China opens up its bank card payment clearing market

June 2015 China opens up its bank card payment clearing market The Decision to Implement Market Access Administration for Bank Card Clearing Institutions (the Decision ) of the State Council, which came into effect on 1 June 2015, is in part a response to a 2012 World Trade Organisation ( WTO ) ruling 1 requiring China to open up its market for electronic payment services for payment card transactions to the electronic payment system suppliers of WTO member states. The Decision enables both Chinese and foreign-invested institutions to apply for bank card payment clearing licences, putting an end to China Union Pay ( CUP ) s decade-long position as the sole clearing agency for RMB-denominated bank card payments. While the Decision aims to improve China s bank card payment clearing services through market competition by introducing new participants to challenge CUP s dominance, new investors will, in reality, continue to face significant challenges in seeking to enter China s electronic payments market even after (as we illustrate below) the Decision comes into effect. Contents Overview of the regime... 1 Qualifications... 2 Business requirements... 3 Issues to consider... 4 Foreign investors and minority investors... 4 National security review... 5 Looking ahead... 5 Reference... 6 Overview of the regime The Decision opens up the market for bank card clearing services to both foreign- and domestically-invested companies incorporated in the PRC. Bank card clearing services is defined as the provision of inter-institutional transaction processing and payment settlement services to card issuers and merchant acquirers by: setting clearing standards and rules; operating clearing systems; and issuing cards under the service provider s logo. To conduct bank card clearing services in the PRC, an institution must obtain a bank card clearing licence ( Licence ) from the People s Bank of China ( PBOC ) (in consultation with the China Banking Regulatory Commission ( CBRC )). The Decision imposes stringent criteria for the obtaining of a Licence, due to the significant volumes of electronic payment transactions and the number of associated card issuers and merchant acquiring institutions which rely on them. 1 WTO Dispute DS413, China Certain Measures Affecting Electronic Payment Services. China opens up its bank card payment clearing market 1

It should be noted that overseas institutions providing bank card payment clearing services in the PRC solely for cross-border foreign currency transactions are, in principle, not required by the Decision to establish or invest in a PRC-incorporated entity or obtain a Licence. These institutions must, however, still report their clearing business to the PBOC and the CBRC, and comply with the applicable requirements (no details of these requirements are set out in the Decision). A Licence application has two phases the preparatory application and the opening application. The application process and timeframes will be as follows: the applicant submits a preparatory application to the PBOC; the PBOC, in consultation with the CBRC, approves or rejects the preparatory application within 90 days from acceptance of the application; the applicant has one year from the date of preparatory application approval to finish the preparatory work and cannot engage in bank card payment clearing business before the work is finished; once the preparatory work is complete and the applicant meets the eligibility criteria (see Qualifications section below), the applicant can submit an opening application to the PBOC for the Licence; the PBOC, in consultation with the CBRC, approves or rejects the opening application within 90 days; and if approved, the applicant has six months from the date of approval to commence business. While the maximum time the process may take is relatively long at two years, it may be possible to expedite the process at certain junctures thereby providing the possibility for approval to be obtained in a shorter timeframe, though the comprehensive infrastructure requirements may limit any scope for shortening the approval timetable. In addition, where a banking financial institution seeks to establish, or invest in, an institution which has (or will have) a Licence, approval from the CBRC will also be required. It is expected that the PBOC/CBRC will jointly formulate implementation rules relating to the Licence conditions, application procedures and supervisory measures. Qualifications An applicant for the Licence must be a PRC-incorporated entity which satisfies the following requirements: registered capital no less than RMB1 billion; qualified shareholders the applicant s main shareholder (if only one) holds at least a 20 per cent. shareholding, or the applicant s China opens up its bank card payment clearing market 2

main shareholders (if more than one) hold a 25 per cent. shareholding in aggregate. A main shareholder must meet certain unique qualifications, including minimum total assets of RMB2 billion or minimum net assets of RMB500 million, having engaged in banking, payment or clearing services for at least five consecutive years, and having been profitable for at least three consecutive years. Correspondingly, each shareholder with a greater than 10 per cent. shareholding must have minimum net assets of RMB200 million, be continuously profitable and be in good credit standing; PRC-compliant bank card payment clearing system the applicant s clearing system is in line with both national and sectorspecific standards; qualified infrastructure and remote back-up system these must be located in the PRC, meet the applicable regulatory requirements and be capable of independently performing bank card payment clearing; directors and senior management suitably qualified approval to be obtained from the PBOC, in consultation with the CBRC, of the qualifications of directors and senior management of the applicant; and internal management system the applicant has in place compliant internal control, risk prevention, information assurance, anti-money laundering and other prudential measures. Business requirements The Decision sets out certain core business requirements for institutions that hold Licences, including: to use their own branding or that of their shareholders; not to restrict issuers and acquirers co-operating with other institutions; to ensure that their infrastructure is safe, efficient and stable, and transaction data is complete and accurate; to keep confidential any information they obtain in the course of their business, except as otherwise stipulated in laws and regulations; and to use onshore infrastructure to process and settle transactions with domestic issuers and acquirers, and (except as otherwise authorised by the parties concerned for the purposes of cross-border transactions) ensure that any personal financial information collected within the PRC is stored, processed and analysed onshore. China opens up its bank card payment clearing market 3

