UnionPay imposes $16.3b penalties on smaller market players

China UnionPay has imposed 100 million yuan ($16.26 billion) in penalties on smaller market players over the past four months for their offline point-of-sales (POS) tampering that may have led to hundreds of millions of yuan of losses for card issuers, the National Business Daily (NBD) reported on Wednesday.

The third-party payment service providers were fined because they meddled with the merchant category code (MCC), which is a four-digit number the credit card industry uses to classify a merchant's business.

To fight for greater market share, these third-party payment service providers helped businesses pay lesser fees set for categories they did not belong to, the NBD reported.

Merchants have to pay a fee in accordance with their business category when a customer uses a POS machine to make a payment. The code is assigned to them by credit card issuers when they first accept the card as a form of payment.

The banks that issue the cards get 70 percent of the fee, the agencies including banks and third-party payment service providers who offer the POS machines get 20 percent, and China UnionPay gets the rest.

China UnionPay found the violations based on their monitoring system and customer complaints, and total losses for bank card issuers were estimated to be much larger than the penalties, -according to the NBD's report.

As China UnionPay serves as a regulator in the card payment network, it is obliged to punish unfair competition market practices and prevent financial risks, Wang Weidong, an analyst at iResearch Consulting Group, told the Global Times on Wednesday.

It also did so for its own benefit as it is also the dominant interbank clearing and settlement provider for card payment, he noted.

UnionPay, the country's inter-bank clearing service provider, did not immediately reply to the e-mail request from the Global Times seeking comments.

A distributor of cnepay.com, a Tianjin-based third-party payment service provider, told the Global Times on Wednesday that it can accommodate a restaurant's request to install a POS machine with a MCC for a supermarket.

A restaurant has to pay 0.78 percent of every card payment made on the POS machine, said the distributor surnamed Xie, while a supermarket pays less than half of the fee at 0.38 percent.

Such fraudulent practices could lead to misinformation about card consumption, shrinking commissions for card issuers mainly the commercial banks, and even lead to illicit cash withdrawals via bank cards, Wang said.

"Small payment service providers did so in order to grab the market share from the dominant market players," he said.

Established in 2002, China UnionPay is the national bank card association in China invested in by State-owned banks including the Big Four.

Before 2011, all POS machines were operated by China UnionPay. But the central bank began issuing payment licenses to smaller third-party providers in May 2011, which quickly rose in usage fueled by online transactions to whittle away market share from UnionPay.

Alipay, China's largest third-party service provider and a unit of e-commerce giant Alibaba Group, shut down its offline POS service in August 2013 to turn its focus to online transactions.

With over 300 million e-commerce users in the nation, third-party payment service providers like Alipay have a great advantage and can avoid going through UnionPay and share the commission earnings with partner banks directly, which inevitably shakes the latter's monopoly status, a Shenzhen-based banker told the Global Times on condition of anonymity as he is not authorized to speak to media.