China’s burgeoning consumer class is getting a
taste for credit cards, but stellar growth is raising concerns over
profitability. However, issuers and networks continue to make
headway in infrastructure development and consumer education. Will
the 2008 Olympics  be the catalyst for greater usage?
Victoria Conroy reports.
China has long
been touted as a prime growth hotspot for credit cards, so it is
not surprising Western issuers such as Bank of America and Standard
Chartered have made such concerted efforts to break into the
market. China’s economic success
story has continued unabated, leading to millions more Chinese
individuals each year joining the country’s consumer class, and
gaining the ability and wealth to purchase consumer goods. Urban
disposable incomes are rising 11.5 percent and this double-digit
growth is set to continue as China’s
economy heats up even further.
Figures from the People’s Bank of China (PBoC) show the number of credit cards in
circulation for the year ending March 2008 rose by a staggering 93
percent to reach 104.7 million, much higher than industry analyst
estimates of between 60 and 90 million. The total number of bank
cards, including debit cards, rose to 1.58 billion in the same
period, a rise of 29.1 percent. At the end of 2007, the outstanding
balance of consumer credit on cards was about CNY75 billion ($11
billion), against a credit line exceeding CNY630 billion, according
to PBoC.
The rise in credit card usage is being driven
by intense bank marketing and sales efforts and the Chinese
government’s commitment to encourage domestic spending.
The government has stated it wants 30 percent
of retail sales to be made through payment cards in tier one and
tier two cities by the end of 2009, up from 10 percent in 2005.
According to a recent report in Shanghai Daily, card-based
transactions accounted for 25.6 percent of China’s total retail sales in the first quarter
of 2008, up from 21.9 percent a year ago. The value of card
transactions is growing at an even faster rate, rising 58 percent
to CNY824.6 billion, helped by an economy that is growing over 10
percent a year.

Profitability challenges

However, such stellar growth in such a short space of time is now
leading to concerns that rising card numbers are not translating
into increases in profitability, at least on a sustainable

Although Chinese issuers are reporting
double-digit growth (in some cases more than 100 percent
year-on-year) in credit card numbers and card spending, the total
number of credit cards in circulation currently amounts to less
than seven percent of all cards issued.
Credit card market share 2007 (%)Whereas as western issuers glean profits
from charging interest, more than 90 percent of card profitability
in China comes from merchant
commissions. Also, despite impressive credit card growth, millions
of credit cards remain inactive, and the challenge for both
domestic and foreign issuers is how to educate consumers about card
usage in a country where cash is most definitely king.
Currently, around 31.8 million people actually
hold credit cards, with each holding on average three cards,
meaning there are millions of potential cardholders to
Although there has been a rapid increase in
credit profits over the last three years, profitability levels in
China are lower than in many other
Asian markets, partly because Chinese credit card customers
generally prefer to pay off their credit card bills in full at the
end of each month and therefore do not roll over enough balance to
generate profitable interest charges.
In addition, the maximum interest rate for card
borrowing is set by the PBoC at 18.25 percent, making profitability
an even greater challenge.
Moreover, the maximum interchange rates for all
yuan-denominated transactions are also set by the PBoC, regardless
of whether cards are debit or credit, meaning that rates are not
representative of the differing transactional costs. However, this
has not deterred the likes of
, Standard Chartered, Bank of America and other western
issuers from forging partnerships with local issuers in order to
gain a foothold in the market.
The intense drive to win customers has not gone
unnoticed by China’s regulators,
with the Shanghai branch of the China Banking Regulatory Commission urging
improved system management by lenders to avoid applicants getting
credit from different banks, stretching their ability to repay
debts. Fraud is also a concern, with the number of prosecutions for
credit card fraud rising 40 percent in the year to October 2007,
with the amount involved increasing 24 percent.
However, banks and industry analysts expect
that it will not be too long before China’s credit card market becomes profitable –
global consultancy McKinsey estimates that within 5 years, credit
cards will become the second most lucrative retail banking product
after mortgages, reaching total profit of up to CNY1.3 billion, or
22 percent of banks’ total retail banking profits.

Increasing acceptance

Beijing will host the 2008 Olympic Games this summer, and around 7
million foreign visitors are expected to descend upon the city and
China’s other main urban areas,
according to the Beijing Tourism Administration.

Because of this, and the growing number of
Chinese consumers with higher disposable income, bankcard network
China UnionPay (CUP) and government
bodies have made concerted efforts to extend card acceptance in
tier one and tier two cities, as well as implementing ATMs and POS
terminals in more rural areas to enable acceptance to the millions
of rural Chinese workers who are also being targeted by card
In both rural and urban areas throughout
China, many state employees’
salaries are still distributed as cash, rather than by cheque or
direct deposit. 

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China by numbersAt present, CUP
has more than 200 domestic and overseas members serving not only
China but also more and more
countries and regions. The number of domestic CUP merchants
totalled 740,000 with 1.18 million POS terminals, and 120,000 ATMs
in 2007.

