renzhi

Someone who is not yet familiar with the Chinese banking industry recently asked me what is the role of China UnionPay, as he sees the logo on credit cards, debit cards, ATMs, etc. After explaining to him, I realised it might a good idea to put it here, in case someone might find it useful.

China UnionPay logo

China UnionPay, commonly known as CUP in the financial industry in China, is a financial institution established in the mid-1990s to provide inter-banks transactions and POS transactions services. The banking systems in China were not connected to each other (they still are not). Smaller regional commercial banks had (they still do today) very limited capabilities in terms of IT systems. Inter-bank transactions were slow, services were very limited. In order to promote more value-added services, credit card transactions and POS transactions, some eighty banking corporations and credit unions had joined forces to create China UnionPay to solve the issues. The Chinese name of the financial institution is “yin lian”, which literally means a “banking federation”. China UnionPay would build and operate a transaction network that connects with all member banks, and would be responsible for all inter-banks transactions and POS transactions.

Officially, China UnionPay was founded by its members, which include almost all banking corporations and credit unions. In reality, the project was pushed by the central government, and CUP is more like a government agency than an enterprise, although it is considered a corporation.

CUP has the monopoly on all inter-bank transactions and POS transactions, even for transactions in which the card BIN does not belong to CUP. And this is a monopoly granted by government regulations. Therefore, any card with a CUP logo, commonly known as China UnionPay card, can perform transactions on any ATM, POS device, or payment kiosk that has the same CUP logo.

CUP makes money by deducting a fee on each transaction. The deduction rate is set by CUP, with some interference from the government, mainly the People’s Bank of China (PBOC). It also manages and regulates all merchant accounts, and as a consequence, regulates the types of business transactions that are allowed or not. In the financial industry, CUP is known as a player of the market as well as a referee. As a matter of fact, CUP’s specifications are sometimes released as regulation documents.

This market is not open to competition. Other companies have tried to break in, but were not allowed to build similar network.

In the last two years, CUP has expanded its network to other countries, and China UnionPay cards can now be used in over 30 countries. However, outside of China, its use is not widespread yet.