Although the Hong Kong credit card market is
close to saturation, issuers are still keen to get a slice of the
island’s increasing affluence and consumer confidence. With
customer retention the name of the game, innovative product
offerings to boost loyalty are on offer. Truong Mellor

Consumer spending is once again on the rise in
Hong Kong, one of Asia-Pacific’s strongest economies, fuelled by
improvements in the labour market such as significant wage rises in
2006 and positive growth in employment rates. Wage growth has been
focused within the upper and upper-middle classes in recent years,
largely due to more foreign workers entering the economy as well as
wage pressure from China on the country’s low value-added industry

The Hong Kong market remained an island of
financial calm during the consumer lending default crises seen by
Taiwan and South Korea several years back, which subsequently saw
major card issuers ramp up their investment in the country. Retail
sales across the entire Asia-Pacific region are expected to show
continued growth on the back of a strong consumer confidence
sentiment for the first half of 2008. According to the latest
MasterCard Worldwide Index of Retail, Hong Kong is predicted to see
a huge 10.5 percent rise – up from 3.2 percent for the first half
of 2007 – driven by rising household incomes and a robust stock

Credit cards market nears saturation

By any reasonable measure, the cards market in Hong Kong should be
close to saturation point at this stage. By the end of 2007, the
number of credit card accounts in Hong Kong fell just shy of 11.6
million, an extraordinarily high level of penetration in a country
with a population of just 7 million. According to figures recently
published by the Hong Kong Monetary Authority (HKMA), total card
receivables increased HK$6.2 billion ($795.3 million) in the fourth
quarter of 2007, a growth of 8.8 percent, despite a transfer of
HK$126 million of rescheduled receivables outside the credit card
portfolios of the surveyed institutions during the quarter.

Because of this market saturation, card issuers
are having to explore new segments and develop innovative products
in order to stay afloat in Hong Kong.

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One particular sector that has proven lucrative
for the industry is that of premium and private-label cards for the
burgeoning upper and upper-middle classes in Hong Kong. The
majority of new card benefits and discounts involve items such as
package tours, toys, electrical equipment, travel and sports goods,
party expenses, travel fares and personal care products.

Standard Chartered’s Shop ‘n Gain offering, which
gives the customer discounts at a variety of local merchants, is a
prime example of this. Similarly, HSBC has a mileage programme for
cardholders that offers frequent flyer miles on both the Asia Miles
and Singapore Airlines KrisFlyer schemes, and a loyalty discount
offering that increases the redemption savings according to the
number of years the credit card has been held. In 2007, Visa
introduced a new range of offers for its Platinum cardholders with
benefits for family, health and wellness, entertainment and

The aim for card issuers is to differentiate
themselves from the competition, but it is worth noting that the
average Hong Kong retail consumer is by comparison with their
Western counterpart rather loyal to their preferred card brand.
Therefore, it is customer retention as opposed to acquisition that
issuers are seeking. While in many ways the market is saturated,
there remains some headroom for further growth and development.
Areas such as insurance and healthcare still provide opportunities
for increased spending on cards.

Debit cards

Due to the prevalence of credit cards in Hong Kong, debit occupies
a relatively small, but growing space. To date, the key debit card
operator in Hong Kong has been Electronic Payment Services Company
(EPS). EPS, established in 1984, is a consortium of 22 major banks
in Hong Kong. Its mission is to provide greater convenience for
customers and merchants via wider use of electronic fund transfers.
EPS is now welcomed at over 25,000 acceptance locations in Hong
Kong, Macau and Shenzhen. EPS processes over 250,000 transactions
worth HK$450 million daily.

Although exact figures for the year 2007 have not
yet been made available, CI estimates that the number of debit
cards in circulation in Hong Kong was 4.9 million at the end of
2006. With the credit card market now at a saturated stage, it is
likely that issuers will look towards debit cards as key
competitive differentiators in the future. The growing popularity
of prepaid cards could lead to a model where issuers’ debit and
prepaid strategies become more closely aligned, resulting in a more
integrated product strategy going forward.