Issues to consider The above requirements must be met by both domestic- and foreign-invested entities. Taken as a whole, they present significant challenges to potential investors. Some of the more important ones are summarised below. All financial institutions seeking to invest in an entity holding a Licence should note that: if the investor is a bank, there is an additional requirement to obtain approval from the CBRC (note that no specific procedures have, as yet, been published as to how the CBRC approval can be obtained); the entity must have a bank card payment clearing system that complies with PRC regulatory requirements (note that there is no lead time for a newly-established entity to put this system in place); and the entity must comply with the technical standard, PBOC3.0, for all new smart chip bank cards issued since 1 April 2015 in accordance with separate rules issued by the PBOC 2. In addition, foreign financial institutions need to consider the additional implications on their operations, both inside and outside the PRC, of: the need to have an onshore transaction processing infrastructure; the need to maintain an onshore disaster recovery provision, including the remote back-up of data; and the three-year profitability requirement which applies to shareholders with a 20 per cent. or greater shareholding (and there must be at least one such shareholder). Foreign investors and minority investors Foreign investors seeking to participate in the domestic payment clearing market in accordance with the Decision could either establish a foreigninvested company or acquire an existing domestic clearing institution with a Licence. The Decision shows an intent to introduce a broad range of investors in the PRC s bank card payments business. Investors holding a 10 per cent. or lower shareholding in an entity with a Licence are subject to less stringent qualification requirements (see above) and are exempt from the Decision s general requirement for PBOC approval of transfers of equity in an entity which holds a Licence. However, it remains unclear how a private equity vehicle or financial investor could satisfy the minimum assets and profitability requirements. 2 Notice to Further Handle the Application of Financial IC Cards ( 关 于 进 一 步 做 好 金 融 IC 卡 应 用 工 作 的 通 知 ), 3 November 2014. China opens up its bank card payment clearing market 4

National security review Investment in or acquisition of an existing domestic bank card payment clearing institution by a foreign investor is, under the Decision, made expressly subject to a national security review. This introduces additional uncertainty to the approval process for foreign investments, as the rules on how the national security regime will be applied to the acquisition of domestic financial institutions (including entities with Licences, which are regulated by the PBOC) have yet to be issued. Greenfield investment: In view of the expansion of the national security review regime in China s free trade zones to include greenfield investment 3, it is unclear if the national security review requirement under the Decision will also be expanded to include greenfield investments in entities with Licences, as well as investments in existing entities. Given CUP s monopoly position in the domestic card payment market, there is a distinct possibility that a foreign investment in this sector would be greenfield, so the issue of a clarification from the PBOC/CBRC that the national security review regime does not apply to such investments would be desirable. Looking ahead In the past, while foreign bank card clearing institutions have been able to participate in the PRC s payment clearing market for cross-border transactions involving foreign currency cards, their only access to the domestic clearing market has been through alliances with CUP in respect of RMB-denominated transactions. The Decision thus presents significant new opportunities for foreign bank card clearing institutions and foreign investors to gain a share of the domestic market in the PRC. While the Decision is a step in the right direction in aiming to improve the quality of service delivery and introduce reputable players in the PRC s bank card payments market, the detailed implementation rules and positions of the PBOC/CBRC will need to be provided in a timely manner if the Decision is to have a lasting impact on the market. 3 Tentative Measures for the National Security Review of Foreign Investment in Free Trade Zones ( 自 由 贸 易 试 验 区 外 商 投 资 国 家 安 全 审 查 试 行 办 法 ), 8 April 2015. China opens up its bank card payment clearing market 5

Reference Decision to Implement Market Access Administration for Bank Card Clearing Institutions ( 国 务 院 关 于 实 施 银 行 卡 清 算 机 构 准 入 管 理 的 决 定 ) (the Decision ), State Council, effective 1 June 2015. Contacts For further information please contact: Jian Fang Partner (+86) 21 2891 1858 jian.fang@linklaters.com Betty Yap Partner (+852) 2842 4896 betty.yap@linklaters.com Annabella Fu van Bijnen Partner (+86) 10 6535 0660 annabella.fu@linklaters.com Eric Liu Counsel (+86) 21 2891 1841 eric.liu@linklaters.com Grace Yu Managing Associate Authors: Bryan Chan, Karim Issa This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters. All Rights reserved 2015 Linklaters Hong Kong is a law firm affiliated with Linklaters LLP, a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com. Please refer to www.linklaters.com/regulation for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by emailing us at marketing.database@linklaters.com. (+86) 21 2891 1819 grace.yu@linklaters.com Linklaters LLP Shanghai Office 29th Floor Mirae Asset Tower 166 Lu Jia Zui Ring Road Shanghai 200120 China Telephone +86 21 2891 1888 Facsimile +86 21 2891 1818 Linklaters LLP Beijing Office 25th Floor China World Office 1 No. 1 Jian Guo Men Wai Avenue Beijing 100004 China Telephone +86 10 6505 8590 Facsimile +86 10 6505 8582 China opens up its bank card payment clearing market Linklaters.com 6 A19857436/0.9/26 Jun 2015