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Beyond Cash:

CHINAS EMERGING PAYMENTS MARKET


RESEARCH SUMMARY
written in collaboration with The Economist Intelligence Unit

Foreword
With over one billion bank cards issued in China and banks and regulators encouraging an increased number of merchant acceptance
points, the cards industry is growing exponentially and is gaining considerable attention.
As new local and foreign banks accelerate their plans for market entry, we wanted to gain some perspective and benchmark the
opportunities and challenges incumbents and new entrants face as they offer new payment options to consumers in this rapidly
growing economy. As a result, First Data International commissioned this report to highlight the views of foreign banks and retailers
on the prospects for Chinas cards and payments industry.
The vast majority of our survey respondents see opportunities for their business in China, naming credit cards as the primary segment for
future revenue potential.
First Data truly agrees with this assessment. As early market entrants to China ourselves we introduced the concept of outsourcing
into the Chinese payments industry where the service is being increasingly used both by newcomers and well-established issuers.
Like the multi-national banks already active in China, we also leveraged international best practices and payments processing
expertise from other markets for the benet of our Chinese customers. First Data offers a range of infrastructure, operations,
licensing and outsourcing solutions from card issuing to merchant acquiring and ATM processing for organisations looking to
develop their cards and payments business in China.
We are committed to the Chinese market and look forward to working with all stakeholders regulators, banks, merchants,
and cardholders to ensure the ongoing successful development of the industry.
I hope this report will provide an interesting perspective on the views of foreign banks and merchants active in China at this critical time
of development in the payments market.

Pam Patsley
President
First Data International

First Data Beyond Cash: Chinas Emerging Payments Market

Who Took Part In The Survey


A total of 152 banking executives worldwide
took part in this survey, all from banks either in
China or planning to enter the market by 2010.
Around 34% of respondents were based in
Asia-Pacic, 32% in Europe and 26% in North
America, with the balance from the rest of the
world. All respondents came from management
positions, with C-level executives accounting
for about 30% of the total and senior vice
presidents, vice presidents, director, heads
of business units or heads of departments
accounting for a further one-third. In terms of
size, rms were split roughly evenly between
those with revenue either above or below
US$1bn; nearly one-quarter had revenue
of more than US$10bn. Retail bankers
accounted for 38% of the sample.

Preface
First Data International commissioned the Economist Intelligence Unit to write
Beyond Cash: Chinas Emerging Payments Market, an in-depth review of the
burgeoning payments market in China.
With the exception of the First Data Insights sections in the text and sidebars of the
report, the views and opinions expressed herein are those of the Economist Intelligence
Unit. The Economist Intelligence Unit executed the online survey, conducted the
interviews and wrote the report. The ndings and views expressed in this report
do not necessarily reect the views of the sponsor.
The research drew on two main initiatives:
The Economist Intelligence Unit conducted a wide-ranging online survey of 152
senior bankers from around the world in March and April 2007. All respondents
represent banks that either operate in the Chinese market already or plan to
enter the market within the next three years.
To supplement the survey results, the Economist Intelligence Unit also
conducted in-depth interviews with 20 senior banking, retail and payment
services executives from rms currently operating in China, or intending to
enter the market within the next three years.

We would like to thank all the executives who participated in the survey and
interviews for their time and insights.
June 2007

First Data Beyond Cash: Chinas Emerging Payments Market

Table of Contents
06 Executive Summary
Sound practice: ve tips for foreign banks entering
the Chinese payments market
09 Introduction
09 The evolution of the Chinese payments market
Chinas card market at a glance: Cards issued and transaction volume
Boom time in China: GDP growth from 2005 to 2010
11 Opening up the market
Entry strategies
Partnering for success
14 The potential opportunity
Holding an edge
16 Operating a cards business in China
Payment fees and incentive structures
Slim margins: Chinas interchange rates set by PBC
Card processing
Merchant card acceptance and ATM use
Do you take cards? Card acceptance on the rise in China
20 Numerous challenges remain
Top challenges for payments
Risk management
Regulatory restrictions
Talent and IT
Savings culture
24 Bringing merchants on board
Merchant acquiring
Co-branded cards
The network experience
26 The outlook for the cards business in China
Short-term pain...
...for long-term gain
The rise of e-commerce and alternative payment platforms
30 Conclusion
Regulatory recommendations
China Merchants Bank: a model for the future?
32 Appendix
The rst wave? Foreign investment in mainland Chinese banks
Making the leap. Foreign banks with announced intentions
to enter Chinas retail banking sector

