China represents a market of vast untapped consumer potential, where household wealth is growing at a mesmerising rate. The country’s new breed of consumers are a prime market for payment cards of all types, and this has led to both foreign and domestic issuers scrambling to put their card operations in place.
Any discussion of the cards market in China must be put in the context of alternative methods of payment. The fact remains that cash is still by far the most popular method of payment for goods and services, for both cultural and practical reasons. Many employees’ salaries are still distributed as cash in envelopes, rather than by cheque or direct deposit. Moreover, it is not unusual for major purchases, such as cars or even houses, to be paid for in cash.
The Bank of China issued the country’s first bankcard in 1985. Since then, the number of cards has grown dramatically, and by the end of 2006, there were an estimated 1.13 billion cards (both debit and credit) in issuance (see Figure 1). The vast majority of these (around 1.08 billion) were debit/banking cards. It has been estimated, however, that only about a fifth of Chinese bankcards are actually used on an active basis.
Card acceptance has increased in recent years and the transaction channels have been extended from traditional platforms such as POS machines and ATMs (see Figure 2) to new payment channels such as online banking and telephone banking. Coverage has also been enlarged from consumption areas such as restaurants, hotels and retail shops to public services such as hospitals and schools. Despite this, merchant acceptance remains a barrier to growth.
Use of cards differs significantly across China. For example, the People’s Bank of China (PBoC), the country’s central bank, estimated that by the end of 2005 consumption-related bankcard transactions as a proportion of the total retail sales of consumer goods reached almost 10 percent, up from 2.1 percent in 2000 (see Figure 3). However they also highlighted the fact that in some of the most economically developed cities (eg, Beijing, Shanghai, Guangzhou and Shenzen), the proportion was more than 30 percent, which is near the level of many developed countries.
Of the 1.13 billion bankcards that were in issue in China at the end of 2006, only about 4 percent of them (or 50 million cards) were actually credit cards. This implies a credit card penetration rate of around 0.038 cards per capita. These figures include both dual currency cards (around 30 million) and approximately 19 million quasi-cards, which offer both debit and credit card functionality.
A report by CCID Consulting estimated that two-thirds of China’s credit cards are inactive. This would indicate that only around 17 million cards are in active use. The growth in the number of credit cards in circulation has been so rapid that 80 percent of the 60 million credit cards that are expected to be in circulation by the end of 2007 will have been issued after 2005.
Unsurprisingly, given the huge potential size of the Chinese cards market, many foreign issuers have shown an interest in entering the fray. To date, they have done so through joint ventures or other partnerships. This is because stringent regulations have barred foreign banks from issuing locally denominated credit cards. In addition, foreign players can benefit from their local partners’ knowledge of Chinese cultural issues as well as an already established distribution network.
In May 2007, China agreed to allow foreign banks to issue yuan-denominated debit and credit cards following the China-US Strategic Economic Dialogue, a bilateral macro-economic forum. The following month, the China Banking Regulatory Commission began reviewing applications from the locally incorporated units of four foreign card issuers to issue yuan-denominated debit cards. Citibank, HSBC, Standard Chartered and Hong Kong’s Bank of East Asia were the first foreign issuers to receive regulatory approval to locally incorporate their mainland China operations earlier this year, which is a prerequisite for offering local currency services to Chinese retail customers.
It is worth noting that some of these foreign banks (HSBC and Citibank) already issue co-branded credit cards with Chinese banks so they are, understandably, treading carefully in light of the new rules which will, in theory, allow them to issue cards without local partners.
Standard Chartered Bank and Bank of East Asia, by contrast, are very active in planning yuan bankcard business as neither of them has ever co-operated with local commercial banks in issuing credit cards.
The results of a research report were published in July 2007 by the Economist Intelligence Unit and global payment processor First Data. The study surveyed 152 senior bank executives who either had businesses in China or planned to enter China in the next three years. Some 85 percent of respondents said they were confident about China’s credit card market, although 43 percent felt that it was difficult to make profits from credit cards within three years. Some 80 percent of the respondents felt that the highest barrier to cards adoption is local retailers who prefer cash payments to cards.
Profitability levels in China are lower than in many other Asian markets. This is 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 a challenge for foreign banks used to charging much higher interest rates elsewhere in Asia.
Moreover, the maximum interchange rates for all yuan-denominated transactions are also set by the PBoC. Observers have pointed out that these rates often do not reflect true costs, especially as debit and credit rates have been set at the same level, despite the fact that costs associated with each type of transaction clearly differ (see Figure 4).
There has been a rapid increase in credit card profits, although retail lending remains small as a proportion of total lending. Bank of China is typical: its credit card loans increased 49.1 percent in 2006 but retail loans as a percentage of total loans at the bank were still only 22.3 percent.
What is not in doubt is that credit cards are making up an increasingly large proportion of bank profits. The China Bank Regulatory Commission has noted that banks in Shanghai alone generated CNY466.26 million ($60.97 million) from the bankcard business in the first quarter of 2007, representing a year-on-year increase of 31.8 percent. Income from credit cards reportedly increased 57 percent year-on-year to CNY43.29 million over the same period.
According to consultancy McKinsey, credit card profits in China could hit $1.6 billion by 2013, becoming the second largest retail banking service behind mortgages.
China UnionPay (CUP) is the country’s largest credit card services company and the only bankcard association and payment network. It has big expansion plans, both domestically and overseas. The company has indicated that it intends to enlist 60 percent more merchants, roll out 1.4 million terminals and launch mobile phone payment services by 2008.
CUP has predicted an increase in the number of POS machines to 1.2 million and up to 120,000 ATMs connected to its network on the mainland. (By contrast, MasterCard International has an estimated 100,000 merchants in China that accept MasterCard bankcards, with about 100,000 POS machines and roughly 20,000 ATMs connected to its network there.)
