FINANCE: UnionPay Answers Alibaba, Tencent in Mobile — Finally

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Bottom line: UnionPay’s launch of a new mobile payments service is a long-overdue answer to challenges by Alibaba and Tencent, and is somewhat late but also vital to maintaining its eroding position in China’s electronic payments market.

UnionPay rolls out mobile wallet card

After coming under growing assault over the last 2 years from the private sector, state-run behemoth UnionPay is finally fighting back by launching a mobile-based payment service to counter rival products from Internet giants Alibaba (NYSE: BABA) and Tencent (HKEx: 700). There’s no mention of either of China’s top 2 Internet companies in an announcement of the new service from UnionPay, even though Alibaba’s Alipay Wallet and Tencent’s WeChat Pay are clearly present in the subtext.

UnionPay is just the latest big state-run company to feel the heat of private sector competition, which is shaking up China’s entire financial sector that was previously dominated by big state-run companies. But UnionPay’s case is even more extreme, since the company operated a state-granted monopoly financial transactions settlement network for the first decade of its existence, similar to global systems run by credit card giants MasterCard (NYSE: MA) and Visa (NYSE: V).

By comparison, at least the big state-run banks had to compete with each other for business. UnionPay not only had no competitors in its home market due to prohibitions by Beijing on foreign competition, but also had the huge advantage of counting most of China’s major banks as its stakeholders.

Now it seems that UnionPay is finally putting some of its many state-granted advantages to work with the domestic launch of its new mobile payment service called QuickPass. (English article; Chinese article) UnionPay made the launch this week in partnership with an impressive array of partners, including more than 20 commercial banks and such major retailers as McDonald’s (NYSE: MCD), Carrefour (Paris: CA) and FamilyMart.

Announcement of the launch doesn’t name any particular competitors. But most Chinese consumers will immediately know the big names lurking in the background of this new launch are Alipay Wallet and WeChat Pay, the mobile-based payment services operated by Alibaba-affiliated Ant Financial and Tencent, respectively.

Alipay and Alipay Wallet have been particularly aggressive lately. Many of the shops and restaurants I visit have been offering recent promotions in connection with the service, which allows users to “swipe” a virtual credit card connected to their account using a QR code generated on their mobile phone. Tencent has also been quite aggressive, and both companies are reportedly planning big “red envelope” promotions around their services for the upcoming Lunar New Year.

Smart, But Late

Against that backdrop, this move by UnionPay looks smart but also a bit late. The company was formed in 2002 to provide a national network that could link up China’s thousands of banks with a system similar to the Plus and Cirrus networks operated by Visa and MasterCard, respectively. The company has embarked on an aggressive global expansion over the last 5 years, using its highly profitable monopoly at home to subsidize that move.

But things began to change with the rise first of Alipay, and more recently Tencent’s own electronic payment products. Like many of China’s banks and other state-run companies coming under threats from private companies, UnionPay initially responded by complaining to Beijing in hopes of having its new rivals shut down. But Beijing has signaled it has no intention of intervening, as it realizes such private competitors are far better innovators than slower-moving state-run companies like UnionPay.

As a result, the big state-run companies are now being forced to do the once unthinkable, and actually try to create products that people want rather than simply following global trends a few years behind the rest of the world. In this case I do need to slightly commend UnionPay for trying to be more commercial and respond to the growing competition it’s feeling from Alibaba and Tencent.

I also have to commend it for finally using its vast web of connections in the retailing and banking sectors, which will also help it to create a competitive product. On top of all that, UnionPay also has much more experience with electronic security, which should also work to its advantage.

Of course it’s also somewhat ironic that with all those advantages, and also its dominant position in the world’s biggest mobile and Internet markets, UnionPay is only taking this move after far newer companies have begun to develop the mobile payments space. But this is really only the first major challenge that UnionPay will have to face. A much bigger challenge will lie ahead, with the expected arrival to China of big foreign names like Visa, MasterCard and PayPal in the next 2 years.

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