First Data Beyond Cash: Chinas Emerging Payments Market

Executive Summary
As Chinas economy continues its robust expansion, and as its banking sector nally
opens up to foreign competition, the demand for credit is taking off. Local banks have
ramped up their operations for the last three or four years in preparation for increased
competition from foreign rivals. As their efforts bear fruit, the potential for Chinas
payment cards market has never looked better.
Nowhere is this more so than in Chinas emerging market for debit and credit cards.
With more than 200m new cards issued last year alone, Chinas total number of plastic
cards broke though the one billion mark in 2006, with no sign of the pace abating. While
a relatively tiny portion of this totalsome 50 millionare currently credit cards, growth
rates for the sector (both in terms of spending and transaction volumes) are now much
higher than for the mass-market debit cards that form the bulk of cards in circulation. No
surprise, then, that foreign banks are now eyeing this space for opportunity.
The main ndings of our research are as follows:
Retail banks are very bullish on consumer banking in generaland credit
cards in particular... For many of the retail banks surveyed for this report,
credit cards are the main priority. When asked what products they believe
hold the greatest prospects for Chinas personal banking industry, retail
bankers were most optimistic about credit cards and bank accounts. Fifty-ve
percent of study respondents believe the prospects for these consumer banking
products are highly promising over the next three years. Debit cards are seen as
the next most promising item (45%), although these are directly linked to the
prospects for basic bank accounts, followed by wealth and investment
management (40%). In fact, respondents report overwhelmingly positive
views for all aspects of the consumer banking sector.
...But the outlook for prots is less certain. When it comes to prots in
the credit card market, our survey respondents are less condent. Forty-three
percent agree that it would be difcult to make a prot in the credit card market
over the next three years, compared with 36% who remain uncertain and
just 21% who believe it is possible. The key issue is tough competition for
customers between local banks growing their market share and foreign rivals
trying to establish a beachhead in China. This competition inevitably leads
to lower card fees, which keeps earnings low (or negative). In addition, banks
are grappling with low rates of revolving credit on cards, resulting from a cultural
aversion to accruing debt, together with low fees and interest rates that issuers
are allowed to levy on merchants and card users.
Infrastructure is key to growth in the cards market. According to the
executives surveyed for this report, improving infrastructure encompassing
both merchants and ATMswill play the biggest role in encouraging the
increased acceptance of card payments in China. Fully 83% of retail bankers
polled chose this as an essential requirement. This component scores
far ahead of any other criteria, for example better collaboration between key
stakeholders such as banks and payment processors (48%) or publicity
campaigns (33%). When asked what the Chinese market needs to support
a payments infrastructure, half of the survey respondents selected better
availability of consumer credit-history data.

First Data Beyond Cash: Chinas Emerging Payments Market

06

Merchant acquisition is a major hurdle. Convincing merchants to accept


credit cards is a major challenge for banks. Eight out of ten retail bankers
polled for this report say that local retailers preference for cash is either
a very signicant or signicant barrier in operating cards and payment
services. In part, this is because retailers dont yet feel much pressure
from customers to provide payment card facilities in a society where
cash is traditionally preferred.
Despite an opening nancial market, much risk remains. More than half (53%)
of bankers polled for this report selected political risk, relating to policy and
regulation, as the biggest existing or potential risk associated with their rms
operations in China. Retail bankers in particular listed licensing risk (chosen by
43%) as a major concern, second only to political risk, highlighting the difculties
associated with getting permission to expand into new regions or markets.
Along with this, 41% of the respondents expressed a general concern about
the outlook for Chinas banking industry.
Much work needs to be done to promote a plastic card payment culture in China.
More than anything else, a more extensive card network and infrastructure must be
rolled out to promote consumer usage. Along with this, databases of consumers credit
and transaction histories require expansion. In addition, Chinese consumers must be
encouraged to make the switch from cash-based transactions to plastic cards.
Despite these challenges, growth is already strong. And in cities such as Beijing,
efforts to prepare for the 2008 Summer Olympic Games will help create an
environment that supports card payments. Although foreign banks entering the
market will have their work cut out, the opportunity is simply too big to ignore.

Sound practice: ve tips for foreign banks entering the Chinese


payments market
1. Dont arrive expecting fast prots. The opportunity is huge but the China market
is a marathon, not a sprint.
2. Choose your partners carefully. All domestic banks are not created equal.
Find one that has strategic goals similar to your own and be wary of those
looking only to extract your expertise for their own purposes.
3. Bring skills with you. The shortage of local talent means that foreign banks
must bring in skilled personnel from abroad to supervise important operational
functions. Also aim for high rates of local staff retention, both by offering
competitive salary packages and structuring employment contracts to
discourage defections once employees have been trained.
4. Maximise use of the Internet and other technology. This will help to compensate
for lack of physical branch networks and provide a higher standard of customer
service than that offered by local rivals.
5. Be focused in choosing your market. Rather than selling to a mass audience,
creatively explore alternative marketing channels. Target market niches and seek
co-branding partnerships with local companies offering client bases with
attractive demographics.

First Data Beyond Cash: Chinas Emerging Payments Market

07

First Datas
Recommendations
Recommendations for Foreign Banks
Respect the culture China is a very
specic market with characteristics unlike
most other countries
Leverage best practice from your banks
operations in other countries (e.g.
marketing, risk, IT)
Build in reasonable timelines for a return
on investment
Build and develop a dialogue with
regulators and keep them updated
on your progress
Focus on customer service it is still
a major advantage for foreigners over
local banks
Leverage banks focus on wealth
management to deliver high-end card
products. High net worth customers are
also a major source of fee income even if
they dont revolve their card balances
Be prepared for competition Chinese
banks are learning very quickly.
Recommendations for Local Banks
Consider remote distribution channels,
not just branches
Differentiate your product offering
Use your branch network to exploit
market opportunities outside the four
main cities
Centralise your IT infrastructure and mine
your databases
Improve customer service
Ensure your technology is easy to
use for customers with limited
technological skills.
Recommendations for Both
Types of Banks
Change the cultural perception on
revolving credit
Leverage alternative distribution channels
Cross-sell credit cards are a very useful
product to use as a base for cross-selling
or to sell to existing customers
There are a limited number of skilled
people with payments industry
experience recruit talent, and
retain them
Build risk capabilities
Build a card acceptance network fast
Look at opportunities to sell card products
to companies commercial cards help
companies manage cash ow, are a
short-term source of funding, offer
management information on employee
expenses and help to manage
suppliers better
Learn from the credit crises that have hit
many emerging markets ensure you have
good risk management practices before
you start lending to consumers
Be prepared to work with regulators
pro-actively to help stimulate the market
for all players.

