China's emerging bank card market could unleash an unprecedented
tidal wave of plastic consumers.
Nowadays, Chinese consumers are inclined to buy a wallet or
purse that can hold as many bank cards as possible, rather than
worry about cash capacity. And, of course, they pay for that new
wallet with plastic.
According to Chai Hongfeng, vice president of China UnionPay, as
of the end of the first quarter of 2004, 690 million bank cards had
been issued in China, an average of one for every two people. The
number of franchised businesses under the bank card regime amounts
to 540,000, and that of bank card issuers has increased to 140
nationwide from 80 when the China UnionPay was founded. This
includes 16 Hong Kong banks. In the first four months, interbank
card business was worth 187.6 billion yuan ($22.6 billion), a
year-on-year increase of 103 percent. "Interbank card-based deals
are steadily rising, and the bank card industry in China is
promising and has broad market prospects," said Chai.
The number of families with annual incomes of $5,000 to $12,000
has now risen to 45 to 60 million, and the middle-income population
has reached the international standard for a rapid development
period in the use of bank cards, said Feng Weiquan, senior vice
president of MasterCard Asian-Pacific Region and general manager of
MasterCard Greater China. He predicted that in the next year or
two, the number of people who use credit cards will rise
explosively, especially in medium and large cities.
In light of the upcoming 2008 Olympics and to elevate the image
of Beijing as an international metropolis, the capital city's
government plans to remove barriers for consumption by cards by the
end of 2004.
According to this target, by the end of this year, more than 50
percent of business institutions that have fixed operational
locations and annual turnover of more than 500,000 yuan ($60,386)
will be capable of providing card services. All the important
commercial zones and districts, star-rated hotels, important
tourism sites, and retail businesses and catering firms near the
Olympic venues will be able to handle card-based business; the
government expects that by 2008, 90 percent of the city's
businesses will be card-capable.
Interbank transactions in Beijing and transactions between
Beijing and other cities should reach 99 and 90 percent,
respectively. The proportion of sales by card within total sales of
all consumer goods is expected to rise from five percent in 2001 to
around 20 percent, and the number of automated teller machines will
increase to 3,000.
In Shanghai, a city with a population of over 16 million, every
person owned at least two bank cards by the end of 2003. Of every
14 bank cards issued in China, one is issued by a commercial bank
in Shanghai, and a quarter of the country's interbank card
transactions took place there.
Shanghai's customer-savvy department stores and banks have begun
jointly sponsoring card-purchase lotteries. It is not unusual for
Shanghai consumers to win an insurance policy or a cellphone by
buying with cards. In a three-year-long card promotion being held
by 17 card-issuing financial institutions in the city, the prizes
are worth a total of five million yuan, and the grand prize winner
will drive home in a new Polo car worth 120,000 yuan ($14,493).
By 2005, more than 50 percent of business institutions, tourism
spots, restaurants and other service providers in Shanghai will be
able to do bank card deals. By then, card consumption will account
for 25 percent of the total sale of consumer goods.
Hu Weiren, a Shanghai-based economist, said the common use of
bank cards is a sign of the dynamic financial activity in the
region. As the city that first opened bank card businesses in
China, Shanghai is the center of the industry in the nation.
Some businesses, however, are not happy with bank handling fees
for card transactions. In June, the dispute escalated to a two-day
boycott of card sales by 35 department stores in Shenzhen.
Although the central bank has implemented a new regulation on
income distribution of interbank card transaction deals, in which
the central bank believes it has granted many advantages to
businesses, it has not ended the friction between businesses and
banks on handling charges.
Another big problem is card-related crime. According to the
central bank, such cases involve around 100 million yuan ($12
million) every year, and economic loss is preliminarily estimated
to be around 30 million yuan ($3.6 million), a figure that is
steadily rising. MasterCard's Feng Weiquan attributes bank card
crimes mainly to technical defects in the magnetic strip, as
criminals in the know can easily steal information on the strip
with specialized equipment and then copy this to a new card.
Some commercial banks have already fought back against such
crimes. The Industrial and Commercial Bank of China resumed the
code system in card business, except Peony International Debit
Cards, in November 2003, one and a half years after it switched to
a signature system, reigniting the debate over whether signature or
code is more secure. Some other banks have increased input to a
theft detection system, which can inform the card owner of
transaction information within a few seconds when a single
transaction has come to certain amount.
But the risk remains. Bank card related fraud around the world
makes up 1.5 percent of total annual transactions. The main
reaction of the international community is to greatly expand the
safety attestation of Europay MasterCard Visa (EMV), a de facto
standard for debit and credit cards, jointly developed by Europay,
MasterCard and Visa, and gradually replace magnetic strip cards
with chip, or IC, cards.
In China, the central bank is stepping up the EMV program and
amending rules on financial IC cards, but there is no clear
timetable for widespread use of IC cards. The high cost of IC cards
and necessary point-of-sale and ATM hardware is slowing the
upgrade.
Another urgent problem facing the Chinese banking system is
legislation on bank cards. China is seen by many as the world's
largest potential credit card market. But Visa China's General
Manager Xiong Anping says the redundant construction, vicious
competition, underdeveloped risk management technology, lack of a
social credit system and other prominent problems are flashing
warning signs of risk. Card business could create new
non-performing assets for Chinese banks.
Thus, at the national banking conference held in March, the
China Banking Regulatory Commission (CBRC) indicated that it would
take serious measures to cool down the "credit card heat" that
occurred in 2003.
Huang Yiping, a chief economist with Citigroup, forecasts that
after China completely opens its banking industry in 2006, the heat
of competition between domestic and foreign banks will first be
felt in the card business.
Current regulations on bank cards state that foreign banks
cannot open foreign currency card businesses unless they have
operated RMB card businesses for more than five years.
But nearly all foreign banks have urged China to hasten its
opening of the card market. Standard Chartered, the Bank of East
Asia, American International Group and Morgan Stanley have applied
to the CBRC to issue foreign currency cards in China. In January
2004, the Bank of Shanghai and HSBC jointly issued a
single-currency card.
On February 17, the Shanghai Pudong Development Bank (SPDB) and
Citibank jointly launched cards, a big step for the market. The
cards are the first in China that can be settled both in RMB and US
dollars and are supported by international management and
technology expertise. The cards can be used in the global networks
of both Citibank and SPDB and be settled by VISA international, a
membership association owned by more than 21,000 banks and other
financial services companies worldwide.
But to Citigroup, the real breakthrough is that it can
participate in the management of the Credit Card Center of SPDB, a
rudimentary credit card joint venture, and keep separate accounts
in the center. Citigroup expects the center to turn a profit in
about two years.
The entry of world-class credit card issuers into China has
brought challenges to domestic banks, as well as a positive effect
in cultivating and standardizing the market.
(Beijing Review June 29, 2004)