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UnionPay-Toting China Shoppers Challenge Visa in 135 Nations

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Among the designer brands from Prada to Chanel at the Harrods flagship store in London, Chinese housewife Li Yafang spotted a logo she knows from back home: the red, blue and green of UnionPay cards.

“It’s very convenient that I can now use my UnionPay card” to shop abroad instead of carrying a stack of cash, said the 39-year-old, who was buying the same 1,190-pound ($1,920) Prada Saffiano Lux handbag carried by the hit woman in the “Mission: Impossible -- Ghost Protocol” movie. “I hope more places abroad will accept UnionPay.”

Her wish is becoming reality as UnionPay, founded 10 years ago in Shanghai by the State Council and central bank, extends its reach. With more plastic in circulation than any other payment network — 2.9 billion cards, or 45 percent of the world’s total last year — UnionPay is now accepted in 135 countries. Its rise is causing friction as the firm grabs market share from Visa Inc. as well as MasterCard Inc., which UnionPay surpassed in customer spending in the first half of the year.

“UnionPay has absolute dominance in China, and it’s now expanding beyond that to become a top global player,” James Friedman, a New York-based analyst at Susquehanna International Group LLP who covers payments firms including Visa, said in a telephone interview. “Their numbers show they are already in the league of Visa and MasterCard.”

WTO Challenge

A case brought by the U.S. government to the World Trade Organization and ruled on in July challenged China’s requirement that foreign card issuers — including Citigroup Inc., which in August became the first Western bank in China to issue solely branded credit cards — must use UnionPay’s network for yuan- denominated transactions.

The rules, along with those requiring all Chinese automated teller machines and merchants to use its network, prompted the WTO to order that China stop discriminating against foreign payment companies.

The decision didn’t spell out specific measures, and the WTO also ruled against the U.S. claim that UnionPay is an “across-the-board monopoly.”

“It’s difficult to say which side won after reading the WTO ruling as you basically can’t tell what’s actually going to happen,” Susquehanna’s Friedman said.

A 2005 linkup with Discover Financial Services gave UnionPay access to a network that now reaches about the same number of U.S. merchants as Visa and MasterCard. On Nov. 30, the firm set up UnionPay International Co. to expand further. More than 10 million UnionPay cards have been issued by 65 lenders in 17 countries outside China, according to the company’s website.

Chinese Shoppers

Chinese shoppers have overtaken Americans this year as the world’s biggest buyers of luxury goods, accounting for 25 percent of global sales through purchases at home and overseas, according to a report released today by consultancy firm Bain & Co. Some 60 percent of such purchases by Chinese shoppers happened outside the mainland, the report found.

Debit-card transactions drive most of UnionPay’s revenue. Its share of combined credit- and debit-card purchase volume for the first half of 2012 rose to 23.8 percent from 20.9 percent a year earlier, propelling UnionPay to No. 2 globally behind Visa, while MasterCard’s climbed to 21.7 percent from 21.5 percent, according to the Nilson Report, an industry newsletter. Visa’s fell to 46 percent from 48.9 percent.

The share of spending volume at American Express Co., which UnionPay supplanted in 2010 as the third-biggest network by transactions processed, slid to 7.2 percent from 7.5 percent.

UnionPay cards issued by banks rose 22 percent in 2011 from a year earlier to 2.9 billion, according to the Carpinteria, California-based newsletter. Visa cards rose 4 percent to 2.3 billion, Nilson said.

‘Compete Vigorously’

Visa’s relationship with its Chinese competitor is similar to that of other firms, Jeff Liao, head of Visa China, said in an e-mailed statement. The Foster City, Calif.-based company has provided technology to help China’s payments industry and worked with UnionPay and the government on industry training programs, he said.

“We compete vigorously, but we also cooperate as appropriate on common industry issues,” Liao said.

James Issokson, a MasterCard spokesman, declined to comment. UnionPay doesn’t publish financial statements and interviews with its executives couldn’t be arranged, said Wang Kongping, a company spokesman.

“If you look forward, the world has a new player that wants to be involved,” Diane Offereins, head of payment services at Riverwoods, Illinois-based Discover, said in an interview in Beijing in August. “We do see them making good progress in building that international network.”

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