Domestic Payments in China

U.S. companies expanding into China or companies who already have payment operations in China know that the payments landscape is familiar, yet quite different. China operates a four-party payment system (i.e. customer, merchant, acquirer and issuer) like the U.S., but for our purposes, there is only one network…China UnionPay (CUP). CUP has more cards issued than Visa, MasterCard, Discover and American Express combined, globally. According to Nilson, CUP has 8.4 billion credit and debit cards under its brand as of 2019. And if you exclude private label cards, CUP makes up 54% of the globally issued network branded cards.

Payment Cards Projected Worldwide

Source: Nilson Report

This market share translates to 30% global purchasing power based on network cards. Clearly, if you operate in China, you want to accept CUP cards. Luckily, accepting cards in China is very easy and inexpensive. In September 2016, the Chinese National Development Reform Commission (NDRC) implemented interchange regulations on credit and debit cards for domestic merchants. All CUP credit transactions have an interchange fee of 0.45% and CUP debit transactions have an interchange fee of 0.35% plus a 0.0325% network fee*. Acquirers in China offer a single blended discount rate based on the mix of credit and debit cards. So by U.S. standards, accepting CUP cards is really cheap. Remember, these are domestically acquired transactions. In other words, these rates apply when a merchant is domiciled in China and accepts CUP cards from customers in the Chinese Yuan.

Source: Nilson Report

The Chinese payments landscape becomes fascinating and prescient for the rest of the world given the exponential rise in mobile payments. Alipay from Ant Financial and WeChat Pay from Tencent make up about 87% of the mobile payments in China and today account for 57% of all non-cash retail payments and 79% of all online payments. The main difference between Alipay and WeChat Pay is that Alipay is a mobile payment system and financial platform, whereas, WeChat Pay is an in-app feature of the social media app, WeChat. Nowhere on the planet is the use of mobile payments so ubiquitous and the value of these payments so large than these two wallets…exceeding $6.5 trillion in 2019.

AliPay App Home Screen                        WeChat App Home Screen

So, if you have a retail and/or online presence in China, you definitely want to accept Alipay and WeChat Pay. These mobile wallets connect directly to a consumer’s bank account and withdraw funds from a checking or savings account, similar to Venmo in the U.S. These mobile wallets are not subject to the NDRC interchange regulations and therefore, they tend to set their own discount rates. These rates tend to be competitive with CUP discount rates. There is some published rate information for AliPay and WeChat Pay and we find there is opportunity to negotiate further for larger organizations based on our experience with some of the largest retail and ecom merchants in China.

Keep an eye out for a second article next Monday that looks at Chinese cross-border payments…Chinese customers using CUP, Alipay and WeChat Pay in foreign markets.

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*There are some nuances with interchange rates for digital content and debit card interchange based on ticket size.

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