The goal for CUP’s development in 2008-2012 is
aimed at laying the framework for further international
competitiveness and increasing its influence globally, as evidenced
by its partnership agreements with issuers and acquirers
In January, CUP announced that within
China’s borders, 3.98 billion
transactions were carried cross-bank through CUP’s bankcard
transaction system with a total volume of CNY3.2 trillion, which
increased by 40.88 percent and 78.42 percent respectively from
2006. More than 14 million transactions were carried out through
the CUP cross-bank transaction settlement system, with a volume of
more than CNY10 billion each day.
The rapid extension of CUP’s bankcard
acceptance network is primarily down to two factors: one is CUP’s
increasing inclination to promote acceptance in more rural areas
like Jilin, Mongolia, Shanxi and Tibet; another was the launch of
services for rural workers at the end of 2006 in 14 provinces
nationwide in conjunction with rural credit cooperatives.
CUP is following a phased plan to boost
acceptance firstly in key cities, then cover the secondary and
tertiary cities and then extend to towns and rural areas. By the
end of 2008, it’s estimated that the volume of consumption by bank
cards will make up 10 percent of the total retail sales of
consumption goods in the secondary cities.
“It is CUP’s social responsibility to enable
the whole society to enjoy the convenience brought by
interconnection and general use of the bankcard network,” said Xu
Luode, president of CUP. “We hope that the bankcard acceptance
network will, like power grid and communications networks, be
interconnected and generally used in secondary and tertiary cities,
central and western regions and rural areas.”
In 2007, CUP extended acceptance in Egypt,
Austria, and Ukraine, making CUP cards accepted in 26 countries and
regions across the Asia-Pacific region, Europe and America,
Australia and Africa. Domestically, CUP cardholders can now also
pay bills through mobile phones, the internet and TV set-top boxes.
In 2007, the number of users utilising mobile phone payment
increased by 4.95 million and totalled more than 10 million, with
the transaction volume reaching over CNY10.8 billion.


Visa and MasterCard

Visa and MasterCard cards can be issued in China only in non-yuan currencies.

Banks can issue a dual-currency card, including
both a yuan-denominated account and a foreign currency-denominated
account, in conjunction with CUP, so that the card displays both a
CUP and either a Visa or MasterCard badge.
Both Visa and MasterCard Worldwide have
significantly increased their marketing budgets in an effort to
persuade Chinese banks to issue their cards instead of those of
CUP, their major local rival.
In the run-up to this summer’s Beijing
Olympics, the Chinese government has spent more than $2 billion in
preparation, and Visa, as one of the major sponsors of the Games,
is working with Chinese authorities to develop card and payment
acceptance infrastructure to meet the demands of tourists.
Visa is partnering with the
Bank of China
(BOC) to install a
special Olympic ATM network and POS acceptance devices at
competition and non-competition Olympic venues.
BOC will also support Visa card acceptance for
the Olympic Games’ ticketing systems, POS terminals, ATMs and
online ticket sale transactions.
In addition, Visa will operate a Visa Service
Centre, providing multi-lingual emergency services and general
assistance for Visa cardholders.
Richard Chang, executive vice-president and
general manager for Visa in Greater China and the Philippines said: “A reliable and
international-standard electronic payment infrastructure is a
fundamental need to ensure that visitors to China – before, during and after the Games – can
purchase their souvenirs from China
using the same payment facilities they are used to at home.
“To this end, Visa has been working closely
with its partners in China to
develop a world-class electronic payment network which offers
convenience and security for those travelling to China this year and in the future.
“This includes adding 90,000 ATMs to provide
better cash access for those attending the Games, as well as
expanding the number of merchants that accept Visa-branded payment
cards to a network of 210,000.”
In March 2008, it was reported that
China Life Insurance had bought a
$300 million stake in Visa, worth about 1.6 percent of Visa shares,
following the card scheme’s IPO earlier this year.
It was the first major investment by a Chinese
insurance company in the US and is indicative of both increasing
Chinese economic power overseas, and Visa’s willingness to work
closely with Chinese partners with the aim of opening up the
Chinese market.

China Merchants

All types of credit cards issued by CMB are denominated in CNY and
US dollars, and CMB also offers flexible payment options. Alongside
the bank’s own-branded classic, gold and platinum cards, CMB offers
a business credit card and a Visa Mini card, the first of its kind
in China. CMB also offers a range of
co-branded cards in conjunction with major retailers such as
Bertelsmann and Parkson, and co-branded cards with Air China and Ctrip.

