The rapid development of China’s credit card market has fostered a growing need on the part of the country’s banks to update and overhaul their back-office operations, processing capabilities and service functions. A new report from payment consultancy Celent highlights the emerging IT trends, as Victoria Conroy reports.
A new report from US payment consultancy Celent, Credit Card Systems in China: Technology and Vendor Overview, charts the development of the Chinese credit card industry to date, and how rapid growth in a short space of time has driven the need for banks in the country to increase their processing capabilities to handle the growing volume of card payments.
A look at the volume of cards issued illustrates why Chinese banks are now placing more emphasis on ramping up their processing power. At the end of 2008, the number of cards issued reached 142 million, and the number of cardholders exceeded 30 million.
China’s credit card industry began to take off in 2003 and over the past five years, the credit card market has been rapidly developing. In terms of system construction, the big banks typically run systems in house, while the small and medium-sized banks have been adopting the outsourcing model, especially in outsourcing to China UnionPay (CUP).
Emerging technology trends
The increasingly IT-driven needs of the Chinese bank card market have produced several emerging technology trends, according to Celent. These include:
• Integration of credit cards with online banking, such as online payments, integration with online malls, and so on.
• Non-core businesses will further be outsourced. Many small banks rely on professional services firms to manage their non-core businesses, which effectively reduces the banks’ operating costs. Some network service providers also establish their own customer credit evaluation systems and data processing systems by tracking online consumer behaviour.
• Managing the issuance of credit cards using customer relationship management (CRM) systems. Through the use of the CRM system, banks are able to collect, track, and analyse customer data and design credit card products based on customers’ needs.
• Integrated chip-based smart cards will play an important role. Smart cards have a high level of security and can effectively implement identity authentication, digital signatures, online payments, and database authorisation, as well as recording loyalty points. They can also effectively reduce the risks of transmission, transaction, and fraud.
• Contactless credit cards: Contactless cards have a unique advantage for payments of small amounts.
Structure of credit card systems
Celent draws several conclusions in the report, including the following major trends based on the number of cards issued:
• Until the end of 2008, the total number of cards issued was nearly 142 million. In the past three years, the annual growth rate reached 54 percent. In the next four years, it will retain an average annual growth rate of more than 30 percent.
• After foreign banks were allowed to issue debit cards, they also started to gradually issue credit cards. In December 2008, the Bank of East Asia started to issue credit cards in China.
• Celent estimates that over the next four years, there will be eight banks with more than 10 million cards issued credit cards, and 30 banks with more than 1 million cards. This also means that many banks will need to upgrade their systems to support a bigger scale of operations.
Regarding the choice of credit card systems of banks:
• Large banks generally choose to purchase software packages from external sources and then develop them internally.
• Small and medium-sized banks often choose to outsource. Outsourcing can reduce the risks of issuing cards borne by the banks, shorten the period needed to issue cards and reduce the costs from issuing cards. At present, only one-third of the credit cards use the outsourcing model, mainly due to the relatively late entrance of small and medium-sized banks and foreign banks to the Chinese credit card market. However, it is expected that more credit cards will be operated by way of outsourcing in the future.
Conclusions and future opportunities
Looking to the future, Celent predicts that there will be major market opportunities for foreign vendors of credit card systems. At present, China’s credit systems are basically foreign systems. As compared to other systems, the banks in China accept foreign credit card systems more readily. China’s credit card market is not yet saturated and will continue to maintain rapid growth. This will not only bring new market opportunities, but also opportunities for more upgrades of the current credit card systems as some banks will likely face a system capacity issue.
In the future, many city banks (third tier banks) and foreign banks will be permitted to issue cards, and they will need to outsource or run a credit card system in house. With the continued development of the credit card industry, profitability will gradually rise. Some banks may set up independent credit card departments and even independent companies. Hence, these companies may need to rebuild their own systems.
With the advancement of technology, more and more credit card systems need to link with CRM and network systems, so as to better practice a customer-centric approach to business.
The challenges for foreign systems suppliers include:
• The processes of the banking industry in China are not very compatible with foreign business systems.
• Large banks in China have high expectations on the performance of the system, but foreign systems are not able to meet these requirements entirely. In this context, large banks usually construct their own system based on purchased software packages.
• Small and medium-sized banks usually use the outsourcing model, and China UnionPay Data is the market leader.
• Support for localisation.
• Acquiring a reference client and successful implementation in China.
• Capital cost: large and medium-sized banks have more mature credit cards systems already. In the future, many small banks are expected to start their own credit card systems, but these small banks usually have limited budgets.