UnionPay Taps Discover Network for Its First Prepaid Card in U.S.

China's state-backed UnionPay payment network seeks a larger presence in the U.S., starting April 29 with a new prepaid card that banks in Asian-American communities will market to consumers who travel to China and other foreign countries, according to news reports.

Discover and UnionPay established a strategic alliance in 2005, with the first UnionPay U.S. merchant transaction routing through Discover's Pulse PIN debit network in December of that year, according to information provided by Discover.

As part of the networks' relationship, UnionPay cardholders who travel to the U.S. can use their credit and debit cards at merchants that accept Discover cards, as well as the Pulse ATMs. In addition, Discover cardholders can use their cards at merchants and ATMs that accept UnionPay in China.

UnionPay will take advantage of its current relationship with Discover Financial Services to route transactions made in the U.S. with the new Bancorp Bank-issued prepaid card — UnionPay's first prepaid card in the U.S. — over Discover's network, reports indicate.

UnionPay is not quoted in any reports and did not respond to PaymentsSource inquiries about the new prepaid card. Discover responded only in saying UnionPay requested that Discover not share any information about its prepaid card at this time.

The UnionPay prepaid card arrangement again illustrates that Discover presents its network as one that introduces other brands, says Gil Luria, analyst with Los Angeles-based Wedbush Securities. "It relates, in a way, to what Discover is doing with PayPal," Luria adds.

Discover is the only U.S. payments network that had satisfied government rules in China requiring foreign payment networks to partner with UnionPay for branded-card issuing in the U.S. and China.

However, the World Trade Organization in July 2012 ruled that China's requirements for card issuing put U.S. card networks at a disadvantage for cross-border transaction business. Until then, that rule had kept Visa, MasterCard and American Express from processing domestic transactions in China.

A month later, Citigroup Inc. became the first western bank to issue credit cards in China without co-branding from a local institution. Under that arrangement, Citi issued cards denominated in yuan or dollars for worldwide acceptance. UnionPay processed payments within China, while MasterCard and Visa handled cards internationally.

Two years prior to the WTO's ruling, MasterCard was seeking to better its relationship with UnionPay by allowing it Internet access to the process payments through the MasterCard network.

Earlier this year, American Express established licensing of its Serve digital wallet in China.

"This is a good deal for Discover, especially since it had previously established a relationship with China UnionPay," says Brian Riley, senior research director and analyst with Needham, Mass.-based CEB TowerGroup.
Discover has been more open than other networks to partners using its rails to route transactions, mainly to stay competitive, Riley says.
“They have to open their network to others because it's like fighting for survival against MasterCard and Visa," he adds.

UnionPay's introduction of a prepaid card in the U.S. market indicates that the global payments market will become more open, Luria says.

While Discover can make an impact with the UnionPay prepaid card, MasterCard "would say it was the first to have a card in China," Luria says.

Visa has been unable to gain the same type of traction that Discover and MasterCard enjoy with UnionPay, Luria adds.

"Over time, China will grow as a payments market and it will be quite substantial," Luria says. "You don't need significant market share to be successful."

China will probably overtake the U.S. as the largest market for cards by 2020, with between 800 million and 900 million cards, according to a MasterCard forecast from September 2010.