The announcement that China Unionpay is now developing an Android based payment app could put China’s largest bankcard association in the driver’s seat as the Chinese mobile payments industry takes off. China Unionpay is expecting to release “Android Pay” by the third quarter of 2015. The focus here will be on NFC capability and fingerprint identification for payment authentication. Coolpad and Lenovo have confirmed the news and have stated that they are both highly interested in cooperating with China Unionpay and willing to support this mobile payments platform.
SE or HCE?
Beyond the name resemblance, it seems like Android Pay and Apple Pay are identical in their functionality as well. However, unlike Apple Pay, Android Pay will cooperate with Chinese security module manufacturers and will adhere to Chinese security and encryption standards.As cloud-based virtual security elements (Host Card Emulation or HCE for short) are currently banned in China, we believe that Android Pay devices will most likely carry a physical secure element (SE); at least in the short-term. The real question to ask though is who will have ownership of the SE? This can have a profound impact on the current state of the mobile payment industry.
As of now, China's mobile network operators (MNOs) own most of the SE’s through SE-enabled SIM cards. Although they are in accordance with China Unionpay network standards, the incentives for Unionpay controlling the SE are obvious. Not only would they receive a much larger chunk of the pie for each transaction, but would also collect valuable data on customer purchasing behavior to offer customized loyalty programs and better conduct credit risk analyses; information which could then be sold to banks. In a growing credit market, centralizing credit ratings on customers could be a solution to an increasingly risky credit market if individual banks can’t do it appropriately. The financial benefits of controlling the SE are big, especially in an environment where Unionpay may slowly lose its monopoly power status in the credit card network, especially if Visa, Discover, Mastercard, etc. enter the Chinese market in 2015 as predicted.
Expansion of NFC & mobile payments
As a vital developer of NFC in China, Unionpay is also interested in expanding the NFC ecosystem through its own TSM. Third party payment providers, such as Alipay, are adamantly escaping China Unionpay’s oversight and developing their own clearing networks, which Unionpay increasingly perceives to be a threat. Alipay has, in fact, already approached smartphone manufacturers such as OPPO to collaborate on NFC payment solutions for mass transit, but has had little success so far. If they can develop a successful competitor to the existing mobile wallet solutions, China Unionpay can further push third party payment providers out of the mobile/NFC payment picture and scale it up on their own terms. Alipay may even have to eventually give in and adhere to China Unionpay’s standards if it wants its mobile wallet to be NFC functional and be on the Unionpay TSM; something that China Unionpay would welcome with great pleasure.
In addition, China Unionpay has a mobile payment solution, namely the CUP mobile wallet, which is hugely unsuccessful due to stiff competition from third party payment providers. Yet, investing in a mobile payment software that seemingly integrates with the rest of the Android software could be, with the right marketing, much more successful and could put them back in the mobile payments game, even more so if all Android devices exclusively use Android Pay to make NFC payments; something that is technically feasible if China Unionpay controls the SE.
The fact that China Unionpay is interested in launching an Android based Chinese payment app shows that it is serious about NFC and believes that it will play an important role in the mobile payments value chain in the future. Third party payment providers currently dominate the mobile payments space and if China Unionpay wants to further strengthen the NFC ecosystem it must also have an elegant mobile payment solution. Whether or not China Unionpay will be successful with Android Pay remains to be seen.