Apple publicized their Apple Pay Deal with China's UnionPay back in November after having worked on the deal much earlier. The initial deal was Apple adding UnionPay as an App Store payment option for customers in China. Moving the deal forward however has a few snags to it that Apple is working on presently. According to China news source Caixin, there are a number of key areas that have to be worked out between Apple and UnionPay.

Apple Pay Must Meet the PBOC 3.0 Standard

Firstly, 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.

Apple must open a Mainland Data Center

Secondly, The Chinese government has also told Apple that as a condition for Apple Pay the company must open a mainland 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.

Profit-Sharing Still a Point of Contention

According to sources, "The talks have also hit snags over profit-sharing issues. Apple Pay in the United States charges 0.15 percent of the 2 percent fee paid by merchants for each credit card payment, as well as a half-cent for each debit card payment, according to the company.

The National Development and Reform Commission, China's top economic planner, says merchants can be charged between 0.38 percent and 1.25 percent for each credit or debit card transaction. Currently, 70 percent of these fees go to the card issuer, 20 percent to the acquiring bank which processes the card payment, and 10 percent to UnionPay.

"Apple Pay's 0.15 percent fee charge is too high for China," said a bank source who asked not to be named.

Sources close to the talks between Apple and Chinese banks with which it's negotiating say these talks are revolving around how Apple might cooperate with UnionPay. The talks, which started late last year, involve at least eight banks including China Merchants Bank, Bank of China, China Construction Bank, and the Industrial and Commercial Bank of China.

The three key areas noted above appear to be points that are being negotiated at present. Yet a financial sector source who wouldn't go on record is quoted as saying that it's more than just technological.

The source contends that "Letting Apple Pay enter China will have a profound impact" on the payment market. The source further noted that "For UnionPay, cooperating with Apple means opening its settlement system. It would be hard to say who's in control. He further noted that "UnionPay definitely wants to keep a grip on the system."

In the end Apple will work out what is required to advance Apple Pay in China. Apple's CEO Tim Cook told the China News Agency back in October that Apple Pay is a top Priority. So no matter how the jockeying appears in the news, Apple is determined to ensure that Apple Pay becomes a widely used contactless payment system in China and will work out the kinks in the system over time.

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