First Data International Insights


The size and rapid growth of Chinas economy has led many foreign banks to enter
the market in the last ve years. As shown by the result of this survey, two of the most
protable business segments - retail banking and credit cards rank at the top of the
banks agenda.
Banks surveyed view their investment as a long-term play. This is a wise strategy in a
market that is still in the early stages of development. However, both local and foreign
banks are conscious that this is an opportunity too big to pass up..
There are now over 1 billion payment cards in issue across the country. Although only
50 million of these cards are full revolving credit cards, it is not surprising that many
of the bankers surveyed see credit cards as one of the most promising products in
Chinese retail nancial services.
Experience from other emerging markets in Asia, Central and Eastern Europe and
Latin America has shown that the credit cards offer huge revenue potential from both
interest and fee income. In addition, banks can cross-sell other banking products to
credit cardholders, something that few banks in China are doing now.
For foreign banks focusing on the Chinese market, credit cards are an excellent entry
product. As standalone products they do not need to offer an account package or
a local branch network to market to or serve cardholders. While most foreign banks
are currently issuing cards in partnership with local banks, this may change as they
become more established in the market.
While Chinese banks face challenges in getting customers to activate and use
their cards frequently, the growing card acceptance infrastructure will make this
task easier. Banks surveyed rightly highlighted this as a major issue. However, it
is a challenge common to many other emerging payments markets. Interestingly,
progress in the countrys main cities has been very rapid. Some 30% of all
payment transactions in big cities are now carried out by cards.
From First Datas experience of operating in China, one of the biggest challenges
faced by banks is risk management. This is also a major nding of the survey. The
introduction of data analytics solutions to help reduce card application fraud will
provide tremendous benet to the industry. Banks also need to monitor transaction
information and develop strong collections capabilities. Knowledge sharing in this
area has been a big part of the co-operation between Chinese banks and their
foreign partners. This will certainly pay dividends in reduced credit losses and better
fraud prevention as the industry develops and transaction volumes increase.
The report rightly points out the key role of merchants in developing Chinas cards
industry. As in many emerging markets, cash is still preferred and the favoured means
of payment for many retailers and other merchants. Experience in other countries has
shown that the industry needs to engage with the merchant community to clearly
educate and communicate the benets of accepting cards. These include higher
transaction volumes, reduced cash handling costs and less risk of theft.
As the survey shows, payment cards have a major role to play in the protability of
the Chinese banking industry and its on going development. The foundations for
a protable cards industry have been successfully implemented. By focusing on
resolving the highlighted challenges such as expanding the card acceptance and
improving the banks risk management and marketing effectiveness the industry will
be well set for further growth.

First Data Beyond Cash: Chinas Emerging Payments Market

08

Introduction
Five years after joining the World Trade Organisation (WTO), China introduced
regulations to open its retail banking market in December 2006, taking a major
step towards the liberalisation of its nancial services sector. Although some
restrictions remain, the change in the rules nally permits foreign banks to
provide renminbi-denominated accounts to the market.
Many of the banks entering the market are looking at the potential of the burgeoning
credit card market. Of the 152 banks surveyed for this report, about eight out of
ten rate the prospects for credit cards as either highly or somewhat promising.
As might be expected, most foreign banks are targeting their activities at Chinas
wealthier customers.
We think there is a big opportunity [for credit cards] because of the low penetration
so far, says Manuel Galatas, head of Asia at a Spanish bank, Banco Bilbao Vizcaya
Argentaria (BBVA), which acquired a stake in CITIC Bank last November. The Chinese
have on average less than one bank card per person, compared with 1.9 in Hong Kong
and 3.87 in the US. Mr Galatas adds that credit card payments account for just 1% of
total consumer spending, compared with about 20% in the US.
Foreign banks are not alone in targeting the market. Domestic banks also see great
opportunity, albeit often in partnership with foreign banks. I believe the credit card
business is most promising and will create more prots, says Hong Lin, a deputy
general manager at the Bank of China, which has several overseas stakeholders.
But it is still early days. Much work remains to be done, not least in terms of
convincing Chinas swelling population of afuent but scally conservative
consumers of the merits of switching paper for plastic.

The Evolution Of The Chinese Payments Market


When the Bank of China issued the mainlands rst credit card in 1986, the event
passed with little fanfare. Just 36 venues scattered around Beijing accepted the
card, and payments could be made only by way of Chinas old Foreign Exchange
Certicates, an abandoned form of convertible currency that Chinese citizens could
not legally possess.
How times have changed. By the end of 2006, some 50m credit cards had been
issued in China, including 30m dual-currency cards, and a further 19m quasi-cards
that combine the functions of debit and credit cards (see table: Chinas card market
at a glance). Indeed, the number of credit cards in circulation at the end of 2006
represents a 39% year-on-year increase. However, these gures are dwarfed by the scale
of Chinas debit card market, which accounts for the majority of cards in circulation.

First Data Beyond Cash: Chinas Emerging Payments Market

09

Chinas card market at a glance


Cards issued and transaction volume
Cards issued,
2006 (m)

Cards issued,
total (m)

Credit cards
Quasi-credit cards
(combined credit and debit cards)
Debit cards
Total

RMB purchasing
volume transacted,
2006 (trn)

30

19

200

1119

215.6

1175

1.89

15.6

Source: China UnionPay, Xinhua.

The surge in credit card issuance illustrates the buzz across Chinas consumer
lending market. In recent years, activity across the sector, including auto and mortgage
lending, has grown substantially, from just 6% of total bank lending in 2000 to 11% in
2005 , as Chinas emerging middle class begins to demand better banking services.
This comes on the back of impressive economic growth, which is expected to
continue. GDP per capita, for example, is predicted to more than double from
US$1,740 in 2006 to US$3,790 in 2010 (see table: Boom time in China).
Boom time in China
GDP growth from 2005 to 2010
2005

2006 (a)

2007 (a)

2008 (a)

2,278

2,689

3,209

3,794

4,390

5,089

10.4

10.7

10.2

9.3

8.6

8.1

Population (m)

1,307

1,314

1,323

1,331

1,336

1,342

GDP per capita (US$ at market


exchange rate)

1,740

2,050

2,430

2,850

3,280

3,790

GDP (US$ bn, at current


market prices)
Real GDP growth (%)

2009 (a) 2010 (a)

(a) Economist Intelligence Unit estimates.


