to competition, prospects for foreign banks in China look bright.
But there are still hurdles to clear before entrants can issue
their own cards, leaving local partnerships the most effective
route to market. Titien Ahmad reports.
With card penetration rates at 0.03 card per capita, credit card
issuers in China are exploring every means to put a credit card in
the pockets of the more than 1.25 billion consumers in the country.
China Merchants Bank, the largest credit card issuer with an
estimated 33 percent market share, has been the most active in
forming partnerships. So far in 2007, it has announced deals with
China Southern Airlines for a frequent flyer card, card issuer JCB
for a Hello Kitty Card targeted at women, and Hola, a home
China Merchants Bank’s number of cards in issue doubled to 10.3
million in 2006, with 70 percent estimated to be active. An
estimated 63 percent of customers are revolvers. In its recent
results, the bank announced that its card transaction volume rose
101.8 percent year-on-year to RMB66.4 million ($8.7 million).
The stringent regulations barring foreign banks from issuing
locally denominated credit cards have led to partnerships such as
GE Money China and Shenzhen Development Bank (SDB). According to
Michael Barrett, CEO of GE Money China: “When you look at China and
its infrastructure, partnerships are required to support the
business. Going to market with partners allows you to understand
the culture and marketplace better – Shenzhen Development Bank
[SDB] is evidence of that. As a foreign bank, you cannot issue
credit cards and SDB was the ideal partner based on distribution
capabilities, market knowledge and management team.”
GE Money and SDB have since launched two credit cards with US
retailer Wal-Mart and French supermarket chain Auchan. GE will
likely continue the partnership approach.
“GE Money in China is about partnerships,” said Barrett. “We
look for partners that believe strongly in retail banking, and
partnerships can extend to retailers with good retail channels. We
also look for partners that share the same management beliefs; we
found that SDB shared our belief in terms of focus on retail
banking. We need different products and both local and global
partners to grow the business in China.”
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When the second round of China-US economic talks ended recently,
China agreed to further open the domestic market by giving approval
to foreign banks to issue renminbi-denominated credit and debit
cards. However, market observers stressed that there are still
hurdles to clear before foreign banks can start issuing their own
“The credit card sector is now in theory open to locally
incorporated foreign banks, but the first draft of the regulations
is still with the China Banking Regulatory Commission [CBRC] and
the central bank, so it is unclear when and how that will be
allowed,” Stephen Green, Standard Chartered Bank’s Shanghai-based
economist, told local newswire Xinhua Financial Network
Green also said that as the locally incorporated foreign banks
grow they will require capital, but the State Administration of
Foreign Exchange, which approves applications to bring in capital,
will probably prefer the CBRC to lower capital requirements or
allow these banks to issue onshore debt or equity. This will affect
the foreign banks that would need capital to expand their cards
Importance of branches
Physical branches are also important for mass market
penetration, and while foreign banks are no longer required to
provide separate capital for each new branch, getting approval to
launch a branch takes up to six months. A foreign bank can open
only two outlets in a year in each main city, thereby limiting
network expansion to a total of eight branches for the four key
cities of Shanghai, Guangzhou, Beijing and Chengdu.
In an interview with CI’s sister publication,
Retail Banker International, Christine Ip, head of
consumer banking for Standard Chartered China, said that while the
bank is looking to extend its product portfolio in China to credit
cards, “we have to grow in a step-by-step manner despite the fact
that we now have a renminbi retail licence”.
To compete against the thousands of branches owned by the four
big state banks, foreign banks have no choice but to partner with
local institutions to increase their market penetration and
Another challenge is that China is still a nascent market for
credit cards. “China is still a cash-based society compared to
other markets in Asia,” said Ip.
Customers do not roll over enough balance to generate profitable
interest charges and prefer to pay off their credit card bill in
full at the end of every month. Local banks charge less than 10
percent on outstanding balances, making profitability a challenge
for foreign banks used to charging interest rates of 18 percent and
up to 36 percent in other Asian markets.
Co-branding partnerships thus try to tap into existing purchase
behaviour and transfer it to a credit card by making it a more
attractive mode of payment than cash. Retailers or service
providers such as Wal-Mart, Staples, Hola and C-trip.com reach
customers to whom the banks might not have access through their
limited branch networks.
It is hard to dent the optimism over China’s cards and retail
banking prospects. A survey of 40 foreign banks by global
consultancy Price–waterhouseCoopers found over 80 percent of
foreign banks operating in China predict that their local business
revenue will grow by more than 20 percent in 2007, and some predict
that credit cards will grow sharply in the next three years.
“There are a lot of opportunities in China. The market has grown
tremendously – two years ago there were 6 million to 7 million
cards on issue and now it’s three to four times that amount,”