Policy change in China helps potential Alipay, Apple Pay hook up by Scott Cendrowski @FortuneMagazine October 31, 2014, 7:13 AM EST E-mail Tweet Facebook Google Plus Linkedin Share icons The idea of an Alipay and Apple Pay partnership in China —suggested by Jack Ma this week—didn’t make a lot of sense when he said it. Alipay is China’s most popular online payment system used for online purchases including Taobao orders, paying utility bills, movie tickets, and other shopping sites. It is not like Visa, Mastercard, or China’s own UnionPay, which have a network of tens of thousands of merchants and swipe stations. Walk around Beijing or Shanghai and you’ll see plenty of signs for UnionPay, the state-owned processor that enjoys a monopoly within China, and barely any for Alipay. Apple’s new Apple Pay, meanwhile, is a mostly physical experience. You forgo the hassle of swiping a credit card at the cash register for the ease of touching the iPhone’s home button at two hundred thousand locations that have signed on with Apple. Yes, it has an online component that makes online shopping easier, but its allure is the physical component, just as Alipay’s allure is online. So when Ma brought up a partnership, it wasn’t clear what Alipay could offer Apple in China: it doesn’t have payment installations across the country and even where it did—in some stores it previously setup QR codes at cash registers that customers scanned with Alipay—UnionPay told Alipay to route them through UnionPay’s network. But Jack Ma doesn’t choose his words lightly. What he says carry weight even if it is difficult to understand. Just two days after he spoke on a stage with Tim Cook in the audience, China’s government announced a massive change to the payments system that supported Ma’s idea of a partnership. Late Wednesday, China’s State Council, the Communist Party’s 35-member policy board led by Premier Li Keqiang, announced China would open its payment system to foreign companies like Visa, Mastercard, and American Express, which it had long discriminated against. It might have well have added Alipay, which has also been disadvantaged. China has blocked foreigners for more than a decade from issuing their own cards and forced them to use UnionPay’s network, handing over a cut of the fees. During that time, UnionPay grew into a full-blown monopoly. Alipay has similarly faced off against UnionPay. Last August, Alipay abruptly said it shut down its offline point-of-sales service—the limited physical locations it had—for “obvious reasons” after UnionPay said Alipay’s transactions must be integrated into its network. It was a bold power grab, but one with state support. “Alipay decided to quit offline payments altogether because it does not want to subject itself to UnionPay’s control,” China’s business magazine Caixin quoted a source saying at the time. Jack Ma stopped short of submitting to UnionPay’s rules when it came to online payments, however, because the stakes were too big. Alipay handled almost half the $900 billion online payments in China last year, according to iResearch. Jack Ma is known for staying a step or two ahead of the government without creating feuds. The way he sidestepped UnionPay’s monopoly in the mid-2000s by setting up Alipay’s online system with 200 banks is one example. Teaming up with Apple Pay looks like another. A partnership made little sense until China’s government announced it was opening up payments for everyone, which reduces UnionPay’s influence on the market and on Alipay. It remains to be seen how the rules will be implemented, but overnight UnionPay’s has less sway over Alipay. Ma’s suggestion of an Apple Pay partnership, knowing a policy change would help it advance, looks prescient. An Alibaba spokeswoman declined comment. Even though China’s government is intent on allowing foreigner card companies, and by extension Alipay, into the market, it will be years before any build scale to compete with UnionPay, which has tens of thousands of agreements with stores, restaurants, and shops. Forrester vice president Bryan Wang in Beijing sees a potential Alipay agreement as a hedge. “The high-end iPhone 6 user wants to buy something at a department store, and they say, ‘Sorry we don’t accept Alipay—that’s probably not the experience Apple want to bring customers,” he says. The first conversations Apple had about coming to China happened with UnionPay. But the negotiations have been slow to form. For now, Apple Pay is deactivated on iPhones sold in China. Caixin has reported that negotiations are still advancing. It may be that the potential tie up between Jack Ma and Apple has little to do with China. “What Alibaba may be trying to do is…gain entry into the huge U.S. offline retail market and in return integrate Apple Pay into Alibaba’s online footprint from app stores to online retail stores in China,” says Neil Shah, who tracks the China mobile market for Counterpoint Research. Apple doesn’t need Alipay and Alipay doesn’t need Apple. But at least now it’s clearer how they would work together.