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China’s big domestic payment network, China UnionPay, is moving forward with plans to roll out mobile payment on microSD cards in full NFC phones–lining up one of China’s biggest banks and models from at least six handset makers for the initial rollout.

Xu Yanjun, general manager of the company’s technical management department, speaking at a recent mobile-payment conference in Beijing, said China Construction Bank and a smaller regional bank already have as many as 100,000 users.

It’s not clear how many microSDs the banks have issued, or how much customers use them, but NFC Times has learned Construction Bank has ordered at least 120,000 cards and may have a tender request out for 500,000.

Xu also said UnionPay had qualified handsets from six phone makers, mostly Chinese brands, but including Taiwan-based HTC. And it said it has approved up to eight suppliers of microSD cards, including China-based Wuhan Tianyu Information Industry and Taiwan’s Go-Trust, the latter working with Chinese smart card supplier Eastcompeace.

UnionPay announced the first phone for the initiative last August, an NFC-enabled Android handset that UnionPay commissioned from HTC.

The phone sports a special single-wire protocol connection between the NFC chip and microSD card slot. The specially designed microSD cards, which come with two extra PINs or a total of 10, could then plug into the NFC antenna built into the phones. The single-wire protocol, or SWP, is a standard hardware connection that now only runs between the NFC chip and SIM card.

Two other handsets, a feature phone from TCL and an Android model from K-Touch, both from China, also support the so-called SWP-SD cards. Both are on the market. It wasn’t clear yet the names of the other phone makers.

Bypassing Mobile Operators
While the project–only initiated last spring–remains small, if UnionPay can make it work, the planned rollout has implications for NFC mobile payment projects elsewhere.

UnionPay is using its own specifications for the microSDs, but the phones themselves support the NFC standard. And smart card and NFC standards body GlobalPlatform is working on an international standard for SWP-SD cards, which could be similar to the standard for SIM cards that support the SWP connection.

Mobile operators four years ago pushed through the SWP standard for SIMs in the European Telecommunications Standards Institute, or ETSI–a body in which they hold sway. The telcos have hoped to use the standard to make SIM cards the de facto secure element in NFC phones.

Using SWP-SD cards, banks could technically bypass mobile operators in rolling out mobile payment. But telcos could refuse to sell phones that support an SWP-SD standard if they control the distribution channels.

In China, however, more than 80% of mobile phones are sold outside of the operator distribution points, so UnionPay and Chinese banks could sidestep giant China Mobile and the country’s two other mobile operators, China Unicom and China Telecom.

While UnionPay has said it would work with Chinese telcos for the rollout of mobile payment in China and would put its contactless payment application onto NFC-enabled SIM cards issued by telcos, in addition to microSD cards, the two sides are not cooperating, sources in China told NFC Times.

“China Mobile is definitely not working with CUP (China UnionPay) on SWP-SD projects,” said one industry source.

China Mobile recently lent its name to an announcement by mobile operator trade group the GSM Association that proclaimed that telcos worldwide support SIM-based NFC rollouts.

But China Mobile has also been exploring the idea of buying and controlling embedded secure chips in NFC phones, NFC Times has reported. This was after abandoning its proprietary RF-SIM technology last year.

China Unicom has firmly supported the SWP for SIM cards, and also agreed to be featured in the GSMA announcement last month in Hong Kong promoting SIM-based NFC. China Telecom has used an NFC bridge technology, SIMpass, from Chinese vendor Watchdata, which links a flexible antenna to the operator’s SIMs.

UnionPay appears to have big plans for contactless payment. It has been busy adding a contactless interface to a substantial share of the estimated 3 million POS terminals that accept UnionPay cards in China. The network appears likely to hit its goal of 700,000 contactless terminals by the end of the year, say observers. The terminals also accept contactless-payment cards.

UnionPay Monopoly
The terminals support a Chinese standard for payment applications developed by the People’s Bank of China and UnionPay. The contactless version of this PBOC 2.0 payment standard, which is similar to EMV, would run on the terminals, as well as on the SWP-SDs, SWP-SIMs and conventional contactless-payment cards.

The Chinese standard would ensure that Chinese vendors or foreign vendors with Chinese partners will be the main suppliers of equipment for any microSD rollout on NFC phones in China.

There is little chance that Visa payWave, MasterCard PayPass or a contactless payment application from any other international card scheme would run on NFC-enabled microSDs issued by a Chinese bank for purchases in China, since UnionPay has a monopoly on domestic 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 in the fall 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. Spending on the Visa cards is much higher, however.

International Interest
But payWave and PayPass could run on SWP-SD cards issued elsewhere, and there is interest developing among Western banks, according to William Holmes, head of international business development for SWP-SD card vendor Go-Trust. The vendor was showing its SWP-SD cards at last month’s Cartes & IDentification expo in Paris.

“A number of European banks are certainly very interested, and we’re in the process of working with Visa and MasterCard to get the solution certified by them,” he said. “When we are able to do that, the interest in U.S. and Canadian banks will rise dramatically.”

Of course, a lot has to happen before the card networks will certify SWP-SD cards and handsets, especially since there are few available yet in the West. Representatives of NFC technology companies, including trusted service managers, say they do not hear of significant demand yet from banks or other service providers for SWP-SD cards in the West.

Handset makers would have to manufacture the phones with a single-wire protocol connection to the microSD card slot. NFC phones that support a single-wire protocol connection only to the SIM card slot would not support SWP-SD cards.

In addition, in such countries as the United States, mobile operators control nearly all of the phone distribution channels and would be unlikely to sell an NFC phone that enables banks to bypass them to launch mobile payment. If they did sell the phones, the telcos would likely disable the NFC connection to the microSD slot.

There are microSD cards on the market with their own tiny embedded antennas that can be inserted into some conventional smart phones to give the handsets a contactless interface. Visa has certified these cards for some smartphones. But the contactless microSDs have yet to be rolled out and most require additional adaptors to extend the range of the embedded contactless antenna.

Chinese Rollout Still in Prep
Meanwhile, the rollout has yet to really begin in China for the SWP-SD cards. UnionPay’s Xu said Construction Bank has tested the card in Beijing, Shanghai and nearly a dozen other areas, and there has also been a sizable pilot by Chongqing Rural Commercial Bank in Southwest China.

The HTC phone, however, is expensive and this and other SWP-SD phones would likely require subsidies from UnionPay or the banks, at least to get rolling.

Still, some Chinese banks are ordering cards, including the giant Construction Bank.

The SWP-SD cards are the latest effort by a major Chinese mobile-commerce player to try to capture a potentially massive market in mobile payment by rolling out its own technology.

China Mobile’s attempt to jump into the payment market with its proprietary RF-SIM technology failed, but UnionPay believes it can surmount the challenges because of its control of merchant acceptance points and use of standard NFC phones–albeit with still proprietary microSD cards.

Just how many SWP-SD NFC models handset makers agree to produce and at what cost to UnionPay–and to Chinese consumers–remains to be seen.