Source: Economist Intelligence Unit.

With strong prospects for growth and a population of more than 1 billion, Chinas
consumer banking sector has unsurprisingly drawn the attention of foreign banks.
They are attracted not only by Chinas vast domestic market, but also (and in contrast
to other domestic consumer sectors) by the fact that the retail banking sector has
been underserved for so long. For example, even though banks in China issued more
credit cards in 2006 than existed in the whole country as recently as 2004, the total
number of credit cards in circulation, at about 50 million, at end-2006 pales in comparison
to the 640 million credit cards currently circulating in the US. If banking services in China
are eventually to emulate the structure now seen in the West, where most bank prots
come from consumer lending, the current market can be seen as a near-vacuum
waiting to be lledone of the last great land grabs in the Chinese economy.
John Shelley, the executive vice president who directs the Royal Bank of Scotlands
recently-established private-banking partnership with the Bank of China, comments: This
is not a short-term game, but its tremendously exciting, a huge opportunity for the banks
that can focus and go about it in an organised way. One report projects that Chinas
domestic credit market will grow from just US$2.8trn in 2004 to US$45trn by 2050.

First Data Beyond Cash: Chinas Emerging Payments Market

10

First Data Insights


Its A Long-term Play

Of the banks surveyed for this report, the majority (57%) are already active in
China, while a further 43% plan to enter between now and 2010. For these banks
in general, access to a larger customer base and the rapid growth of the middle
class are Chinas key attractions. For retail banks in particular, lending potential in
the consumer-credit market is high on the list (24%), on a par with opportunities to
lend to either Chinese companies or foreign companies in Chinaand far ahead of
the mortgage market, selected by just 7%. A signicant minority (12%) also see the
distribution capabilities of large local banks as a key attraction.

84% Percent of respondents are


optimistic about the prospects for
credit cards in China
Foreign banks give long-term prospects of
the credit card industry in China a strong
vote of condence, but recognise that it is a
long term play. Right now, credit cards are
a marginally protable business for most
issuers, with the programmes of some
new entrants still loss-making.

Major attractions to market


What were/are the major attractions for your rm in deciding
to invest in China?

At present, the Chinese cards market


depends heavily on fee income while
interchange rates have already fallen to
levels more common in highly developed
credit card markets. However, the mix of
protability in the Chinese cards industry
may well change in the future. This would
happen if the Chinese government decided to
relax its interest rate policy, allowing issuers
much more leeway on the interest rate they
charge for credit card lending.

Retail bankers only

Access to a larger customer base

67.2%

Rapid growth of the Chinese middle class

55.2%

Our regional clients expect us to have a presence


in China

25.9%

Lending potential to Chinese companies

24.1%

Lending potential to foreign companies in China

24.1%

Lending potential in consumer-credit markets

24.1%

Distribution capabilities of large local banks

12.1%

Taking advantage of the historic WTO-related


market opening

8.6%

Lending potential in mortgage markets

6.9%

Other

1.7%
0

The industrys big problem is that so few


cardholders currently revolve their balances.
This leaves the credit card industry in China
without one of its major sources of revenue
and prots. The challenge for issuers in China
is to develop pricing and marketing strategies
that can sustain protability over the long term.
Banks in China need to realise that interest
income is not the only revenue they should
be looking for. Fee income is also important.
Payment products offering valuable sources
of fee income include:

10 20 30 40 50 60 70 80 90 100

Prepaid cards (e.g. top-up fees,


balance checks)
Commercial cards as well as helping
companies manage cash ow and
expenses more effectively, commercial
cards generate substantial fee income
for issuers

Opening Up The Market

Charge cards (e.g. issuing fees, late


payment fees, etc)

New rules introduced in December 2006 under the terms of Chinas 2001
accession to the WTO now allow foreign banks to incorporate locally and to create
retail businesses. Indeed, if foreign banks want to enter the credit card market they
must incorporate locally.

Money transfers these account for up to


40% of fee income at some Central and
East European banks
Foreign exchange fees.

As this report was being written, an initial group of four banks had already received
approval to incorporate locally, and a further eight were still completing ofcial
paperwork. Several more had plans to incorporate in the near future (see Appendix
for a full list). Although this rst wave of entrants must still wait for nal amendments to
domestic regulations, and nal approvals to allow them to operate branch systems,
foreign banks can now effectively compete on an equal basis with local banks.

First Data Beyond Cash: Chinas Emerging Payments Market

11

Entry Strategies
Banks that have already entered the market have clearly dened strategies. In general,
most respondents to this survey either opted to take a strategic equity stake in a Chinese
institution or engage in a partnership with a national bank. Interestingly, for those banks
already established in the Chinese market, the highest majority (26%) believe an equity
stake in a local bank presented the best way to enter the market. However, for those
banks still planning to enter, the majority believe that a partnership, either with a national
bank (22%) or a city commercial bank (21%), offers the most feasible route for entry.
The bigger foreign banks such as HSBC and Citigroup are adopting strategies that
combine strategic equity stakes with organic growth.
Overall, just one in ten banks plan to go it alone, primarily because the scale of the
Chinese market makes it unfeasible for all but the largest banks. You cannot really
work in China without a partner, says BBVAs Mr Galatas. For global banks that have
been in China for years it is possible. For the rest of us, we can do it by ourselves,
but it is a very, very long-term strategy.
Market entry strategy
In light of recent market-opening measures, what entry strategy would you
consider to be the most feasible for a foreign bank or cards issuer?
Partnership with a national bank

