Open bank card clearing market raises competition, benefits consumers

China will open bank card clearing to foreign companies to improve competition and reduce costs to card issuers and users.

The State Council announced on Wednesday that foreign companies which meet certain criteria will be allowed to set up clearing networks in China.

"The move is aimed at wider opening of China's financial market and boosting innovation in bank card market and payments market," the cabinet said in a statement.

The liberalization could be a great opportunity for global big names, including Visa and MasterCard.

According to a report by the Payment and Clearing Association of China (PCAC), 47.6 billion bank card transactions were made in China in 2013 with a total value of 423 trillion yuan (68.8 trillion U.S. dollars).

Clearing companies connect banks, shops and card users together and settle transactions by turning the promise of payment into actual transfer of money from one bank to another. Their profits come mainly by charging commission.

China's clearing market is dominated by China UnionPay, a state company founded in 2002.

A total of 3.8 billion UnionPay cards have been issued by member banks globally and foreign card companies have to piggyback on UnionPay's network when accepting yuan payments in China.

China promised to reform its payments clearing market in 2012 after the United States filed a complaint to the World Trade Organization accusing China of discriminating against foreign firms.

The upcoming foreign penetration is expected to further raise competition in the business as "third party payment" companies, Alibaba's Alipay in particular, boasting convenient and free online payment are already eating into the user base of traditional card transactions.

How China's clearing market will be influenced by an inflow of foreign companies remains to be seen as there are no specific measures in place, but commission and other fees are expected to fall in a more competitive environment.

Commission rates in department stores, supermarkets and restaurants now range from about 0.38 percent to 1.25 percent.

"I believe opening up the clearing market will largely improve services, lower costs and benefit the real economy and consumers," said Guo Tianyong, a banking researcher with the Central University of Finance and Economics.

With more companies, rules should be updated to regulate the business, according to Yang Tao, head of the Payment and Clearing Research Center under the Chinese Academy of Social Sciences.

"Policymakers should strike a balance between innovation and risk control," said Yang.