As of 31 December 2007, retail loans amounted
to CNY175.027 billion, a 71.62 percent increase compared to the end
of 2006. Growth was attributable to residential mortgages and
credit cards – accounts receivable at the credit card business
increased 110.17 percent compared to 2006. The number of new retail
customers using online banking services increased by 90 percent,
and the related online transactions made up 61 percent of total
retail banking transactions.
CMB issued 10.34 million credit cards during
the year, with the total number of credit cards issued to date
exceeding 21 million. In 2007, bankcard fee income increased by
89.03 percent compared to the previous year, due to increased
issuance and transactions volume of bank cards, of which credit
cards fees accounted for over 70 percent, an increase of 107.1
percent compared to the previous year.
Credit card balances increased by 110.17
percent compared to the previous year, and income from credit card
non-interest business was CNY1.51 billion, an increase of 104.9
percent. POS service charge was CNY655 million, an increase of 80
percent compared to the previous year, and annual credit card fee
income was CNY103 million, up by 71.4 percent.
The total number of cards in circulation was
14.41 million, the cumulative number of card holders was 7.95
million, the cumulative transaction volume via credit cards was
CNY131.3 billion, the average transaction volume per month of each
card in circulation was CNY1,047, and the revolving credit card
balance was CNY7.8 billion.

Shenzhen Development Bank

In January 2007, SDB in conjunction with CUP launched the Hong Kong
Tour credit card, partnering also with Agricultural Bank of
China, China Construction Bank, CITIC Bank and the Hong
Kong Tourism Board. The card is a standard product aimed at
tourists coming to Hong Kong from the Chinese mainland and as part
of a wider effort to forge an inter-industrial partnership alliance
and universal credit card service platform.

Later that year, SDB also launched the Auchan
Hongque card in collaboration with Auchan Group, a French
hypermarket retail group, and followed the launch of the Wal-Mart
Changxiang Card by SDB and GE Money in late 2006. The Auchan card
is denominated in both CNY and US dollars, as is the Wal-Mart card,
and also incorporates discounts, instalment payments and rewards
points at Auchan outlets in China.
SDB also announced it would be waiving annual
fees on its ‘Shanghai Youth’ card. By the end of 2007, SDB’s fee
income surged 51 percent to CNY521 million on the back of booming
stock market and credit card growth. SDB had issued 1.88 million
valid credit cards by the end of 2007, up 1.91 times from a year

Industrial and Commercial Bank of China

ICBC offers a range of bank cards branded under the ‘Peony’ banner,
along with a credit card and a quasi-credit card. Peony Money Link
Card is a debit card allowing customers to transact money deposit
and drawing, personal settlement, e-banking, investment and
financing, self-help bill payment, and other services. The Peony
credit card has a maximum authorised credit limit of

For the year 2007, growth in income from
bankcards rose by 41 percent, and the bank reported that ICBC’s
total cards in issue had reached 210 million, of which over 23
million were credit cards, doubling the number at the end of 2006,
while spend rose to CNY160 billion. ICBC, with a 30 percent share
of the credit card market, also leads in terms of total and average
credit card transaction value. In the first quarter of 2008, ICBC
reported that net fee and commission income increased by 86.4
percent from the same period in 2007 to CNY12.1 billion, accounting
for 15.9 percent of the bank’s operating income.

Bank of Communications

Since the inaugural launch of its Pacific Card in 1993, Bank of
Communications has issued three categories of products, comprising
credit cards, quasi-credit cards and debit cards, in CNY and US
dollar denominations.

Over a hundred types of
co-branding/identification/specialised cards have also been
distributed under the Pacific Card series. The Bank of
Communications dual currency credit card is jointly managed by HSBC
and is accepted by merchants worldwide. Cardholders can use the
card at more than 300,000 China
UnionPay merchants in China, and
also at over 20 million Visa and MasterCard merchants around the
As of the end of 2007, total BoComm credit
cards in issuance had reached 5 million, rising by 3 million from
the previous year, with an annual spending per card of CNY11,000.
As of the first quarter of 2008, BoComm’s banking cards contributed
24.42 percent of fee income for the bank, or CNY5.72 billion.

China Construction

CCB’s credit card range is centred around the ‘Long’ card
proposition. The Long credit card comes under both Visa and
MasterCard brands (alongside the standard CUP logo found on all
Chinese payment cards) and offers two currencies, with domestic
transactions being settled in CNY, and overseas transactions
settled in US dollars.

CCB claims to be the first Chinese issuer to
offer a password function for the Long credit card, and has also
tied up with select categories of merchants to offer preferential
and VIP treatment to cardholders. Long Business Card is targeted at
group clients and is a dual-currency credit card that supports
payment settlement and financial management for the purchase,
business trips and other business activities of Chinese
In 2007, bankcard fees increased by 36.97
percent to CNY5.2 billion, with credit card fees increasing by
154.92 percent to CNY698 million over the previous year, and debit
card fees increased by 58.13 percent to CNY3.7 billion over the
previous year.
At the end of 2007, CMB had issued 224 million
debit cards in total, representing an increase of 37.41 million
over 2006. Spending via debit cards during the year reached CNY407
billion, an increase of 91.73 percent over 2006. In 2007, CMB also
launched its ‘virtual card’ tailored for online shoppers.
At the end of 2007, the total number of Long
credit cards issued was 12.60 million, of which 6.26 million were
issued during the year, an increase of 98.75 percent over the
previous year; spending via credit cards during the year was
CNY78.6 billion, an increase of 94.39 percent over 2006. Income
from credit card loans was CNY10 billion, an increase of 115.76
percent over 2006.