Apple comes up against roadblocks, regulatory concerns in bringing Apple Pay to Chinese marketplace

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Date: Wednesday, February 18th, 2015, 05:46
Category: Finance, Legal, News, Software

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Apple may have a few roadblocks before it can get Apple Pay into the Chinese marketplace.

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

At the same time, Apple 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 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.

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 Chief Executive Tim Cook and Alibaba Chairman Jack Ma said separately in October 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.

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 China 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.

So, as always, there are definitely some obstacles to overcome.

Stay tuned for additional details as they become available.

Via Marketwatch

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