Despite being Asia’s largest payment card market in terms of value and volume, much of China’s large rural population has little access to formal banking infrastructure. What will rises in the economically active population and disposable incomes, and the adoption of contactless do for card use and acceptance?
China is Asia’s largest payment cards market in terms of card transaction value and volume, accounting for 74.7% and 41.2% respectively. The average annual spend per card is also high in China, at $1,501.40 – compared to regional peers such as Malaysia ($651.20), Indonesia ($290) and India ($88.70).
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Cash, however, remains a popular payment instrument among Chinese consumers, especially in rural areas.
This is primarily a result of a lack of knowledge among the population about the benefits of electronic payments, and limited access to banking infrastructure.
As the government and banks began to provide basic financial access to the unbanked population, by expanding banking infrastructure, launching new branches and making efforts to change consumer payment habits, payment cards gradually became more accepted, with their use consequently growing between 2011 and 2015.
Consequently, the share of Chinese population aged 15 or above with a bank account rose from 63.8% in 2011 to 78.9% in 2014, according to the World Bank’s Global Findex survey.
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By GlobalDataRises in the economically active population and per capita disposable income, the growing popularity of online shopping, the increased acceptance of cards at retail outlets and the adoption of contactless technology supported the growth of payment cards over the past five years; this trend is anticipated to continue until 2020. The rising acceptance of payment cards was also supported by improvements in the country’s payment infrastructure.
China UnionPay maintains its stranglehold
China UnionPay (CUP) is China’s sole payment card scheme provider. According to central bank regulations, all banks and card issuers operating in the country are required to route yuan-based transactions through CUP’s electronic payment network.
However, following a complaint filed by the US against China via the World Trade Organisation (WTO) with regards to discriminating against foreign companies in 2012, the WTO directed the Chinese government to open up its payment cards market to foreign operators.
Consequently, in October 2014, the Chinese government announced its decision to allow foreign companies to set up their own payment card clearing businesses, effective from June 1, 2015.
The move is anticipated to intensify competition in the Chinese payment cards market, and end CUP’s dominance as China’s only authorised card clearing organisation.
However, Visa and MasterCard have a long way to go before they can make a dent in CUP’s market share, as they need to build up infrastructure from scratch.
Contactless mobile to gain prominence
Contactless mobile payments (m-payments) are expected to gain prominence in China, as retailers and mobile operators actively promote contactless technology to improve their businesses.
Consumer preferences for secure payment services that allow them to purchase products are also gaining ground. Companies are also embracing this technology to benefit from expansion in the m-payment market.
The latest initiative was the launch of Apple Pay, Samsung Pay and Huawei Pay in 2016, in association with CUP. Apple Pay entered the Chinese market in February 2016, in partnership with CUP. The service uses tokenisation technology to ensure payment security.
On adding a payment card to Apple Pay, no actual card numbers are stored on the mobile phone, and instead a unique device account number is encrypted and securely stored, with transactions authorised with a one-time dynamic security code.
Following the launch of Apple Pay, Samsung also launched its m-payment service in China in March 2016, in alliance with CUP. In June 2013, CUP and China Mobile launched a NFC-based mobile wallet, CUP Wallet, in 14 cities.
E-commerce offers scope
China is one of the world’s largest e-commerce markets. In terms of transaction value, it grew at a compound annual growth rate of 49.59%, from $151.3bn (CNY586bn) in 2011 to $757.7bn in 2015.
The rapid adoption of smartphones, growing internet penetration, availability of secure online payment mechanisms, reduction in delivery times and growing preference for online shopping – especially among the rural population, as a result of underdeveloped bricks-and-mortar shops – led to this growth.
To capture the rural market and increase customer convenience, online retailers such as Alibaba and JD.com are investing heavily in improving logistics infrastructure.
In June 2015, the Chinese government permitted 100% foreign ownership of e-commerce companies, which were previously accessible only to companies operating within free trade zones. With the change in government policy, the e-commerce market presents itself as a profitable market for foreign companies.
Increasing number of POS terminals
The number of POS terminals recorded a significant CAGR of 43.96%, rising from 4.8 million in 2011 to 20.7 million in 2015.
The expansion of the organised retail sector is expected to lead to growth in the number of POS terminals over the next five years, to reach 36 million in 2020.
The growing payment cards market had attracted Chinese banks to launch mobile POS (mPOS) solutions in the market.
In June 2014, for example, BOC launched mPOS terminals in partnership with CUP and Visa. The-chip-and PIN reader can be connected wirelessly through audio cable or Bluetooth to a smart phone or tablet.
