Long frustrated at being shut out of China's domestic credit card market, Visa Inc. may have found some leverage to help it gain access.
"Visa's blocking of [China UnionPay's] foreign channels is clearly designed as a warning aimed at prompting [UnionPay] into discussions about opening up access to the Chinese market," Michael Lafferty, chairman of the Lafferty financial industry research house, wrote in a research note.
Last week, Visa said it was reasserting what it claims is its right to process certain international payment transactions with credit cards that share its logo and that of China UnionPay Co., China's sole card network.
UnionPay has a monopoly on processing credit card transactions in China, but it has teamed up to co-brand cards with Visa and other major credit card companies so that its cards can be used in other countries where UnionPay's own network is still limited. So far this has proven to be the only way a foreign card company can get access to China's consumers — when they travel abroad.
The ploy could carry some risk, warned Lafferty, if it means that MasterCard Inc. and American Express Co. can further their cooperation with UnionPay at Visa's expense.
The move probably reflects the degree of frustration Visa has felt at watching UnionPay expand its international network and chip away at Visa's market share.
"This would not normally be cause for conflict," Lafferty wrote, "but since only [UnionPay] has access to China's lucrative domestic bank card sector, Visa has decided to flex its muscles on this issue."
According to Lafferty, Visa has warned banks that they will face fines of up to $50,000 if they use China UnionPay's clearance network.
So far, the amount of business at stake is marginal. Chinese tourists spent more than $42 billion while traveling overseas last year, the note said, a small portion of the $717 billion in overall point of sale bank card transactions processed by UnionPay. This in turn is dwarfed by the $2.7 trillion in point of sale transactions processed by Visa globally.
But UnionPay clearly has global ambitions, and the amounts Chinese travelers spend overseas are likely to balloon as a growing middle class stretches its wings.
Visa's salvo may not be enough to bring UnionPay to the negotiating table. One reason China has kept payment clearance the exclusive domain of state-backed companies is the need to control the value of the currency by keeping a tight check on fund flows in and out of the country.
"If significant amounts of billed volume on payment cards are settled through networks outside of government control, then its grip on exchange rate controls is loosened," said Lafferty.
Visa might be able to check UnionPay's overseas expansion, but gaining access to China's domestic market may come down to factors beyond its control.