In the first half of 2007, CUP issued 353 million UnionPay debit cards, a year-on-year increase of 113.7 percent. The number of credit cards issued showed remarkable growth – a near 20-fold increase to 10.21 million cards, surpassing the 10 million-card target set for the entire year of 2007.
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 International and MasterCard Worldwide are set to increase their marketing budgets in China, in an effort to persuade Chinese banks to issue their cards instead of those of CUP, their major local rival.
In 2006, Visa was reported to have spent CNY200 million in advertising in China while MasterCard spent CNY50 million. These figures are expected to more than triple in 2007.
In 2006, China set up the world’s largest database, which stores the credit records of more than 11 million companies and 533 million individuals to help commercial banks and most rural co-operatives to manage risks and avoid potential fraud.
In 2007, the Bank of Communications announced that it is to invest at least CNY100 million to set up an internal rating system to assess the credit worthiness of individual borrowers to cut bad loans as consumer lending accelerates. The bank plans to launch the system before 2010.
Each of the bank’s 40 million retail customers and cardholders will be systematically graded over the course of the next three years.
Role of government
Part of the credit for the rapid development of the cards industry in China must surely go to the government. The PBoC has consistently tried to formulate guidelines and measures aimed at accelerating the development of the country’s bankcard industry. In 2005, for example, it joined with eight other government agencies to jointly issue a circular that aims to strengthen the competitiveness of the local bankcard industry and minimise risk, largely by stepping up pertinent legislation, enhancing government support and upgrading technology.
The PBoC’s aim is that by the end of 2008, 60 percent of those merchants that have over CNY1 million ($125,000) in annual sales should be accepting cards at the POS. The PBoC has also indicated that it aims for one-quarter of merchants with sales below that figure to accept cards by the same date. It also intends to bring the share of bankcard payments in total retail sales in medium and large cities to 30 percent by 2008. This target was set in 2004, when the figure was only 5 percent.
Bank of China
By the end of 2006, Bank of China had issued 7.21 million quasi-credit cards in China – it is the largest quasi-credit card issuer in China in terms of issued card volume and has a market share of over 37 percent. By the end of 2006, the bank had issued 98.6 million debit cards in mainland China. Domestic credit card loans amounted to CNY2.87 billion by end-2006 but this was equivalent to only 0.65 percent of total loans.
In February 2007, Bank of China announced that it was collaborating with the Royal Bank of Scotland to set up an independent credit card business unit. This unit will integrate Bank of China’s existing credit card operations and will be operated jointly but headed by a Bank of China representative. Royal Bank of Scotland owns a 4.37 percent stake in Bank of China.
China Merchants Bank
China Merchants Bank’s number of credit cards in issue doubled to 10.3 million in 2006. Seventy percent are estimated to be active, although reports from other sources indicated that only 30 percent of its credit cards are actually active. In its recent results, the bank announced that its card transaction volume rose 101.8 percent year-on-year to CNY66.4 million to the end of 2006. The bank is the country’s biggest private lender and has forecast that the number of credit cards it has in issue will reach 15 million by the end of 2007, a rise of 50 percent from 2006.
China Merchants Bank’s four-year-old card business achieved profits two years earlier than anticipated and contributed significantly to profits in 2006. In January 2007, China Merchants Bank said that it is to focus on its credit card business in order to offset its lack of outlets and compete with state-owned counterparts.
Looking forward, China Merchants Bank has indicated that it expects to double the number of credit cards issued to 20 million by August 2008, when the Beijing Olympics will be held. Unlike many of its main rivals, the bank says it is not planning to partner with a foreign institution and prefers to hire foreign executives instead.
The Industrial and Commercial Bank of China (ICBC) describes itself as China’s largest lender. Over 2007, it has consistently been either the second- or third-largest bank in the world by market capitalisation. By the end of 2006, the bank had issued 15 million credit cards. ICBC’s main retail card product is the Peony Card. Transaction levels through the Peony Credit Card reached CNY105.32 billion, while the Peony Money Link Card generated CNY246.7 billion. There were 170 million Peony debit cards in circulation as of end-2006.
ICBC is bullish about the future of credit card spending, forecasting that Chinese spending from credit cards will rise to between CNY140 billion and CNY150 billion in 2007, up from some CNY100 billion in 2006.
Bank of Communications
Bank of Communications (BoCom) established its Pacific Credit Card Centre in October 2004, in a strategic co-operation agreement with HSBC. HSBC is a 19.9 percent shareholder in BoCom. The total number of Pacific Credit Cards was 1.94 million and total spending on these cards reached CNY11.1 billion by the end of 2006. BoCom has outlined the major business areas in which it co-operates with HSBC, including risk management, internal control, corporate business, international business and personal financial service business.
China Construction Bank
The main card brand in China Construction Bank’s stable is Long Card. Its number of pure credit cards issued amounts to 6.34 million – 3.22 million of these credit cards were issued in 2006 alone. The number of Long Cards and quasi-credit cards combined was 10.06 million. The number of credit cards issued and spending amount both recorded a year-on-year growth over 100 percent. The total spending amount of bankcards reached CNY243.7 billion, up 68.86 percent over 2005.
By the end of 2006, the bank had issued 186 million debit cards in total, which represented an increase of 20.47 million over 2005. Spending via debit cards in 2006 reached CNY212.50 billion, an increase of 69.2 percent over 2005. Fee and commission income from debit cards climbed to CNY2.88 billion, representing a 17.6 percent rise compared to 2005.
In May 2007, China Construction Bank announced that it will partner with Bank of America to set up its credit card business and eventually launch a joint venture. Bank of America acquired a 8.52 percent stake in China Construction Bank in 2005, for a cost of $3 billion.