On April 9, 2015, the State Council officially promulgated the Decision on the Bank Card Clearing Agencies Access Management (《关于实施银行卡清算机构准入管理的决定》) (the“Decision”), which will come into effect on June 1, 2015.
As a response to a WTO ruling that China must open its bank card clearing market, the long awaited Decision announces the opening of market to both domestic and foreign players. As a result, China UnionPay, the only domestic bank card clearing agency for decades, will usher competitors, including international card companies, banks, as well as domestic third party payment agencies, who will be able to operate RMB-denominated bank card clearing business in the People’s Republic of China (the “PRC” or “China”).
We summarize highlights of the Decision as follows:
The Decision defines the bank-card clearing business as “the activities of assisting in clearing the payment by bank-card clearing agencies through formulation of bank card clearing standard and rules, operation of the bank-card clearing systems, authorization of the issuance and acceptance of bank cards using its own brand and providing inter-institution transaction processing services in respect of the bank card under its own brand”.
Pursuant to this wide definition, not only the domestic clearing business which is carried out by Union-pay falls into scope of regulation, but the activities of international card companies in dual-logo cards business and cross-border clearing in foreign currency are also captured.
According to the Decision, this sector is subject to dual regulation of the People’s Bank of China (“PBOC”) and China Banking Regulatory Commission (“CBRC”). The Decision authorizes PBOC and CBRC to jointly formulate implementation rules relating to the conditions to license, licensing procedures, supervision rules, etc. In particular, although PBOC is the authority to issue the clearing license, PBOC has to consult with CBRC when deciding whether or not to grant a bank card clearing license or approve the material changes proposed to make by license holders.
However, it remains unclear how the respective roles of these two regulators are distinguished in regulating the bank card clearing market, in particular who will be responsible for overseeing the business operations of the clearing agencies. Like many questions unanswered by the Decision, this will need to be further defined in the forthcoming implementing rules.
Pursuant to the Decision, an eligible applicant for the clearing license needs to be a legal person incorporated within China under the Company Law, and satisfy the following key requirements:
- Its registered capital is not less than RMB 1 billion;
- Its main shareholders (individual shareholder holding more than 20% shareholding, or shareholders holding more than 25% shareholding in aggregate) are required to meet certain criteria, including, among others, (a) the total assets of main shareholder(s) in the previous year shall not be less than RMB 2 billion or their net assets in the previous year shall not be less than RMB 0.5 billion, (b) they shall have continuously conducted banking, payment or clearing business for more than 5 years prior to the application and have been continuously profitable for at least 3 consecutive years; and (c) there is no material violation records in the latest 3 years;
- it has a standard bank card clearing system which is in line with national standard and industry standard;
- it has qualified facilities and offsite disaster recovery system located within the PRC for purpose of independent operation of bank card clearing business;
- it has directors and senior managers who meet the qualification requirements set out by PBOC; and
- it has the internal control, risks management, information security assurance, anti-money laundry systems that are in compliance with the prudence requirements.
- The above qualifications are equally applicable to both foreign and domestic players. For foreign investors, the fourth condition is particularly critical as they usually have global infrastructure and facilities (such as data center) located in other countries supporting their existing clearing business. It will certainly be not only costly but also time-consuming for them to invest in and build such facilities within the PRC. For the Chinese regulators, this is a precondition for operating the clearing business as the card clearing is deemed as critical for the major public interest and safety. For example, it is required that all personal information of card holders will only be stored and processed within China.
- In addition, some of conditions, such as items (iv) and (vi), are quite “soft”, leaving the regulators large discretion in determining who will be the first to receive licenses. More detailed rules on each of the qualifications will need to be formulated by the regulators before the Decision becomes operative in practice.
License Application Procedures
The procedure for applying a bank card clearing license is rather complicated and very lengthy, and will normally take one and a half years. Similar to the establishment procedures for financial institutions, the process is divided into two phases, namely the preparation phase and opening phase. PBOC will be the regulator that accepts and reviews the applications and issue the license in consultation with CBRC. It is also worth noting that the successful applicant is required to start the business within 6 months upon its receipt of the license.
Below is a flow chart illustrating the whole procedure how a license is applied and granted:
It should be noted that the preparation period starting from the preliminary approval by PBOC is one year which is not a mandatory waiting period. If an applicant can finish preparation in less than one year, it may submit a license application after completing the preparation.
Business Management Rules
The Decision also spells out certain important guidelines for business activities of the bank card clearing agencies in terms of branding, confidentiality obligation, storage of personal financial information, etc. Specifically, a bank card clearing agency shall, among others,
- use its own bank-card clearing brand or the bank-card clearing brands held by its investor;
- not restrict the card issuing agencies and acquiring agencies from cooperating with other bank-card clearing agencies;
- ensure that the bank-card clearing facilities are safe, efficient and stable and the transaction data are complete and true, process the business with the domestic card issuing agencies and acquiring agencies through the bank-card clearing facilities located with the PRC; and
- keep the information obtained from the bank-card clearing business in confidence, and store, process and analyze personal financial information within the PRC if such information is collected within the PRC.
Impacts upon Existing Business
The Decision will also have significant impacts on the current operation of international card companies in China. It is common for international card companies to operate cross-border clearing business for foreign currency-denominated cards in cooperation with Chinese banks. Such business may be continued without incorporating a corporate entity in China nor obtaining a clearing license from PBOC; however, international card companies are required to report their business activities to PBOC and CBRC and comply with the business rules set by them.
If the international card companies, however, are already conducting any RMB clearing activities within China, they are required to file an application for the clearing license latest within one year after the effectiveness of the Decision.
PBOC and CBRC will exercise ongoing supervision over license holders. In case of any material change, such as establishment of branches, change of name, registered capital, brand or director/senior management, the license holder shall apply to PBOC for approval before effectuating the relevant changes.
The Decision itself is certainly encouraging by laying out general rules opening the Chinese bank card clearing market. Under the Decision, foreign players will be able to compete with domestic companies on an equal footing as long as they satisfy the market entry conditions. However, the market players need to be patient to wait for the implementation rules so as to commence the application procedure. How such rules will be translated into reality would also need to be tested in practice.
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