-card-payment-volume-tops-200b-

in-2013 (accessed 24 March 2015)

North America,

40.0%

Western Europe, 23.0%

Asia Pacific, 21.0%

Latin America,

8.0%

Central and Eastern Europe,

4.5%

Middle East and Africa,

3.2%

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EXHIBIT 7: A LIST OF CARDS WITH THE UNIONPAY LOGO

Source: Jiang, X. et al. (30 October 2014) “Bank card clearing market opened up”, ChinaDaily

Asia, http://www.chinadailyasia.com/business/2014-10/30/content_15184435.html (accessed 19

March 2015).

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EXHIBIT 8: THE ESSENCE OF STRATEGY

Source: Mike W. Peng (2014) “Global Strategy” 3rd edition, Cengage Learning, pp14.

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EXHIBIT 9: A COMPREHENSIVE MODEL OF FOREIGN MARKET ENTRIES

Source: Mike W. Peng (2014) “Global Strategy” 3rd edition, Cengage Learning, pp159

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EXHIBIT 10: THE FIVE GLOBALIZATION IMPERATIVES

There are five imperatives that drive any firm to pursue global expansion. Because of

differences in industry structure and the firm's strategic position, the intensity of these factors

can be expected to differ across firms and, for the same firm, over time.

The growth imperative: For many industries, developed country markets are quite mature.

Thus the growth imperative generally requires companies to look to emerging markets for

fresh opportunities.

The efficiency imperative: Whenever there are one or more activities in the value chain

(R&D, production, and so on) where the minimum efficient scale exceeds the sales volume

feasible within one country, a company with global presence will have the potential to create

a cost advantage relative to a domestic player within that industry.

The knowledge imperative: No two countries even close neighbors such as Canada and the

United States, are completely alike. Therefore, when a company expands its presence to more

than one country, it must adapt some features of its products and processes to the local

environment. This adaptation requires the creation of local know-how. Some of this know-

how may be too idiosyncratic to be relevant outside the particular local market.

Globalization of customers: This phrase refers to customers who are global corporations

(such as soft-drink companies served by advertising agencies) as well as those who are

globally mobile (corporate executives served by American Express or global travelers served

by hotel chains such as Sheraton). When the customers of a domestic company start to

globalize, the firm must keep pace with them. These customers may strongly prefer

worldwide consistency and coordination in the sourcing of products and services. They may

also prefer to deal with a small number of supply partners on a long-term basis. Furthermore,

allowing customers to deal with different suppliers in other countries puts a company at risk

of losing them to one of these suppliers even in the domestic market. It is motivations such as

these that have driven professional service firms in such industries as advertising, accounting,

consulting, and legal services to become global.

Globalization of competitors: If your competitors start to globalize and you do not, you

become vulnerable to a two-pronged attack. First they can develop a first-mover advantage in

capturing market growth, pursuing global scale efficiencies, profiting from knowledge

arbitrage, and/or providing a coordinated source of supply to global customers. Second, they

can use multi market presence to cross-subsidize and wage a more intense attack in your own

home markets. Underestimating the rate at which competition can accelerate the pace of

globalization is dangerous.

Source: Gupta et al. (2008) “The Quest for Global Dominance: Transforming Global Presence

into Global Competitive Advantage” 2nd edition, John Wiley & Sons, pp. 28-29.

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EXHIBIT 11: A FRAMEWORK FOR CHOICE OF PRODUCTS

Source: Gupta et al. (2008) “The Quest for Global Dominance: Transforming Global Presence

into Global Competitive Advantage” 2nd edition, John Wiley & Sons, pp. 27.

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EXHIBIT 12: A FRAMEWORK FOR CHOICE OF MARKETS

Source: Gupta et al. (2008) “The Quest for Global Dominance: Transforming Global Presence

into Global Competitive Advantage” 2nd edition, John Wiley & Sons, pp. 33.

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EXHIBIT 13: CHINA UNIONPAY’S GLOBAL NETWORK IN 2015

Source: UnionPay (2015) “中国银联的成立和发展 (The Establishment and Development of

China UnionPay)”,

http://corporate.unionpay.com/wangluozhanting/zhongguoyhk/file_112371686.html (accessed 24

March 2015)

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EXHIBIT14: UNIONPAY’S COMPETITIVE SERVICE AND TRANSACTION FEES

Cardholder Service Fees

Transaction Type UnionPay

Card with a prefix 62

Other Cards such as Visa,

MasterCard and American

Express

Local transactions Exempted Exempted

Foreign transactions

(currency conversion

fees)

Exempted 1-2%

Source: Adapted from China UnionPay International (2015) “Exemption of Currency

Conversion Fee for Using UnionPay Card Overseas”,

http://www.unionpayintl.com/en/enserviceCenter/enoverseas/encardInstructions/219349.shtml

(accessed 24 March 2015).

Merchant Transaction Fees

UnionPay

Other Cards such as Visa,

MasterCard and American

Express

0.04%-0.9% 2% - 3%

Source: Adapted from Sina Finance (2013) “Bankcard transaction fees were reduced (銀行卡刷

卡手續費下調)”, http://finance.sina.com.cn/money/bank/bankshouxufei (accessed 24 March 2015)

and Davidson, J. (7 July 2014) “AmEx’s Battle With the Feds Could Mean Lower Costs for

Credit-Card Users”, Times.com, http://time.com/money/2962417/amexs-battle-with-the-feds-

visa-mastercard-credit-card (accessed 24 March 2015).

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EXHIBIT15: PROMOTIONS FOR UNIONPAY CARDHOLDERS

Discount for UnionPay Card Holders’s Tourist Transactios

Discount for UnionPay Card Holders at Chic Outlet Shopping Village

Discount for UnionPay Card Holders at Airport Duty Free Shops

Source: Chic Outlet Shopping (2015) “China UnionPay”,

http://www.chicoutletshopping.com/en/spotlight/competitions/china-union-pay (accessed 24

March 2015). Hang Seng Bank (2015) “Hang Seng CUP Credit Card”,

http://www.hangseng.com/cms/emkt/pmo/grp04/p86/eng/index.html (accessed 24 March 2015).

RCBC Bankard (2015) “Welcome UnionPay: UnionPay Global Fiesta”,

http://www.rcbcbankard.com/category/expired-promos (accessed 24 March 2015).