China has grown by almost 8% in 2012 and the IMF expects it to maintain the same rate in the years to come. Sara Perria investigates on the impact that this booming economy is having on the development of the credit card industry
The growth of the credit card industry in China reflects the development of the country’s economy. The first credit card was introduced in 1985, but it was not until the establishment of domestic retail payment switching network China Union Pay in 2002 that the country experienced a significant growth.
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Indeed, China’s 1.3bn population is traditionally very attached to cash. Even so, the retail transactions are shifting to more non-cash payment methods. These include bankcards, cheques, bank drafts and electronic payments.
In 2011, a total of 33.8bn payment transactions equalling CNY1,104tn Yuan ($175.5tn) were handled through non-cash payment instruments, with a 22% year-on-year growth.
A report by consultancy firm Kapronasia, China’s Credit Card Industry – What’s next, focuses on the change of attitude towards credit among Chinese consumers, highlighting the future direction of this trend and the great potential of the credit cards industry.
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By GlobalDataAt the end of 2011 the number of credit cards in China reached 285m, an increase of 24% from the previous year. Total circulation is expected to exceed 500m by the end of 2016, fostered by China’s continued focus on domestic consumption.
Kapronasia research analyst Ken Ding explains: "There has been a significant change in attitudes towards credit. Ten years ago, China was very cash-based. When credit cards emerged, customers felt ‘uncomfortable’ when using cards as the idea of paying off debt bothered them a lot."
Even banks focused on issuing as many credit cards as possible, without setting up any credit evaluation.
"Customers could apply for a credit card just by filling out an application form with false personal information which then led to a high delinquency rate. Today, as cards are more and more popular in China, cardholders pay more attention to their credit records, and banks also focus more on issuance quality rather than quantity," Ding says.
The consultant tells Cards International that three main factors summarise the reasons behind credit cards’ growth:
– Strong domestic consumption underpinned by the country’s economy and stability;
– A significant change in China’s customers’ consumption habits, with credit cards now the primary payment tool for most of China’s households, and
– The fact that in the long term, issuing credit cards is more lucrative for banks compared to other retail products. As a result, banks are investing heavily in promoting increased and wider usage of cards.
Credit Card Issuing
In 2011, 285m credit cards were issued in China. However, the growth rate of credit cards has been decreasing gradually, as commercial banks focus on issuance quality rather than quantity.
The challenge of the extremely low number of ‘active’ credit cards still remains. According to Kapronasia, only about 20% of issued cards are active. However, this number increased by 16% to 152m in 2011, representing 53% of total circulation, and growth is set to continue.
Ding says: "Although the circulation of credit cards has increased considerably during recent years, the rate of inactive credit cards is much higher in China, compared with western countries. The key challenge for larger banks now is not necessarily issuing cards, but making money from existing cards, many of which are inactive."
Ding also identifies two other specific features of the Chinese credit market. "On average, although Chinese consumers make less money, they spend more money per transaction and carry a larger balance than their western counterparts."
Secondly, the Chinese market does not emerge as particularly innovative.
"Most issuers still cannot earn profit from China’s credit card market so they need to encourage cardholders to use credit cards more frequently by offering attractive services and benefit programs."
Indeed, the key challenge for larger banks is not issuing cards, but making money from existing cards. A challenge in a nation of chronic savers – households save about 25% of discretionary incomes, about six times the US savings rate and three times the rate of Japan.
Credit card acceptance in China
A sign of the growing importance of this industry is the way the acceptance network is expanding, helping to increase circulation of cards. The network now covers not only developed regions and large cities in China, but also underdeveloped areas in central and western China, middle and small-sized cities and rural areas.
At the end of 2011, the number of domestic merchants joining the network increased by 46%, to 3.1m; the total number of POS accepting credit cards rose by 44% to 4.8m; there are 334,000 ATM machines in China, Kapronasia reports.
International acceptance network expansion by China Union Pay has also improved significantly, providing opportunities for credit card issuers in China to expand their services abroad. At the end of 2011, CUP credit cards were accepted by 1.5m merchants, 1.6m POS terminals, and 917,000 ATMs in 124 countries.
Transactions
Transaction volume shows a steadily upward trend, reaching 2.9bn at the end of 2011. The total credit card transaction value rose by 49% to $1.2tn. Transaction value per credit card increased markedly to $4,242 dollars per card.
The total retail spending in China indicates the domestic consumption, and the share of domestic spend on credit card in the total retail spending has increased rapidly. At the end of 2011, the total consumption value of credit card grew to $651bn, representing 22.6% of total retail spending in China. This means that in China one fifth of total spending was completed by credit card, the Kapronasia report highlights.
Credit cards are preferred for large-value transactions, a trend promoted by banks themselves for purchases such as cars, tours, and computers.
Currently the value per transaction is quite high, but as the market is relatively immature, this is still expected to increase over the next few years, peaking in 2014-2015.
According to the consultants, longer term, smaller-value transactions will gain popularity, driven by improved acceptance, promotions by banks and merchants and rising consumer confidence.
For this reason, Kapronasia expects the Chinese credit card market to expand at a double-digit growth in the next five years, driven by growing wealth and urbanisation.
By the end of 2016, total cards in circulation will exceed 500m.
At the same time, domestic spend on credit cards will continue to grow strongly, buoyed up by higher consumer demand. The total transaction value will grow from $1.2trn to about $3.7trn with 25% of compound average growth rate from 2011 to 2016.
Credit cards, Kapronasia predicts, will become the fastest growing segment within the personal finance universe and, increasingly, become an important source of revenue for banks.
The big players: market share
Industrial and Commercial Bank of China (ICBC), China’s largest commercial bank by assets, has the largest credit cards’ market share, with 71m credit cards in circulation.
China Merchants Bank (CMB), surpassed the other four state-owned banks, ranking second by market share (13%).
The big five state-owned banks constitute over 60% of the total credit cards in circulation.
However, banks such as ICBC and CMB have started to focus less on issuing and more on innovative services. On the other hand, small banks such as Beijing Bank, which issued 88% more credit cards in 2011 than in 2010, have sped up their card issuance to obtain as much market share as possible.
In terms of transactions – namely, how much cards are used and are profitable – in 2011, China Construction Bank had the largest transaction per card, followed by Bank Of Communications.
As numbers boom, banks have to deal with a parallel increase in fraud. The total loss due to fraud was $23.5m, rising by 26%.
Ding stresses: "Credit card fraud is still a big problem for issuing banks in China. Among different kinds of fraud loss, Application Fraud is still the major source of credit card fraud loss, accounting for 60% of the total.
"Also, because of the rapid development of online payment, the Card-Not-Present Fraud/Online Fraud is increasingly common."
The 2nd generation risk control system launched by CUP at the end of 2010 and the release of credit card legislature in March 2011 focusing on credit card risk control indicate the increasing tightening on credit card risk control by the government and banks, Kapronasia stresses.
Looking ahead, although the cards market will enjoy strong growth in the medium term, there remains a need for banks to focus on
combining this growth in the number of cards with a growth in profits.
Another issue that will be considered in the analysis of the Chinese credit card market is the role of foreign players.
Although Citibank became the first Western bank to issue its own credit card in China, Kapronasia says, it does not mean China’s market has fully opened to foreign institutions.
For most foreign banks, they still need to work with local partners. In general, partnerships are going well with foreign banks bringing key card management and risk experience to the market, the report concludes.