22.2%

Partnership with a city commercial bank

20.6%

Joint venture with a national bank

19.0%

Strategic equity stake in a Chinese institution

15.9%

Joint venture with a city commercial bank

11.1%

Wholly-owned branch network

9.5%

Other

1.6%
0

10

20

30 40 50 60

70 80 90 100

Local-foreign bank alliances have been in place since 2001, when HSBC made
the rst such investment in the Bank of Shanghai. The increase in the number
of alliances is more recent, however. In 2003, Citigroup purchased 4.6% of the
Shanghai Pudong Development Bank, which was followed by HSBCs 19.9%
stake in Shanghai-based Bank of Communications (BoComm) the following year.
Both investments were made with the specic goal of kick-starting co-branded
credit card units in an environment where neither Chinese partner had signicant
card businesses before the alliances were formed. The Citigroup unit launched
in early 2004 and has since expanded to ten cities. The HSBC/BoComm credit
card centre began operating in late 2004, and by March this year had issued
more than 2m dual-currency credit cards. Both operations have placed emphasis
on developing sophisticated online banking capabilities, partly as a result of building their
infrastructure from the ground up and partly to create distribution channels to compensate
for their lack of extensive branch networks.

Partnering for success


Equity tie-ups allow banks entering the market to generate instant economies
of scale by leveraging their partners existing distribution channels, client bases,
and local business and political contacts. According to a director at a French
bank currently looking for an investment partner, China is huge and we are a
modest European bank. No modest European bank has ever managed organic-only
growth in China. You need to know the language, people and clients very well.
First Data Beyond Cash: Chinas Emerging Payments Market

12

First Data Insights


To Partner Or Not To Partner

Survey respondents also acknowledge the importance of branch networks when it


comes to marketing and distributing payment cards. Nine out of ten retail bankers polled
for the report rated branch networks as either highly or moderately effective, with direct
selling the only other channel that was positively rated, by 80% of respondents. Alternative
channels, including the Internet, e-mail, postal campaigns and telemarketing, were rated
as effective by less than half of bankers.

Although a very attractive market


for foreign banks, there is no clearly
favoured market entry strategy.
The message is clear most respondents say
that the main attraction of the Chinese market
for them is access to the countrys huge
customer base. Far less obvious from the
survey is a clear preference among foreign
banks for a specic route to market entry.

Marketing/distribution channels
How effective do you consider the following marketing and distribution channels
for payment cards in China to be?
Branch Networks

35%

52%

6%

7%

Direct Selling

25%

49%

17%

9%

Telemarketing

11%

24%

55%

10%

Postal Campaigns

12%

27%

48%

13%

E-mail Campaigns

11%

29%

50%

10%

Internet

12%

41%

36%

11%

10

20

30

40

50

60

70

Highly Effective

Limited Effectiveness

Moderately Effective

Dont Know

80

90

Almost all rst and second-tier banks are now


in strategic alliances with foreign partners.
Credit cards are often the rst product on which
both partners work together, but an increasing
number of foreign banks are now preparing to
launch their own credit cards in China.
There are three ways that banks usually
enter the China market: (1) direct investment
in a bank; (2) partnership with a bank; (3)
being a wholly owned foreign entity (WOFE)
that conducts business by themselves. As
all roads lead to Rome, all three ways can
provide a bank a start to its business in
China. Both central and local governments
are very supportive of both partnerships and
of WOFEs establishing operations in China.

100

Our experience of entering into the China


market is initially-go-alone. First Data has had
success in bringing international expertise into
the China payment market. After ve years of
being in the market, we are also looking into
establishing partnerships in different areas of
electronic payments business.

The benets of partnerships for local banks are equally clearthe chance to learn
the ropes from experienced counterparts in areas where they are weakest, such
as credit and risk management, development of IT systems, and cross-selling
and other marketing strategies. One senior executive at China Construction Bank
explained that his banks alliance with Bank of America has helped to develop
their expertise: [Their] credit card management techniques and expertise helped
us enhance our own credit risk control capabilities.
Needless to say, partnering with local rms is not without its challengesand risks.
One concern is simply the number of available partners, which is steadily declining
as more foreign banks enter the market. Another is that deals can take a long time
to conclude. According to Gerard Van Empel, director of development at Hollands
Rabobank, which nalised a 10% investment in Hangzhou Rural Cooperative Bank
last November, the deal took several years to complete. Others warn about having
to deal with much bureaucracy, especially within larger banks.
But those banks that have concluded successful deals with local Chinese banks have
been encouraged by progress so far. Theres a real desire and willingness to take on
new ideas, comments RBSs Mr Shelley. We have long debates about individual points,
and reaching a decision on something sometimes takes a long time, but once a decision
is made Ive been very impressed with the speed with which they execute.

First Data Beyond Cash: Chinas Emerging Payments Market

13

The Potential Opportunity


For those banks that have made the decision to enter the Chinese market, there is
much optimism. Nearly nine out of ten banks (87%) polled for this report say they are
optimistic about their rms revenue growth in China between now and 2010. But
this optimism is tempered with realism, with about twice as many (59%) respondents
saying they are somewhat optimistic, rather than highly optimistic (29%).

