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China’s fast-growing bank card network China UnionPay is making its move this year into mobile payment–and may try to outflank China’s big mobile operators by pushing for microSD cards to carry its application rather than SIM cards or other secure elements in NFC phones.

UnionPay last week announced the first handset supporting its mobile payment standard, an NFC-enabled Android phone from Taiwan-based HTC. UnionPay has also embarked on an aggressive program to equip its point-of-sale terminals to handle contactless payment.

The HTC phone is reportedly due to be launched as early as next month in China. No mobile operator is apparently backing the launch.

Sources told NFC Times that the NFC-enabled HTC smartphone, known in China as the Stunning, is designed to put UnionPay’s contactless application onto microSD cards, which banking partners would issue. The SD cards and their implementation in the HTC phone comply with UnionPay’s mobile-payment standard.

SWP-Enabled microSD Cards?
Following that standard, HTC has implemented a hardware connection between the NFC chip and microSD card slot that resembles a standard single-wire protocol connection, or SWP, said sources with knowledge of the phone and the UnionPay specifications. Update: An HTC spokeswoman confirmed to NFC Times that the phone supports what UnionPay calls an “SWP-SD” secure element. End update.

Unlike contactless microSD cards on the market that come embedded with their own tiny antennas or which insert into contactless phone sleeves, the microSDs for the HTC phone in China are designed to work with the built-in NFC chip and antenna in full NFC phones.

The international single-wire protocol standard, adopted by the European Telecommunication Standards Institute, technically only applies to SIM cards. It describes the hardware connection between the SIMs and NFC chips in phones, enabling the SIMs to carry secure applications, such as payment.

At least one source believes the HTC phone also supports a true SWP connection to the SIM slot that could be enabled if needed to run payment applications on SIM cards in the phones. Others have their doubts the phones would support NFC-enabled SIMs.

UnionPay was not available for comment this week. But Chai Hongfeng, executive vice-president of UnionPay reportedly disclosed last week at a news conference announcing the planned mobile-payment project with HTC that the card network is planning to launch in about a dozen cities with local banks and would expand from there.

Reports say that China UnionPay, also known by its initials, CUP, has already equipped 300,000 or 400,000 POS terminals for contactless payment, including 70,000 in Shanghai, and has a goal of retrofitting up to 700,000 terminals by the end of the year.

“The strength for CUP is the contactless acquiring infrastructure,” one Chinese market observer told NFC Times. “Once handset vendors realized that the SWP-SD handset is useful to bank card users, they may be more willing to differentiate by following the CUP route than MNOs (mobile network operators), who do not have any application yet.”

UnionPay has grown more powerful in recent years, helped greatly by the monopoly it enjoys on domestic bank payment and ATM transactions.

Thanks to that, pretty much all Chinese bank cards have to be co-branded with the UnionPay logo, leading UK-based Retail Banking Research this month to conclude that UnionPay surpassed Visa in 2010 as the card network with the most cards carrying its brand in circulation. There were 2.33 billion UnionPay-branded cards on issue last year, compared with 2.29 billion cards sporting the Visa logo, according to the firm. Of course, use and spending on the Visa cards is much higher.

Chinese Telcos Expected to be Cold to New Phone
The HTC phone is not likely to draw cheers from Chinese mobile operators, which could see themselves getting cut out of many of the mobile-payment rollouts by banks if the microSD form factor takes hold in China.

“I don't think any operator in China will sell SD-based NFC phones at this moment,” one Chinese telecom-industry source told NFC Times.

But if UnionPay is attempting to go around Chinese mobile operators to roll out mobile payment, it is helped by the fact that most Chinese consumers do not buy their handsets through their operators and telcos provide few subsidies for the phones. That is unlike most countries in Europe and especially the United States.

“So it makes the microSD-card solution more feasible for the banks because they can subsidize the distribution of microSD-based NFC handsets independent of the operators,”  said Terry Xie, director of international advisory service for U.S.-based Mercator Advisory Group. “Yes CUP, and the banks, are certainly very reluctant to give the control of the NFC mobile-payment system to the mobile operators, so they will rely on operator-independent solutions such as the microSD-based as much as possible.”

The arrangement with UnionPay could suit HTC, a top-10 handset maker globally, which hopes to quadruple its market share in China this year. It hopes to do this mainly by expanding the number of consumer electronics shops not affiliated with telcos that sell its phones, according to Taiwan’s government news agency, quoting HTC’s chief financial officer at an investors’ conference Monday. HTC seeks to expand the number of distribution outlets in China to 2,000, from 650 now, according to the Central News Agency article, quoting CFO Winston Yung.

“China's telecom operators are less dominating and less willing to pay subsidies for smartphones compared with those in the United States,” Yung reportedly said. “We will increase the number of open channels this year, which is critical to our strategy in China.”

Dennis Chen, head of the Asia and China enterprise department at HTC reportedly said last week the handset maker had worked with UnionPay for six months before introducing the NFC phone. Chen added that UnionPay’s mobile-payment specification was open to other handset makers to follow.

UnionPay may also be working with Chinese handset maker TCL on an NFC-enabled phone model supporting SD cards, a source told NFC Times.

A representative from Shenzhen Netcom Electronics, which recently introduced a microSD card with its own embedded contactless antenna, told NFC Times the company was discussing with UnionPay the possibility of using these types of microSD cards in addition to or instead of the microSDs that hook into the antenna built-into the full NFC phones, such as the HTC Stunning. Other vendors that make microSDs with their own contactless antennas are DeviceFidelity and Tyfone, both based in the United States.

China Mobile–Seeking Embedded Chips?
If UnionPay rolls out mobile payment without mobile operators, it would turn the tables on giant telco China Mobile, which had been planning to bypass Chinese banks and UnionPay by rolling out its own payment scheme using its proprietary RF-SIM technology.

China Mobile abandoned the RF-SIM rollout plans last year, and has agreed to support standard contactless technology, operating at the 13.56 MHz frequency. But the telco has not abandoned its desire to play a strong role in the payment market. It bought a 20% stake in Shanghai Pudong Development Bank last year as part of its mobile-payment rollout plans.

And sources told NFC Times that China Mobile has been seriously considering ordering NFC phones with embedded secure chips, which could carry the payment application. But China Mobile is not yet ready to launch any NFC phones, the sources said.

Meanwhile, No. 2 operator China Unicom has backed NFC phones that support the single-wire protocol and SIM-based applications. But with few SWP-enabled phones available, Unicom has been experimenting with SIM cards connected to flexible antennas, a product called SIMpass and supplied by China-based Watchdata. No. 3 telco China Telecom is rolling out SIMpass.

The competing contactless-mobile technologies by China’s mobile operators and its domestic payment network could be a recipe for fragmentation in the budding mobile-payment market, which could prompt the Chinese government to step in, as it likely did to hasten the end of China Mobile’s RF-SIM plans.

Still, all of the technologies being planned or contemplated by China’s major mobile-commerce players are potentially interoperable because all use the underlying 13.56 MHz contactless frequency, unlike the RF-SIM. 

But with the first real NFC-enabled smartphone coming out and the reported hundreds of thousands of contactless terminals in place, China UnionPay appears to have the upper hand among Chinese m-commerce players, at least for now.