hina UnionPay Co. Ltd., China's only national bankcard Association, serves a country of 1.3 billion people and has issued about 800 million active cards on its debit-only network. Any way you crunch it, that's a lot of swipe potential, and the Association is signing deals around the globe with major financial institutions and payment networks.

In May, Discover Financial Services (owner of the Discover Card Network and PULSE ATM/POS Network) and UnionPay inked a reciprocal deal. UnionPay will accept Discover cards at its 365,000 merchant locations and 80,000 ATMs throughout China, and the PULSE network will process UnionPay cards in the United States.

Ultimately, acceptance of UnionPay cards in North America will expand beyond the PULSE Network to Discover's Network of more than 4 million combined merchant and ATM locations. This December the very first UnionPay-branded card was accepted on the PULSE Network for payment in the United States at a New York Macy's department store. Executives from UnionPay and its sponsor, the government-run Peoples Bank of China, ceremoniously paid for a necktie with one of the cards.

"This strategic alliance ... expands the links between the growing Chinese consumer economy and the U.S. market," said David Nelms, Discover's Chairman and Chief Executive Officer. "It will create new opportunities for merchants, financial institutions and other ATM owners by enabling them to serve Chinese travelers."

According to the U.S. Office of Travel and Tourism Industries, the number of Chinese tourists visiting the United States increased 20% between 2003 and 2004, from 271,438 to 325,879. By 2008 the United States expects to welcome almost 500,000 Chinese tourists.

If UnionPay appears eager to offer its cardholders a worldwide footprint, electronic payment operations elsewhere around the globe are just as eager to bring those 800 million active cards onto their networks. In May, the European ATM network EUFISERV agreed to allow UnionPay cardholders access to participating EUFISERV members' ATMs. In December, U.S. processor TSYS purchased a 34% stake in China UnionPay Data Co., the processing arm of China UnionPay.

In September, an alliance with even greater global reach was made between UnionPay and Citibank. When finalized, UnionPay cardholders will have access to Citibank's international proprietary ATM network. Citibank cardholders, in turn, will be able to use UnionPay' foreign-enabled ATMs. Citibank will profit from fees generated by the ATM transactions.

New Rules Mean New Opportunities

The handling of Chinese citizens' money was something that a foreign bank almost was never able to do before, "The Wall Street Journal" reported. This will change, though, at the end of 2006 when China opens its banking market to foreign competition as a result of certain banking trade agreements with the World Trade Organization (WTO) taking effect. In order for China to take part in the WTO it must expand opportunities for foreign investment.

Although most major global banks currently have set up limited operations in China, they are not able to do much, said Mike Fisher, President of Los Angeles-based BanCard Consulting International. According to current Chinese policy, foreign bank branches only may accept deposits in their respective country's currency and may not offer consumer or commercial banking services such as mortgages, loans and card issuing. They almost exclusively serve commercial clients, usually foreign companies making deposits in their own currency, though some Chinese companies also make foreign currency deposits.

At the end of 2006 banks will be able take deposits in the Chinese yuan when their banking trade agreements with the WTO take effect. They will also be able to offer a full range of both commercial and consumer banking services. "Foreign banks won't be completely free, but much freer than they are now," Fisher said. Foreign banks issuing cards will most likely have partnerships with Chinese banks. "Over the past few years U.S., European and Asian banks have been making massive investments in Chinese banks," he said.

Domestic Chinese banks currently may issue Visa, MasterCard and other foreign card brands yet do so in a limited capacity. UnionPay only issues and processes its own cards but will route authorization requests for other cards

Any Opportunities for ISOs and MLSs?

The rapidly expanding Chinese market, which has garnered full attention from the international business community, raises the question of opportunities for ISOs and merchant level salespeople (MLSs). Unfortunately, Fisher said, there isn't much opportunity right now because everything is still in its infancy. He began traveling to China with the intention of setting up an ISO. Instead, he developed a consultancy for Chinese banks.

UnionPay does have a merchant services division, which Fisher said has two direct sales forces operating under unusual circumstances.

"The way it has evolved so far is that the two sales forces are more or less directly competing with each other even though they work for the same people." One sells directly to merchants and the other sells on behalf of banks.

Right now very few merchants take plastic. Fisher said about 5% of all merchants in the country take cards, though this number is higher in the cities; in Shanghai, for example, it's about 10%.

Also, the current situation is not conducive to the residual income model. "Acquirers don't make much from the interchange so there is not much left to share with an ISO," he said. He added that eventually there will be more opportunities for ISOs and MLSs, especially as more merchants start accepting cards.

China will host the 2008 Olympic Games in Beijing, and the government is positioning the country for increased foreign commerce. Included is a push for more Chinese merchants to accept cards as payment by offering incentives such as tax breaks.