Visa has told banks they must stop using the payment system of Chinese state-backed China UnionPay to process international transactions for co-branded Visa and UnionPay credit cards.
The move comes as credit card companies are becoming increasingly frustrated in China, where transactions must be conducted through the monopoly UnionPay, which is aggressively expanding beyond China’s borders.
Visa has written to banks to remind them of operating regulations that require financial institutions to process international transactions outside China through Visa’s system.
If banks did not comply with Visa’s request, the card company said it would start to charge penalties from August 1.
Visa’s move to block UnionPay outside China comes after US trade officials held talks in late March with Visa, American Express and MasterCard over the possibility of taking action against China for shutting them out of its growing payment processing market.
China does not allow foreign groups to issue their own credit cards, build networks to support such cards or process interbank point-of-sale transactions. Companies such as Visa are required to “co-brand” with Chinese partners to provide any of these services.
China’s banks generally charge fewer and lower fees than international competitors, and Un-ionPay has been offering cardholders better exchange rates on certain currencies than Visa and its peers normally charge.
Although Visa said its actions were not aimed at limiting UnionPay’s international expansion, the China group responded with a scathing statement.
“Both companies have a responsibility and obligation to provide overseas transaction services to co-branded card holders,” UnionPay said. “Neither side has the right to unilaterally restrict cardholders’ options for overseas payment channels.”
Some US lawyers, trade officials and finance executives say China is violating commitments it made on joining the World Trade Organisation in 2001 to open the market to foreign companies for “all payment and money transmission services, including credit, charge and debit cards” by the end of 2006.
UnionPay was established by China’s central bank in 2002 and is owned by more than 80 Chinese state-controlled banks.
While US card groups complain they are blocked from doing business in China, UnionPay-branded cards can be used in more than 90 countries and regions and the company is strongly promoting its cards abroad.
China issued around 50m credit cards in 2008, according to McKinsey. It forecasts that by 2013 the number of credit cards in China will surpass 300m.