Octopus extends its reach

One player that is driving further innovation and expansion in the
Hong Kong cards market is the Octopus scheme, which has long
outgrown its initial transport function and spread its tentacles
into retail micropayments, building access control and the
education environment. It is estimated that 28 percent of Octopus
transactions now happen within the retail space – an annual figure
of HK$4 billion. Nearly 16 million Octopus cards are in circulation
in Hong Kong. More than 1,000 retail service providers accept
Octopus cards, with over 50,000 readers now deployed in the

Further growth for the company will be most
likely to happen within these newer applications for the card, as
there is already an almost comprehensive adoption rate for the
transport function. According to Donald Cheung, head of corporate
communications for Octopus, Hong Kong still holds growth potential
for the company as more businesses in the retail sector see the
benefits of utilising the Octopus payment service. He notes the
launch of the Portable Octopus Processor last year, which has
helped extend the company’s reach to the traditionally underserved
small- and medium-sized retail sector. This has brought in over
1,000 new retailers since its introduction, and Cheung cites
several examples such as bookstores, cosmetic stores and
photo-finishing shops.

Despite its continued success in Hong Kong,
Octopus faced some operational difficulties in 2007. After numerous
customer complaints, the company was forced to shut down its EPS
card channel, an ATM-like system that allowed cardholders to reload
their Octopus cards through linked bank accounts, after cardholders
reported that EPS deducted funds from their bank accounts without
putting the funds on their Octopus cards.

Smart card competition

2008 may see the first viable challenge to the Octopus monopoly on
the contactless smart card market in Hong Kong. Hang Seng Bank has
recently launched the new co-branded enJoy credit card in
conjunction with Visa, the first credit card in Hong Kong to
utilise the Visa payWave contactless payment technology. While
there have been other attempts to chip away at the dominance of
Octopus in the local market – HSBC’s Mondex wallet and the Visa
Cash backed by the Bank of China (and later Bank of East Asia) were
launched in 1995 but were both dead in the water by 2002 – they
came burdened with expensive service charges and long transaction

Visa’s payWave tap-and-go technology could
provide the crucial element of speed and convenience. Additionally,
customers can add up to two different bank accounts onto the enJoy
card and use it as an ATM card for deposits and withdrawals. To
make the product appealing to the rewards-hungry Hong Kong
consumer, the enJoy card comes with a generous rewards scheme with
selected retailers.

However, stealing away significant market share
from Octopus in the contactless space will be difficult for any new
proposition. The level of transaction fees involved will generally
mean that retailers will be by and large opposed to accepting any
new credit card or purchase card scheme. The general propensity for
brand loyalty within the Hong Kong retail market means that it will
be hard to shift consumers to any new platform.

Dual-currency cards

There has been a lot of growth in the dual-currency card market,
driven by a marked increase in the number of Hong Kong residents
who travel to mainland China for business or vacation. Conversely,
Chinese businesses seeking to work with the West have all set up
shop in Hong Kong in recent years.

It is very difficult to find a merchant in
mainland China that accepts Visa or MasterCard, which gives cards
issued by the sole Chinese interbank network and credit card
organisation, China UnionPay (CUP), a distinct advantage. The main
problem for foreign issuers looking to set up operations is that
they will not be allowed to issue in renminbi, the Chinese
currency. Although this situation is changing, progress remains

Paradoxically, CUP-issued credit cards are
generally branded with either MasterCard or Visa, as they are
designed for Chinese residents who travel. The ease-of-use factor
ensures that this will be a strong growth area in the years to
come, although whether dual-currency cards will become a serious
threat to Visa and MasterCard in the local Hong Kong market as the
influx of Chinese business travellers and tourists grows remains to
be seen.

Both Bank of China and HSBC in Hong Kong have
been very active in this area. HSBC’s renminbi-denominated credit
card is widely accepted by all CUP merchants at over 370,000
locations and 62,000 ATMs in mainland China. It also offers a
generous rewards scheme for cardholders with a variety of Chinese
retailers. Bank of China (Hong Kong) (BOCHK), which has a strong
background in mainland China, allows customers to withdraw renminbi
if they have their card linked to an renminbi savings account. The
BOC Card (renminbi) lets cardholders make renminbi account balance
enquiries, change their PIN number and transfer funds through more
than 380 ATMs of BOCHK in Hong Kong. They can also withdraw
renminbi notes from over 170 ATMs displaying the ‘renminbi
available at this ATM’ signage.

Understandably, this is an area that Octopus is
keen to expand into. The company has recently joined forces with
CUP to expand its availability across the border, enabling
customers to use Octopus in popular restaurant chain Cafe de
Coral’s Shenzhen outlets. The exchange rate for Hong Kong customers
will be set by Cafe de Coral with reference to the rate announced
by the bank for clearing and settlement, and this rate will be
posted for customers in the outlets.

