UnionPay’s European expansion threatens Chinese rivals, not the West

China UnionPay is assembling the relationships it needs to directly issue cards in Europe, but local saturation suggests UnionPay’s best bet is to use European merchant relationships to counter its own domestic rivals in China rather than disrupting Visa and Mastercard.

UnionPay has reached a deal with Tribe Payments, a U.K. startup that has the certification to allow banks to issue UnionPay cards. The partnership in theory allows UnionPay to approach local banks to issue credit and debit cards as a competitive play against Visa and Mastercard, though that’s unlikely to have a huge near-term impact. There’s not much incentive for local issuers and European consumers to switch card relationships.

“Visa and Mastercard certainly dominate the European market, though there are pockets of card issuance on local schemes throughout Europe,” said Gareth Lodge, a senior analyst at Celent. “But given that the fees are capped by regulation, there will need to be a compelling proposition for a bank to switch any brand, let alone to a new one.”

Qilai Shen/Bloomberg

UnionPay, Visa and Mastercard did not return requests for comment by deadline. Tribe Payments confirmed the deal via an email.

UnionPay has almost a full monopoly in China, where it has issued about 6 billion cards. European merchant acceptance isn’t a problem for UnionPay, which has partnerships with more than 2,000 financial institutions and is accepted in 174 countries. UnionPay recently signed an agreement with Worldline that gives it access to about 40,000 merchants in northwest Europe, and last year it also began issuing virtual business travel cards for Europeans traveling in Asia.

By partnering with merchant acquirers, UnionPay will build upon that acceptance market both online and offline with significant Chinese business and tourist traffic, said Eric Grover, a principal at Intrepid Ventures. “Merchants believe that by accepting China UnionPay, they’ll generate more sales,” Grover said.

But on the issuer side of the network, UnionPay’s value proposition outside of China is weak, said Grover, adding issuers aren’t going to win cardholders and generate more spend and balances offering China UnionPay credit or debit cards to European cardholders. “Mastercard and Visa enjoy ubiquitous acceptance,” Grover said.

UnionPay recently installed point of sale terminals in Harrods department store, which Finextra reports led to a surge in business. But that business came primarily from Chinese students and tourists looking to make purchases in their own currency.

That use case — serving China-based travelers or students when outside China with digital or mobile payments — is likely the largest competitive move for UnionPay in Europe, at least for the short-term.

Chinese payment apps WeChat Pay and Alipay are making major inroads in Europe, the U.S. and other markets by partnering with local merchants to serve Chinese travelers, expanding their brands and offering European merchants an added revenue flow amid the U.S.-China trade war.

WeChat and Alipay are pressuring pressuring UnionPay to find new avenues to expand. Those two digital wallet brands control about 90% of China’s mobile payments market, spurring UnionPay’s geographic expansion to make sure it can support the needs of Chinese consumers abroad so it doesn't lose relationships at home.

But finding a local combination of issuers, merchants and consumers will be tough. While Discover has a relationship to support UnionPay at Discover merchants, Discover’s footprint in Europe is smaller than Visa and Mastercard’s, noted Tim Sloane, vice president of innovation at Mercator Advisory Group. "As a result, it's unlikely that UnionPay will be broadly adopted in Europe given the small acceptance footprint," Sloane said.

At the same time, Visa and Mastercard face long odds in China, meaning the U.S. brands and UnionPay don't have a large overlap for domestic bank card issuance. In China, Visa and Mastercard face government regulations that often shift, mostly in terms of the investment in a local processing or data management presence in the country. But beyond those regulations, Visa and Mastercard still face challenges in building a card market in China because of UnionPay's dominance of that market.

In Europe, UnionPay's regulatory hurdles would not be as strict as Visa and Mastercard's challenges with the Chinese government, but that brand recognition gap remains.

"Credit cards are primarily chosen for affiliation with the bank or account or based on rewards," Sloane said. "It isn't clear how UnionPay will position itself relative to rewards."