2%
2%
1%

Prot/revenue prospects
How optimistic are you about your rms revenue and prot growth prospects
in China over the next three years?
29%

59%

8%

Prot Growth

29%

46%

27%

4%
2%
1%

Revenue Growth

10

20

30

Highly Optimistic
Somewhat Optimistic

40

50

60

70

Neutral
Somewhat Pessimistic

80

90

100

Highly Pessimistic
Not Applicable

This uncertainty is especially true when it comes to generating prots. Although two-thirds
of bankers say they are optimistic about their prot growth prospects in China over
the next three years, just 21% say they are highly optimistic and nearly half (46%) say
they are somewhat optimistic.
The main reason is competition. Chinas banks have made remarkable operational
advances in the ve years they have had to prepare for market opening, and they
retain one major advantage: a huge branch network that dwarfs that of the foreign
banks. Indeed, the rst four foreign banks to obtain licences now have just over
100 branches between them. By contrast, the Industrial and Commercial Bank of
China (ICBC) has 18,000 branches, the Bank of China (BOC) has 11,000, and the
Agricultural Bank of China (ABC) has nearly 25,000. All of Chinas big four banks
(ICBC, BOC, ABC and China Construction Bank) now have foreign stakeholders,
which will gain access to this branch network. The banks grassroots reach, together
with the depth of their existing client bases, virtually guarantees that local players
will remain in the driving seat for the foreseeable future.
For many foreign banks, credit cards are the main priority, providing a self-contained
business line that allows them to build brand, gain experience and establish a
beachhead to the high-medium end of the market. Retail bankers are most optimistic
about both credit cards and bank accounts, with 55% saying that the prospects
for these products are highly promising over the next three years. Debit cards
are seen as the next most promising item (45%), although these are directly linked
to the prospects for basic bank accounts, followed by wealth and investment
management (40%). Indeed, there are overwhelmingly positive views of the
prospects of every eld across the consumer banking sector.

First Data Beyond Cash: Chinas Emerging Payments Market

14

First Data Insights


Finding Ways to Reach Out

Prospects for products


How do you view the prospects for Chinas personal banking industry?

Branch networks are effective


distribution channels for payment
cards the internet and direct selling
are also well regarded

Retail bankers only


Bank accounts

55%

28%

7% 10%

Debit cards

45%

43%

5%

7%

Credit cards

55%

29%

9%

7%

Co-branded cards

30%

Prepaid cards
Mortgages

37%

18%

16%

26%

37%

25%

11%

26%

49%

18%

8%

Personal loans

33%

55%

7%

5%

Financial planning/wealth management

40%

26%

25%

9%

Personal investment services

40%

35%

16%

9%

Vehicle nancing

26%

47%

19%

9%

10

20

30

40

50

60

70

Highly Promising
Somewhat Optimistic

80

The opportunity to market and distribute


payment cards to 1.3 billion consumers
expected to have per capita income of
$5,000 in the next 10 years is a major
attraction for local and foreign banks.
Reaching many of these potential customers
will be a challenge. Given the huge branch
networks of Chinas largest banks, it is not
surprising that 87% of survey respondents
see branches as either highly or moderately
effective distribution channels.
However, this advantage could be leveraged
far more effectively. Up to now most bank
branches have been run as autonomous
units or even separate businesses.
Centralising and analysing the data in each
branch could provide a ready-made credit
card target segment for institutions of all
sizes. This would enable banks to segment
their customer base, develop product
propositions and cross-sell card products
to existing retail banking customers.

90 100

Limited Prospects
Dont Know

Nevertheless, when it comes to prots in the credit card market, the outlook is
less certain. Fully 43% of respondents agree that it would be difcult to make a
prot in the credit card market over the next three years; 36% remain uncertain
and just 21% disagree.

Branches are not the only distribution channel


for card products. China has the second largest
number of Internet users in the world.

Holding an edge
Foreign banks believe they hold a signicant competitive edge over their local rivals.
This is especially true when it comes to risk management and product development,
where 39% and 36% of retail bankers respectively rate the capabilities of domestic
Chinese banks as poor or very poor. On most measures, the majority of survey
respondents rate local banks as fair. However, when it comes to distribution, one-third
of retail bankers rate their local rivals as good or very good, higher than any other
capability, given the substantial advantage of domestic Chinese banks in this area.

Offering nancial services by mobile phone


is another viable option, which would enable
banks to get around the absence of and the
cost of building - nationwide branch networks.
This would be especially valuable in provincial
areas, where mobile phones are widely used.
Also, interesting distribution partnership
models are developing in other markets that
may be relevant to China. Some banks are
now partnering to share expertise. For example,
one bank could manufacture a card product
for distribution by a partner organisation.
This happenes in Europe where Barclaycard
manufactures revolving credit card products
for distribution through Swedbank branches in
the Nordic countries. As the trend for banks to
do everything from manufacturing, distribution
and processing themselves becomes less
prevalent, this model will gain ground and could
be of major interest to foreign banks looking to
partner with local Chinese banks.

Rate local banks


In your view, how good are the current capabilities of domestic banks in China,
with regards to the following aspects of consumer lending?
Retail bankers only
Risk management

14%

40%

29%

10%

7%

33%

3%

9%

14%

9%

Product development

3%

Distribution

12%

Marketing

3%

19%

41%

26%

10%

Customer relationship management

7%

14%

41%

31%

12%

Ability to derive income from


service fees

14%

Ability to derive income from


penalty charged

7%

16%

36%

21%

45%

45%
9%

21%

31%
25

31%
50

2%
3%

19%

75

100

Very Good

Fair

Very Poor

Good

Poor

Dont Know

First Data Beyond Cash: Chinas Emerging Payments Market

(continued on next page)

24%

15

First Data Insights


It should be noted that Chinese banks have
not used direct mail to market cards. However,
several issuers have started to use lists bought
from list brokers. Also, Chinese banks are
using specialist service providers who do card
acquisition to recruit new customers.
Finally, other possible distribution channels
include non-bank partners, such as retailers
and mobile phone providers. This would enable
banks to reach a much wider customer base.

