Hong Kong’s explosive growth over the last few decades has been helped along by its fast-growing payments market. The Chinese territory is known for its quick adoption of new technologies and smart cards have been no different
In terms of number of cards in circulation, the Hong Kong card payments channel registered positive growth during the review period 2009-2013, recording a compound annual growth rate (CAGR) of 5.23% to reach 50.8m cards in 2013. In terms of transaction value, the card payments channel valued HKD943.9bn ($121.7bn) in 2013, after registering a CAGR of 10.94%. Improved banking infrastructure and the increasing acceptance of card-based payments at point-of-sale (POS) terminals were key growth drivers for the card payments channel.
In terms of transaction value, credit cards accounted for the highest share during review period with 51.7% in 2013, and are expected to maintain this over the forecast period (2014?2018). The category is expected to post a forecast-period CAGR of 3.31% from HKD512.1bn in 2014 to HKD583.3bn in 2018. The second-highest share in terms of transaction value was held by debit cards with 40.9%, followed by prepaid cards (5.7%) and charge cards (1.7%).
Debit cards to exhibit nominal growth, while other cards drive the industry
The debit card category is anticipated to post a forecast-period CAGR of 1.31%, while the prepaid card category is expected to register a CAGR of 2.56% and the credit card category is projected to record a CAGR of 2.45% over the forecast period. Due to the convenience of electronic payments, the emergence of contactless payment systems and an increase in security features, Hong Kong’s population has been encouraged to perform more card-based transactions.
Despite the financial crisis, Hong Kong recorded a growth in credit card expenditure, supported by the increased acceptance of these cards at POS terminals and associated benefits such as reward points, discounts and cashback. All the major global card scheme providers ? Visa, MasterCard, American Express, Diners Club and JCB International (JCB) ? have a presence in the country’s credit card category.
The prepaid cards category grew at a strong pace during the review period, a trend that is anticipated to continue over the forecast period. The rising demand for Octopus cards supported the category’s growth. Initially developed to be used for public transit systems, the cards are now used for to make payments at car parks, leisure facilities and retail outlets. These cards are compatible with contactless payments, and facilitate faster payments.
Card fraud is expected to decline
Total card fraud in Hong Kong recorded a review-period CAGR of -4.70%, declining from HKD10.5m in 2009 to HKD8.6m in 2013. As part of offering enhanced security for automatic teller machine (ATM) transactions, in June 2011, the Hong Kong Monetary Authority (HKMA) announced the implementation of chip-based technology for all ATM services. This process is expected to be completed by the end of 2015. This step was taken to ensure and increase the security during card-based transactions. The chip-based technology has been introduced to provide the greater security, as data stored on the chip is protected by advanced security controls, protecting cardholders against fraudulent activity. The emergence of contactless payment systems, and Europay, MasterCard and Visa (EMV) compliance, are also helping to enhance security and deter card fraud.
Growing demand for smart cards
Hong Kong’s Octopus card has been one of the world’s most successful electronic payment systems. Initially developed to collect fares for the city’s massive transit system, the card is now used for a wide range of services. In total, 95% of Hong Kong’s citizens aged 16?65 owned an Octopus card. Due to its range of acceptance, Citibank and DBS bank offer two-in-one smart cards in association with the Octopus card. These cards have dual functionalities: Octopus payments and credit functions.
Innovative marketing strategies to attract customers and enhance consumer spending
Intense competition in the cards and payments industry forced issuers to innovate their marketing strategies. In addition to discounts and rebates, banks now offer additional services and benefits. These include complementary insurance, options to pay for purchases in interest-free instalments, and international medical and legal assistance. Such benefits not only lead to higher levels of customer satisfaction, but they increase customer loyalty and attract new clients.
Many banks charge competitive interest rates on extended credit, and both issue and renew cards free of charge to maintain a competitive edge. Many banks offer direct cash discounts or cashback offers. For instance, HSBC offers reward points to its card customers through its Red-Hot reward scheme where customers can choose between the RewardCash Programme, the RewardCash e-Shop Programme, the RewardCash Certificate Programme or the Mileage Programme.
Adoption of new technology and enhanced infrastructure for retail payments
Technical advancements and supporting infrastructure, such as EMV, near-field communication (NFC) and contactless technology, are boosting consumer confidence in alternative payment methods. In the case of EMV technology, cards are enabled with chips, which store data and can be read with any NFC device. NFC technology enables a contactless payment system, where transactions can be completed without swiping the card.
This technology has significantly reduced processing and dialing time, and strengthened security. Citibank Hong Kong launched a NFC-enabled wallet in November 2013 in partnership with mobile network operator 3 Hong Kong. Citibank Visa credit cardholders can store the payment details of up to three cards. Another example is the Octopus card, which acts as an electronic wallet (e-wallet) and is mainly used to make public transport payments. The use of technology such as this is expected to increase the card adoption rate and drive industry growth.
Government initiatives for economic growth: Tax deductions on salaries and personal allowances
The 2012?2013 budget imposed a one-off reduction of 75% on income tax and tax under personal assessment for 2011?2012, subject to a ceiling of HKD12,000. This reduction was reflected in the final tax payable for 2011?2012. The financial secretary also proposed changes to tax deductions for determining a person’s income tax liability.
- Relief on mortgages: For one property, owners can claim a deduction for mortgage interest payments up to HKD100,000 annually.
- Caring for the elderly: According to the proposal, the annual deduction ceiling for elderly residential care expenses can be raised from HKD72,000 to HKD76,000.
