To tackle China’s potentially lucrative credit card market, American Express and Visa have launched their largest initiative yet on the same day – December 8th – by partnering with some of China’s biggest banks, Industrial and Commercial Bank of China (ICBC) and Bank of China (BOC) respectively to release dual currency cards. The launches will take nationwide what has previously only been attempted on a small scale, largely in Shanghai through products launched by Bank of Shanghai and Shanghai Pudong Development Bank (SPDB). In addition to this HSBC has announced a 2005 credit card joint venture with Bank of Communications, in which it has made the maximum-allowed investment of nearly 20 percent.
It has been said that if China’s big four banks were to promote credit cards, business would boom overnight, but a lack of developed credit bureaus in China could make this a risky proposition. Credit card operators in China so far have been operating at a loss, or with very slim profits. But the numbers show that the potential for market growth is highly encouraging.
Operators are clearly encouraged by the sheer lack of presence of credit cards in a massive bank card market that is nearly entirely governed by debit cards. Of China’s 704 million bank cards in circulation, 650 million are debit cards with the balance taken up by store cards, quasi credit cards – debit cards with an overdraft – charge and real credit cards.
With 7 million credit cards in circulation in the first half of 2004, a marginal base of one percent represents a high potential for growth, as demonstrated by the fact that credit cards in issuance increased 70 percent from 2002 to 2003. ICBC aims to release 100,000 of its American Express cards in 2005.
According to Asian Banker Research, among Asia’s main markets, China’s per capita card penetration rate is 0.03 percent, ahead only of Indonesia (0.02 percent) and India (0.01 percent). Korea and Japan, the highest, are both near two percent. It has been estimated that if present trends continue, the card market may have $3 billion in annual revenue by 2010. Should China achieve the 80 percent of eligible adults holding credit cards, as it is in the US, 48 million cards would be issued.
Merchant acceptance is presently still a weak link in China’s credit card chain. With only two percent of merchants accepting credit cards by the end of June 2004, and even with 30 percent in major cities such as Shanghai, there is clearly still much work to be done. According to American Express less than 0.4 percent of merchants that take credit cards accept foreign currency cards.
Visa International hopes to have 75 percent of merchant terminals accepting its card by 2008, to be in line with what it claims was achieved in Athens for the 2004 Olympics. It claims that China currently has 100,000 terminals that accept Visa.
American Express, working for the first time with a Chinese bank, would not disclose the number of terminals that would accept its card, although it explained that the card will work with the networks of ICBC and China Union Pay (CUP). The Visa cards do not carry the CUP logo.
Due to the small size of the market, credit card fraud trends are not properly understood yet. The Chinese government in October announced changes to the criminal law that would include legal definitions of credit card fraud.
According to sources at Visa, most of the new terminals being installed in China are compliant with the EMV anti-fraud security standard that is being promoted in China, although the cards themselves do not carry chips yet. The government will only be publishing China’s EMV standard this month. Neither Visa’s new BOC card nor ICBC’s American Express card will carry a chip, although IC cards of varying types are already in wide use in China. American Express has not released any IC chip cards in Asia Pacific.
Credit bureaus, while still in an early stage of development, should still play an important role in the development of a sustainable rate of credit card usage in China. Local credit bureaus are available to gather a robust set of data, including information drawn from utility payments, that credit bureaus even in mature markets like Singapore and Australia are by law not allowed to gather. Debit card spending and usage patterns, of which China has a well-established industry, may also be a robust source of information for credit information providers.
Partnering with a local institution is also vital for understanding the local markets. Banks like China Merchant Bank run successful credit card programs, that they claim have high profitability – at levels comparable to the USA – without using credit bureaus, largely by issuing through corporations to their employees.
<< Home