Here's why ending co-brands will hurt foreign card networks in China (V, MA, AXP)

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Chinese banks will reportedly stop issuing co-branded cards between foreign card networks, like Visa and MasterCard, and the state-affiliated UnionPay, according to reports from the Financial Times.

The news comes following a People’s Bank of China notice to stop renewing these cards when they expire. Such a move could deal a major blow to foreign card networks because these co-brand partnerships were one of the easiest ways for them to access the massive Chinese card payment ecosystem. 

The move could have a material impact on foreign companies. For context, when a customer receives a co-branded card, UnionPay generally processes domestic payments in China, while the foreign network processes dollar-based payments abroad.

• It’s possible that they could lose customers. In the past 14 years, Chinese banks have issued 240 million co-branded cards, according to the Financial Times. Once existing cards expire, customers will reportedly be issued two cards — one UnionPay, for domestic use, and one foreign-branded, for international purposes. That could allow for the retention of some customers, but it’s extremely likely these firms' user bases will decline.
• The bigger impact could be on transaction volume. Chinese tourists in the US are expected to spend $40 billion in 2017, a figure that’s growing. It’s likely that the foreign card networks have captured a good portion of that share through these co-brands. But UnionPay has been drastically expanding its reach abroad, which could make it easier for customers to continue using their UnionPay cards abroad, ultimately rendering the foreign-issued card somewhat obsolete. 

The move could limit the potential of foreign card networks as they prepare to move into the Chinese market. It’ll likely be a year or longer until foreign networks launch in China as a result of stringent guidelines issued as China opens up its card payment ecosystem. Ending the co-brand program means that, until then, foreign firms’ exposure and visibility in the Chinese payments card market will likely be limited. That could hurt their competitive positioning ahead of their launch in the market, and make it more challenging for them to attract a broad user base and capture a share of the over $8 trillion Chinese card payment market. At the same time, the move could help UnionPay maintain its edge in mainland China while growing abroad.

The U.S. payments ecosystem is in the midst of a shift toward mobile, and countless new and old stakeholders are attempting to accelerate this migration, which is moving at a glacial pace relative to other markets globally. But mobile payments can rise to the mainstream. For companies seeking to build out a robust mobile payments product, China's thriving mobile payments ecosystem offers some insight — and some lessons.  

Total mobile payments volume in China will reach $6.3 trillion by 2020, according to our estimates based on iResearch data. This marks a healthy 33% five-year compound annual growth rate (CAGR). In comparison, the U.S. will generate $154 billion in mobile payments volume this year by our estimates, which amounts to just 6.5% of China's mobile payments volume. 

Even accounting for population discrepancies, China will generate over $1,700 in mobile payments volume per capita in 2016, compared with $475 in the U.S., based on forecasts from BI Intelligence and eMarketer. China's advantage will eventually diminish, but it will still produce around twice as much volume per capita in 2020. 

China has unique factors buoying the industry, like the dominance of mobile phones, a lack of legacy infrastructure, and the surging popularity of digital retail marketplaces. Some of the characteristics behind the country's success can be mimicked, or even replicated to some extent, in other markets like the U.S. However, one fundamental barrier in the U.S. is that it's being forced to layer mobile payments on top of an existing payments system, and the ecosystem is very fragmented.

BI Intelligence, Business Insider's premium research service, has compiled a detailed report on mobile payments in China that takes a deep dive into China's mobile payments ecosystem and deciphers which growth drivers can be exported to the U.S. to help spark its relatively lackluster market. 

Here are some of the key takeaways:

• China claims the world's largest mobile payments market and serves as the global benchmark for other markets to pursue. China will process a whopping $6.3 trillion in total mobile payments by 2020, according to our estimates based on iResearch data. This marks a healthy 33% five-year compound annual growth rate (CAGR).
• It dwarfs the U.S.' mobile payments industry. The US will generate $154 billion in mobile payments volume this year by our estimates, which equates to just 6.5% of China's mobile payments volume. Meanwhile, China will generate over $1,700 in mobile payments volume per capita in 2016, compared with $475 in the U.S., based on forecasts from BI Intelligence and eMarketer.
• Mobile commerce, a lack of legacy infrastructure, and marketplaces have fueled China's enormous success. Consumers in China are much more comfortable shopping on their mobile phones compared with their counterparts in the U.S., and the devices face less resistance from other legacy payments methods like credit cards. The open approach to mobile shopping has been fortified by Alibaba, a Goliath-sized marketplace, and WeChat, a go-to messaging platform, which support Alipay and Tenpay, respectively. 

In full, the report:

• Forecasts and compares mobile payments volume, in-store mobile payments users, mobile payments volume per capita, and mobile commerce penetration in China and the U.S. 
• Overviews the key competitors in China's mobile payments market, and how new entrants may shuffle the hierarchy of dominant players.
• Uncovers the key drivers propelling China's mobile payments market.
• Identifies which drivers the U.S. can import from China, and which barriers may be standing in the way.

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