- Retirement contributions: Deductions should be available according to employee contributions for retirement and provident fund schemes. According to the proposal by the financial secretary, the deduction will be increased from HKD12,000 to HKD15,000 per annum.
- Self-education costs: The deduction for self-education expenses is available up to a maximum of HKD60,000 per annum.
- Relief on charitable donations: A deduction for approved charitable donations is available up to a maximum of 35% of assessable income.
- Tax deductions on salaries are expected to increase the personal wealth of citizens in Hong Kong.
New measures to protect the credit card holders from unreasonable charges
In March 2012, Hong Kong Association of Banks (KKAB), in consultation with the Hong Kong Monetary Authority (HKMA) announced new measures to increase transparency in the credit card interest in order to protect credit card holders from unreasonable charges. Overall, 31 measures were announced, which were fully implemented in phases by the end of 2013.
According to the new measures:
- When issuing cards, banks are requested to state clearly all terms and conditions.
- Banks must inform customers at least 60 days in advance if they intend to raise interest rates.
- Clients have the right to reject any increase of their credit limit.
- While applying for credit cards, the customers should be provided with Key Fact Statements containing information such as interest rates, fees and charges. In addition, customers should be made aware of full set of terms and conditions before their application is approved.
ATMs and POS terminals
The number of ATMs installed in Hong Kong increased during the review period, from 2,668 in 2009 to 3,239 in 2013, at a CAGR of 4.97%. This growth was primarily due to an increase in Hong Kong’s banked population and competitive pressures that have forced banks to launch ATMs to attract new customers. The number of ATMs in Hong Kong is expected to increase at a forecast-period CAGR of 2.27%, from 3,342 in 2014 to 3,655 in 2018. ATM penetration (the number of ATMs per 100,000 inhabitants) is also expected to increase from 45.7 in 2014 to 48.2 in 2018.
The number of POS terminals in Hong Kong increased from 385,600 in 2009 to 419,100 in 2013, at a review-period CAGR of 2.10%. The growth of POS terminals is an important infrastructure driver that increases the scope of card-based payments. POS terminal penetration, calculated as the number of POS terminals per 100,000 inhabitants, also increased from 5,512 in 2009 to 5,786 in 2013. Penetration is expected to reach 6,370 in 2018.
The number of contactless cards in Hong Kong grew at a review-period CAGR of 5.52%, from 21.2 million cards in 2009 to 26.3 million in 2013. Contactless payments are playing an essential role in speeding up transaction times, and the innovation of facilitating contactless payments through NFC-enabled mobile phones is expected to widen growth opportunities. The Octopus smartcard encouraged the usage of contactless cards in Hong Kong, and Visa payWave is also popular. This has normalised the trend for contactless payments.
Card information is much more secure on EMV-compliant chip-based cards than on traditional magnetic-stripe cards. An increase in EMV adoption and rising internet penetration rates are expected to support the security and growth of card transactions. To help combat online fraud, Visa encouraged ATM operators in the Asia-Pacific region to migrate to EMV-compliant machines. From October 1, 2015, only ATM operators without EMV-compliant machines will be liable for counterfeit card fraud on transactions made using Visa- or Plus-branded cards in the Asia-Pacific (excluding China, India, Japan, and Thailand), instead of card issuers. As a result, counterfeit card fraud is expected to decrease over the forecast period.
Payment channel market share
The Hong Kong Monetary Authority (HKMA) acts as the central bank of Hong Kong. It was established in 1993 and operates under the Exchange Fund Ordinance and the Banking Ordinance. As of April 2014, there were 202 authorised banks and 61 local representative offices operating in the Hong Kong banking sector. Authorized Institutions (AI) consisted of 23 deposit-taking companies, 21 restricted licensed banks and 158 licensed banks. Hong Kong’s main payment channels are cash, cards, credit transfers, direct debits and cheque payments.
Cheque payments held the highest channel share of 80.0% in 2013, rising from HKD6.8tn in 2009 to HKD7.4tn in 2013, at a review-period CAGR of 2.31%. Card transactions rose during review period, at a CAGR of 10.94%. The value of cards grew from HKD623.1bn in 2009 to HKD943.9bn in 2013. Despite advancements in banking technology, 5.7% of transactions ? equivalent to HKD525.6bn ? were made in cash in 2013. However, cash transactions did decrease in value at a review-period CAGR of -0.18%. The value of direct debits grew at a review-period CAGR of 2.41%, and credit transfer posted the negative review-period CAGR of -1.24%.
The HKMA is a government entity responsible for the proper functioning of all the monetary and banking activities. From November 4 2004, it has supervised the country’s clearing and settlement systems under the Clearing and Settlement Systems Ordinance (CSSO). The CSSO also provides legal assistance to protect the completion of settlements under bankruptcy laws. According to the regulatory framework of the HKMA, all licensed banks (LBs) are needed to possess a settlement account with the HKMA.
- Providers of payment services: According to the Banking Ordinance, LBs, restricted-license banks (RLBs) and deposit-taking companies (DTCs) are collectively recognized as authorized institutions (AIs), and operate as a layered system.
- Code of practice for payment card scheme operators: In December 2006, a code of practice was drawn up for all general principles covering the effectiveness and transparency of payment card operations, operational consistency, safety, and data and network security.
- Safety: Scheme operators should be responsible for all processes and their relationships with card issuer, merchants and card holder.
- Operational reliability and business continuity: The payment scheme operator is required to have prudent management, administrative and control procedures for the upcoming possible financial and non-financial risks. The operator should launch the new payment card product after proper risk analysis on that particular card. They have to make sure that it has an adequate number of trained personnel to operate its system at a level it considers appropriate in all situations.