Regulatory change

The key regulatory change to the cards landscape in Hong Kong in
2007 was the introduction of the Code of Practice for Payment Card
Scheme Operators. This is a non-statutory initiative drawn up and
agreed to by MasterCard, Visa and numerous other players in the
local market that came into force on 1 January 2007. In light of
events such as the well-publicised TJX fraud case in the US, the
HKMA sought to bolster the confidence of consumers in payment
operations by endorsing efficiency and safety within the

However, it remains too early to see what effect,
if any, the Code of Practice has had in Hong Kong. The
implementation of the code has been smooth so far, the HKMA told
CI. It will have a better idea by the second quarter of 2008 of the
level of compliance with the Code. In the meantime, the HKMA is
maintaining close contact with them to ensure that the code
achieves what it is designed to achieve.

Because there was previously no clear legislation
regarding the payments industry, the push for such a Code of
Practice was perhaps a reflexive action on the part of the HKMA to
have some form of ethical framework in place. The fact that the
Code of Practice is voluntary means that it will not be binding for
the issuers in question. The HKMA has limited clout when it comes
to the regulation of credit cards in Hong Kong.

What this new Code of Practice will most likely
drive is an increased prudence when it comes to the storage of
credit card data, something to ease the minds of both retailers and


2008: effects of the credit crunch?

While all the major players in Hong Kong are maintaining a cautious
approach, it seems unlikely that the local market will see much
impact from the global credit downturn. It is worth remembering
that the Asia-Pacific region has recently seen a loan default
crisis of its own – one that Hong Kong remained largely immune to.
Traditionally, revolving balance rates have been very low in Hong
Kong, and the tendency is for consumers to pay off any outstanding
balances each month. Should a consumer want to purchase anything of
a more substantial value, they would generally approach their bank
for a personal loan.

While a sharp rise in loan defaults would
undoubtedly spill over into the credit card space, this still
remains an unlikely scenario as credit cards account for only 30
percent to 40 percent of all transactions. Combined with an ongoing
construction boom and a continual stream of businesses moving into
Hong Kong, the market appears to be sustainable.


Standard Chartered

Standard Chartered has a long history in Hong Kong, having begun
operations there in 1859. More recently, the bank launched a
Business Platinum Card in conjunction with Asia-based IT
distribution and service company Jardine OneSolution (JOS), aimed
at SMEs that offers business instalment loans, business overdrafts,
mortgages, non-expiring bonus points, exclusive offers on IT
products and services, telecommunications services and essential
office supplies. Standard Chartered is intending to issue 5,000
cards in the first 12 months.

The bank has also been busy during the past year
trying to launch dual-currency credit cards in China for wealthier
customers as well as small- and mid-sized corporate customers.
Although Standard Chartered has been allowed to issue the cards by
the Chinese authorities, the bank is still attempting to hammer out
the details regarding data centres.


HSBC is a stalwart in the Hong Kong banking market. In 2006,
average cardholder balances grew by 16 percent to $3.5 billion, and
the bank issued over 1 million new cards that year. HSBC’s market
share in Hong Kong was just shy of 50 percent in 2006. Net fee
income rose by 32 percent to $977 million.

The bank is about to launch a Green credit card
in Hong Kong that will contribute a percentage of every purchase
made to environmental causes. The card will also feature paperless
statements alongside Green rewards unique to the offering, as well
as the privileges offered by HSBC Visa Platinum.


Citibank in Hong Kong was actively involved with co-branding
initiatives in 2007 in order to create more focused offerings in
the competitive Hong Kong market. Partners include airline Cathay
Pacific – its co-branded card comes with an offering of air miles
and complementary membership to The Marco Polo Club – and oil giant
Shell. The Shell Citibank Platinum Card allows customers to earn up
to HK$1.30 per litre as a fuel rebate upon filling up at any Shell
stations in Hong Kong. Citibank also offers a dual-currency
renminbi card, with a two-year annual fee waiver plus the most
extensive network coverage in mainland China. Cardholders have the
option of several instalment programmes, including cash conversion
and a balance transfer option for flexible financial management,
and Citibank cards are all Octopus AAVS-enabled for

Citibank is heavily committed to switching
customers to electronic statements, offering various lifestyle
incentives including healthy cooking lessons and health centre VIP
guest passes. In line with its focus on more targeted customer
offerings, Citibank has been active in conducting surveys and
analysing databases to examine the lifestyles and requirements of
its customers.