China UnionPay faces increased competition and branding crisis

China UnionPay not only faces increased competition from global giants Visa and MasterCard but also from public criticism about market monopoly, Nanfang Daily reported.   China UnionPay emphasized its anti-monopoly principle and claimed its position as a national force against global giants.   Although China UnionPay has shown reasonably good performance in issuing debit cards since its establishment four years ago, the company is highly marginalized in the credit card sector, said an expert with the company.   China has issued 50 000 000 credit cards, of which more than 95 percent are issued by Visa or MasterCard and not even 5 percent by China UnionPay.   One of the factors contributing to the situation is the lack of effective sales and marketing. “Visa and MasterCard offer regular incentives and training programs for their customers both on national and international levels. China UnionPay, to the contrary, offers nothing of the sort,” said a manager with the China Construction Bank.   Since Visa and MasterCard offer strong capital support to the banks, China UnionPay needs to raise income then capital input and investment in the market. However, even though China UnionPay’s revenue jumped from 2 million yuan in 2002 to 10 million in 2005, it is still a long way from the capital strength of Visa and MasterCard. According to the 2005 Annual Reports of Visa and MasterCard, their annual incomes from the Chinese market are US$29 million and US$26.41 million respectively, with a net income of US$3.6 and US$2.67 million.   China UnionPay said that the double-currency credit cards issued by Visa and MasterCard create an imbalanced business environment. Currently, 95 percent of double-currency credit cards are used inside the country via China UnionPay’s network. The branding and other administration fees are charged by the two international corporations.   To enhance competitiveness, China UnionPay has tried to build up its own Point of Sales (POS) network not only to increase income by charging administration fees but also to extend control over POS terminals.   “Issuing credit cards and establishing POS networks are very costly to most Mainland corporations. Therefore, the banks want to cooperate with those who can sponsor the heavy cost of the start-up stage including training, establishment of network and POS terminals. This is what China UnionPay can’t do but Visa and MasterCard are doing,” said an analyst with China Merchants' Bank.   Another hurdle China UnionPay encounters is the company’s bureaucratic structure which has failed to operate efficiently enough to combat the competition triggered by Visa and MasterCard. The most obvious example is the recent public criticism towards the company’s new pricing policy, which charges customers administration fees when they do inter-bank transaction enquiries with their ATM cards. The company has also failed to launch crisis management with effective public relations activities.   “Judging from the development of national banking services, the central bank has executed the right policies towards China UnionPay’s expansion and pricing policy. However, China UnionPay has to establish a cost-effective system to strengthen ties with banks as well as with the public,” said Yang Qing, an Associate Professor with the Institute of Financial Research of Fudan University.