Operating A Cards Business In China


Eight out of ten retail banks surveyed for this report either already offer basic bank
accounts or plan to start doing so within the next three years. Beyond that, about three
out of ve either offer or plan to offer debit cards, with about two-thirds either already
offering or planning to offer personal loans and credit cards. These account for the
dominant products being offered by retail banks, with mortgages, wealth management
services and other retail banking services all trailing behind.
Dominant product offerings
Which of the following is your rm offering in China, or planning to start offering
within the next three years?
Retail bankers only
Bank accounts

36%

Debit cards

25%

48%

27%

Credit cards

20%

48%

32%

Co-branded cards

9%

41%

50%

Prepaid cards

6%

42%

53%

Mortgages

19%

40%

40%

Personal loans

24%

46%

31%

Financial planning/Wealth management

15%

46%

40%

Personal investments services

18%

44%

38%

Vehicle nancing

11%

37%

53%

Credit/debit card merchant acquiring

11%

44%

46%

10

45%

20

30

40

50

19%

60

70

80

90 100

Already offering
Plan to start offering within 3 years
No immediate plans to offer

All banks entering the cards business will need to deal with one key player:
China UnionPay, or CUP, the Chinese equivalent of Visa or MasterCard. Any
renminbi-denominated card issued in China, whether a debit or credit card,
carries the CUP brand. Since its inception in 2002, CUP also operates the key
payments network in China, providing an inter-bank and inter-country card network,
which enables interoperability between different banks and cards. In this aspect of
its business, however, there is no competition in China, as CUP currently operates
as a monopoly. There is only one network, period, explains an executive from an
international card issuing company.

First Data Beyond Cash: Chinas Emerging Payments Market

16

ATMs were introduced in China 20 years ago, but they only became truly
convenient in 2002 when CUP was set up and established a network that linked
them all together. The CUP network facilitates any inter-bank card transaction made
through an ATM or within a retail outlet. The only exception is for travellers in China
carrying a card issued outside of China, which is then processed through the
relevant card companys international network.
Rival international card brands, such as Visa and MasterCard, can only issue cards
in China (via their member banks) that are denominated in another currency, such
as the dollar, euro or yen. Alternatively, their member banks can issue a single
card that is dual-currency, including both a renminbi-denominated account and
a foreign-currency-denominated account, in conjunction with CUP, so that the
card bears both brands. All this makes CUP the dominant player in the overall
Chinese card market. In 2006, its member banks issued 144m new bank cards,
accounting for about 68% of the total for the year. In credit cards, however, Visa
and MasterCard are leaders, in terms of the number of cards issued, although CUP
is working to catch up. By the end of 2006, there were some 3m UnionPay credit
cards, a ten-fold increase on the previous year.
The implication for banks setting up in China and wanting to issue renminbidenominated cards is that they can only issue CUP-branded cards, unless
they wish to provide foreign-currency-based cards. In addition, all transactions
conducted with any renminbi-based card, whether CUP-branded or dual-branded,
will be conducted through CUPs network.
For its part, CUP is working to expand acceptance of its cards in the international
market. By the end of 2006, it had concluded deals in 24 countries, providing
acceptance for Chinese tourists or business travellers carrying a CUP card within
some 55,000 merchants and more than 235,000 ATMs. As might be expected,
transactions from CUP-branded cards have soared: in 2006, some Rmb25.5bn
(US$3.3bn) was transacted on these cards in markets outside of China, a 99%
increase on 2005, according to CUP.
Payment fees and incentive structures
One of the realities for banks issuing cards in China is the low fees that are set by
the central bank, the Peoples Bank of China (PBC). The maximum interest rate
for card borrowing is set at a relatively modest 18.25% annually. By comparison,
international practice commonly charges several hundred basis points more for
less-creditworthy customers or different types of loans such as cash advances.
Government rules also stipulate what merchant acquirers can charge merchants.
In most countries, the biggest component of this fee (known as the interchange
rate and paid by the merchant acquirers to the card issuers) is dictated by market
forces. In China, however, maximum interchange rates for all local-currency
transactions are set by the PBC. While these rates vary slightly depending on
what type of product or service is being purchased (see table: Slim margins), they
generate inefciencies, according to an executive with a major foreign card company,
because they do not reect the actual cost to the issuer. For example, merchants are
charged the same rate for debit card and credit card purchases, despite the fact that
respective transaction costs differ. Nor do Chinese interchange rates reect varying
risks that different types of transactions may represent.

First Data Beyond Cash: Chinas Emerging Payments Market

17

Slim margins
Chinas interchange rates set by PBC
Merchant type

Issuer interchange
reimbursement fee

China UnionPay
service fee

Public hospital and public school

Supermarket, airline, tour operator, gas station

0.35%

0.05%

Other retailers (department stores, etc)

0.70%

0.10%

Hotel, restaurant, entertainment, jewellery

1.40%

0.20%

Wholesale

Maximum Rmb16

Maximum Rmb2

Source: PBC.

Chinese interchange rates are not only already lower than international norms
(which are currently about 0.70.8% per transaction, compared with an international
average of 1-1.6%), but competition between local banks is increasing the pressure
to reduce these rates further.
Banks setting up a cards business in China will also struggle to attract customers.
Strong competition in the market means that few banks can charge cardholders
annual fees. Indeed, most have taken to offering special promotions to draw new
customers. Some banks use this to try to boost card usage, by offering to waive
card fees as long as customers use their cards a certain number of times per year.
In other examples of margin-cutting incentives, Standard Chartered, offers gold
bowls to customers opening xed deposit accounts with at least Rmb80,000
(about US$10,000). Meanwhile, London-based HSBC and its Chinese partner,
BoComm, launched a campaign in 2006 offering credit card clients interest-free
installment payments on purchases of Rmb1,500 or more (US$195). Customers pay
a monthly service charge of up to 0.72%, but are exempted from the annual 18.25%
interest charge as long as they pay their monthly installments. Such price wars are
widespread in Chinese consumer markets and commonly lead to long periods of
losses for participants. Chinese customers in general are savvy and are looking for
interest-free, fee-free debt, and less for revolving debt, explains one executive at
a major European bank.
Another group of customers that requires incentives (typically through discounted
rates) is the retail community. Three out of four retail bankers surveyed for this report
agree that card issuers will have to offer strong incentives to merchants to encourage
the adoption of payment cards within their businesses.
Card processing
A key barrier to growth in the market selected by bankers was Chinas underdeveloped
or immature back-end banking infrastructure, such as payment processing. In taking
this on, many executives try to meet the challenge by handling the job in-house. Just
5% of retail banks polled say they have outsourced their card processing in China so
far, although a further 17% expect to do so. Nearly one-third say they will not outsource,
and about the same proportion do not know.
For some, card processing is a core capability: We think that card processing is
an area where we have strategic expertise, says one survey respondent. But for
others where this isnt the case, the outsourcing of card processing makes sense.
As another respondent points out, The initial set up cost [for outsourcing] is high
without a medium-sized customer base.

