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  1. Analysis
September 26, 2012

Taming the dragon

Prepaid cards have been, until recently, a very dangerous business in China. The lack of regulation has enabled corrupt practices by both issuers and card holders. But, writes Sara Perria, that is all starting to change.

By Verdict Staff

China prepaid industry is a wallet-size microcosm of contemporary China. It is growing rapidly. A wide base of consumers has the potential to fuel this growth even further. It is also a fresh and ambitious market, in striking opposition to Western established economies.

This comes at a price: in recent years a lack of regulation and KYC rules has meant that while the industry was rocketing it became closely associated with corruption, bribery and tax evasion.

Things began to change in 2011, when the Chinese government released specific rules for the prepaid card industry, which have posed a whole new set of challenges for the prepaid industry, forced to find a balance between expansion and control.

How the market is reacting to this consumer safety-net and what makes the Chinese environment so unique is now a block capital-letters question.  

A report by consulting firm Kapronasia, China’s Prepaid Card Industry – What’s next?takes a close look at the key trends of this contradictory market.


The new direction

Prepaid cards are already widely used in China. According to a 2011 China Ministry of Commerce estimate, total prepaid card sales in 2010 reached USD225bn, with a 25% growth rate year on year. The total value of transaction reached USD160bn.

The report highlights the fact that as the use of prepaid cards increased, the average transaction value decreased, similar to what is typically seen with credit cards as markets develop.

Kapronasia consultant Ken Ding explains: “Compared with relatively mature markets like the UK and US, China is still at a nascent stage, but it has a large customer and merchant base, strong consumer demand and dynamic players,” he says.

This, together with its political and social environment, determines the strong specificity of the Asian country.

Supermarkets and shopping malls are the main sales distributors of prepaid cards and large retailers, such as Carrefour and Tesco, issue their own single-purpose cards.

However, private companies and the government have played a central role in the diffusion of multi-functional prepaid cards, as these are widely used to distribute employee-benefits. For the Chinese governments this is also a way to stimulate the economy.

“For the government, prepaid cards are a good tool to promote domestic consumption,” Ding stresses.

“Also, there are always strong demands from individuals and companies. For individuals, it can be a convenient payment instrument and by using it, individuals can get discounts,” he says.

However, here is where the problems have originated , causing the People’s Bank of China, the Ministry of Commerce, the State Administration of Taxation and the Ministry of Finance to intervene.

The Kapronasia analyst says, is that there are a number of potential ways prepaid cards could be misused. Bribery between individuals or corporations is one of them, as plastic was considered a ‘safer’ means of corruption compared to giving or sending cash.

This was made possible because, previous to regulation changes, there was neither a card-personalisation requirement nor a limit on purchase value of prepaid.

Anonymous customers could send large sums on a prepaid card to people as “gifts”.

For private companies storing money on prepaid cards is also a potential good tool for tax evasion, if not money laundering.  

Another issue the government is aiming to tackle is the misuse of prepaid money by card issuers, who have been using the reserve money on prepaid cards to make inappropriate investments.

Prior to 2011 and the introduction of the rules, the money customers paid for the purchase of the card and the breakage was commonly used by the issuer for high-profit investments in capital markets or property, without having to pay any interest back to the customer.

All these elements combined called for intervention.


The new rules: what has changed?

The first result of the attempt to bring some order to the industry was the designation of two distinct types of prepaid card: single-purpose and multi-purpose, analogous to closed- and open-loop cards

Single-purpose prepaid cards are monitored by the People’s Bank of China (PBOC), while the multi-purpose cards are monitored by the Ministry of Commerce. The latter cannot be issued by non-financial institutions, unless authorised by the PBOC.

A watershed in defining the new prepaid-scenario has been the introduction of the so-called ‘real-name systems’ for card purchases.

In order to tackle corruption concerns related to prepaid, issuers are now obliged to register the identity of any customer wishing to purchase CNY10,000 (USD1,500) or above in prepaid. At the same time, the holder of a single prepaid can remain anonymous if the value of the cards is below CNY1,000 (USD150). Even when named, the value of a single card cannot surpass CNY5,000 (USD750).

The new regulation also poses limits on the maximum value of cards that can be purchased with cash for corporates (CNY5,000) and individuals (CNY50,000), beyond which payments must be made via bank-transfer.

The life of a prepaid card must be of at least three years and it can be extended. Before the government’s intervention, users would loose their money in a much shorter space of time.

A key direction given by the institutions involves the reserve of money. Prepaid reserve money has to be deposited with a bank and monitored.

The Chinese cards market is not open to foreign companies, and this is the case for prepaid cards as well, where foreign companies are not eligible to be third party issuers. Kapronasia notes that this has had an extremely positive impact on commercial banks’ business, who now compete to partner with large card issuers.


The impact and the future

The definition of borders in the prepaid industry was a necessary step to safeguard users and guarantee a sound environment.

After one year Kapronasia has tried to understand the impact of this regulation in the market.

The conclusion is straightforward, stating that “in the short term, these new regulations will have a huge impact on the industry with possibly hundreds of unqualified prepaid card issuers unable to continue to conduct their business”.

The point made by Ding, though, is that in the long term the industry will definitely benefit by the intervention, helping it to gain ground in terms of stability and growth.

“The industry needs a sound environment,” Ding stresses.

This is a concept that has been widely accepted by Chinese authorities, poised to release further regulation in the near future.

Ding explains: “More detailed regulation on prepaid cards, such as how to make sure issuers can effectively manage the reserve money, are expected to be released soon, limiting the market growth in the short-run, but making the industry healthier over the longer term,” he anticipates.

“Generally, the industry will continue a strong growth and become more competitive in the future”.

Under a tighter regulatory regime smaller players are less likely to survive, Ding says, and large players will expand their operations quickly.

At the same time the analyst forecasts that individuals’ purchase volume will grow more rapidly as issuers begin to attract more individual’s usage.

Given this outlook we are likely to see considerable M&A and strategic development across the industry.

“Large prepaid card issuers will not only increase circulation of issued cards, but, more importantly, they will focus on innovation of new business models to increase customer loyalty,” says Ding.


International position

While foreign players still cannot issue cards in China, the thirst for innovative solutions and cutting-edge technologies will open opportunities for international companies willing to bring foreign experts and expertise to the Chinese market in order to help the industry grow.

The expansion across regional borders will be one of the challenges the industry has to be ready to face, as third party issuers, previously regional-oriented, will now have to expand their merchant network cross-regions quickly and seek to sell cross-industry. And because it is now impossible for an issuer to depend upon income from reserve money, it is more important than ever to increase the circulation of cards in order to drive profits.

“That said, smaller issuers will not have sufficiently strong financial position required to support the rapid expansion of merchants, and maintenance of cardholders, whereas large players can aggressively expand into small players’ territory and acquire market share by launching more attractive prepaid card products,” Ding says.

Overall, the prepaid card industry is going through massive changes as a result of the regulations from 2011. These changes will continue to shake out over the course of 2012 as the industry and players adapt to the new marketplace.

“However,” Ding concludes, “it is clear that the market will keep booming and we can expect more integration between prepaid card and other payment tools such as online payment and mobile payment in the future.”



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