Apple Pay Stalled, Frustrated in China

U.S. Mobile Payment Service Faces Steep Competition led by UnionPay and Alibaba

The central bank, UnionPay bank card service, and e-commerce giant Alibaba Group Holding Ltd. are standing up to Apple Inc.'s effort to bring the Apple Pay no-card, no-cash payment system to iPhone users in China.

"Apple is seeking to cooperate with Chinese financial institutions," including banks for the use of Apple Pay, a People's Bank of China (PBOC) official said.

At the same time, the American company has not yet "acknowledged regulators" and as a result "it's unclear whether the product meets the government's requirements" for a commercial operation.

Apple is also struggling with its relationship with UnionPay, China's state-owned credit and debit card system operator. Sources close to the companies said that talks aimed at an agreement that would open China to Apple Pay have stalled.

The central bank official who asked not to be named said regulators have not intervened in negotiations between Apple and UnionPay, which began last year and were reportedly aimed at an agreement by March.

Apple Pay was launched for commercial use in the United States about a month after the September release of the iPhone 6 and iPhone 6S handsets. By swiping an iPhone at a checkout counter, an Apple Pay customer in America can complete a transaction quickly through a wireless link to his or her bank account or credit card.

Apple is reportedly working toward expanding this service globally. But it is unclear whether the Apple Pay feature will be allowed in China, one of Apple's biggest markets, anytime soon.

Apple Pay relies on near-field communication (NFC), a wireless system that transmits data from a special chip-equipped smartphone to a bank through a point-of-sale (POS) reader at a checkout counter. A UnionPay-linked NFC system has been around for about two years, letting consumers with Chinese bank accounts shop with smartphones equipped with China Mobile or China Unicom SIM cards.

Separately, some consumers are using smartphones to make payments through quick-response (QR) code systems linked to Alibaba Group's Alipay, Tencent Holdings Ltd.'s WePay, and other mobile application services.

Apple Pay has hit bumps in China despite Apple's efforts to make friends with Alibaba and UnionPay.

Industry observers had hoped for an agreement after Apple CEO Tim Cook and Alibaba Chairman Jack Ma in October separately said their companies were in cooperation talks. Speculation ran high that Apple Pay might find a way to access China by using Alipay instead of UnionPay to process iPhone owner transactions.

Alipay's app uses a fingerprint password that, underscoring their corporate friendship, was jointly developed by Alibaba and Apple, apparently with a view to building a cooperative payment system in the future, said an Alipay employee who requested anonymity. The companies "have stayed in contact and are preparing for several projects," the employee said.

But Alipay has yet to find a way to work around the UnionPay system, which is the sole channel for NFC transactions in China and sets rates for settlement fees paid by merchants. UnionPay's control of this system thus stands in the way of a potential Apple Pay-Alipay deal.

The rate charged by UnionPay to users of the NFC system "is a heavy price to pay for Alipay. We don't have an offline settlement system, and expensive POS equipment is unaffordable to us," said the Alipay source.

Chen Jianwei, director of the mobile finance department of Zhongyintong Payment Co., a UnionPay affiliate that provides payment services, said Alipay is doing no more than "supporting offline payments in some grocery stores and vending machines using QR codes."

Standards and Profits

UnionPay is holding its ground despite a November agreement whereby Apple started accepting consumer payments through UnionPay at its stores in China. UnionPay's NFC system is indeed "technologically compatible with Apple Pay," said one analyst.

To qualify for access to any NFC system in China, according to regulators with the central bank, Apple Pay must comply with a central bank rule that restricts electronic payment systems to those using chips that meet a technical standard called PBOC 3.0. A source familiar with Apple Pay said iPhone chips that drive the payment system do not fully comply with this standard.

Indeed, regulators who studied Apple Pay raised concerns about compliance with Chinese regulations and security standards.

The Chinese government has also told Apple that as a condition for Apple Pay the company must open a mainland data center to house all Chinese customer-related information tied to Apply Pay clients, said an official at the central bank. This rule is in step with the country's data security standards, which are designed to "prevent data leaks" and keep the Chinese payment system running smoothly if technical problems arise at a data center overseas.

Some industry watchers say Apple is also facing headwinds because UnionPay does not want to lose the power it has over financial transactions.

"Letting Apple Pay enter China will have a profound impact" on the payment market, said a financial sector source. "For UnionPay, cooperating with Apple means opening its settlement system. It would be hard to say who's in control.

"UnionPay definitely wants to keep a grip on the system."

Sources close to the talks between Apple and Chinese banks with which it's negotiating say these talks are revolving around how the American company might cooperate with UnionPay. The talks, which started late last year, involve at least eight banks including China Merchants Bank, Bank of China, China Construction Bank, and the Industrial and Commercial Bank of China.

The talks have also hit snags over profit-sharing issues, according to sources.

Apple Pay in the United States charges 0.15 percent of the 2 percent fee paid by merchants for each credit card payment, as well as a half-cent for each debit card payment, according to the company.

The National Development and Reform Commission, China's top economic planner, says merchants can be charged between 0.38 percent and 1.25 percent for each credit or debit card transaction. Currently, 70 percent of these fees go to the card issuer, 20 percent to the acquiring bank which processes the card payment, and 10 percent to UnionPay.

"Apple Pay's 0.15 percent fee charge is too high for China," said a bank source who asked not to be named.

China Merchants Bank, whose clientele is said to generally include more young adults than other banks, appears more willing than other institutions to cooperate with Apple, the person said.

Banks that are bigger than Merchants "have mature POS markets and they don't have to relinquish such a large share of their profits just for a payment service that's in vogue," said a source at one of China's biggest state banks. "It won't give a big bank any significant advantage. How many customers would come get a bank card just for Apple Pay? I wouldn't expect many."

Alipay charges merchants 0.7 percent to 1.2 percent per each transaction, while WeChat Wallet charges 0.6 percent. Smaller players charge less.

These payment services "don't follow the fee standards set by banks, so their pricing varies a lot," said an employee of a large bank who works in the electronic banking department. "But in general it's quite low."