First Data Beyond Cash: Chinas Emerging Payments Market

18

First Data Insights


This view was reected by other executives interviewed for the report. We are
developing our own credit card offering at the moment, says Yaming Zhu, head of
the consumer clients division at ABN Amro Van Gogh Preferred Banking in China.
We are likely to partner with one of the major credit card companies. We are
innovative, but we are not interested in reinventing the wheel.

The Foundation for Success Has


To Be Strong

Merchant card acceptance and ATM use

Survey results show that banks have two


major concerns about the cards market
infrastructure in China IT capabilities for
transaction processing and settlement
as well as the need to grow the card
acceptance network.

Using best of breed IT capabilities will


be crucial to the development of Chinas
cards industry

When compared with international markets, relatively few merchants in China currently
accept cards for payment although, the growth rate is strong. By the end of 2006, the
number of merchants accepting bank cards in China had increased by 34% from 2005,
to more than half a million (see table: Do you take cards?), according to CUP. During the
same period, the volume of cross-bank point of sale (POS) transactions increased by
some 57%. This increase in acceptance is surely helped by the increased competition
between merchant acquirers, which has driven down transaction fees.

Outsourcing is a very attractive option


for local banks, especially those concerned
that the best of breed in-house capabilities
of foreign banks could put them at a
major disadvantage.

Nevertheless, the number of merchants accepting cards accounts for only about 4%
of the total, according to bank executives interviewed for this report. To some extent,
this reects already razor-thin retail margins, meaning many merchants are reluctant to
cut prots by giving a slice to card issuers. More fundamentally, however, slow uptake
is simply a reection of the novelty of credit card payments in a culture where cash is
traditionally king. Indeed, eight out of ten retail bankers polled for this report note that
local retailers preference for cash is either a very signicant or signicant barrier in
operating cards and payment services.

Outsourcing also works for foreign banks,


keen to keep costs to a minimum as they
build up their cards business.
Legacy systems are non-existent in China so
the countrys banks can enter the cards market
with best of breed solutions. However, there
are challenges here too, such as:
Lack of skills in many Chinese banks to run
complex card management systems

Retailers preference for cash


In operating cards and payments services, how signicant a barrier is Chinese
retailers preference for cash transactions?

The ability of cardholders to adapt quickly to


new means of payment

Retail bankers only


Very signicant

22%

Signicant

59%

Not signicant

7%

Dont know

12%
0

10

20

30

40

50

60

70

For smaller merchants the investment costs


to accept cards are too high.

80

90

As far as transaction processing is


concerned, banks need to manage
a wide range of issuing and acquiring
services, including authorisation, account
management, and transaction management.
Support services such as customer service,
collections, fraud and risk management,
embossing, statement printing and mailing
are also key elements of running a
card programme.

100

However, the Chinese authorities are pushing more merchants to accept cards,
especially in major citiesand particularly in anticipation of the 2008 Olympic
Games. The central bank blueprint currently calls for at least 60% of merchants with
turnover of over Rmb1m (US$130,000) in Chinas large and medium-sized cities
to be accepting locally-issued bank cards in time for the Olympics. In addition, it
calls for bank card use to rise to 30% of retail sales in these cities, up from just
10% in 2005. We see an aggressive rollout in point of sale infrastructure, with
explicit targets set down in Beijing for the Olympics, says Richard Williamson, a
general manager for Asia strategy within the Commonwealth Bank of Australia.

First Data Beyond Cash: Chinas Emerging Payments Market

Whatever their approach, it is in the interests


of Chinese banks to migrate clients to
more self-service channels. Branch-based
services are expensive, especially in lowpopulation rural areas.
Electronic channels (such as ATMs, point
of sale transactions, mobile and Internet
payments) are much more secure and cost
effective. However, banks need signicant
card volumes to justify the deployment of
self-service devices and to drive a more
electronic-based strategy.

19

Do you take cards?


Card acceptance on the rise in China
Merchants
accepting
payment cards,
added in 2006

Merchants
Card-accepting Card-accepting ATMs, added ATMs, total
accepting
POS terminals, POS terminals, in 2006
payment cards, added in 2006
total
total

114,000

520,000

188,000

810,000

14,000

98,000

Source: CUP.

ATM networks represent another area of strong growth, with some 14,000 new
cash machines rolled out during 2006, bringing the total to nearly 100,000. This
rapid rate of growth is likely to continue. Retail Banking Research, a British market
research rm, predicts that 128,000 ATMs will be installed in China between 2005
and 2011. Meanwhile, the volume of ATM transactions is rising even faster, as the
total number of transactions in 2006 grew by 67% over 2005.
According to the executives surveyed for this report, this increase in card-accepting
infrastructure, encompassing both merchants and ATMs, will play the biggest role
in encouraging the increased acceptance of card payments in China. Fully 83%
of retail bankers polled chose this as the key factor, far ahead of anything else,
such as better collaboration between key stakeholders such as banks and payment
processors (48%) or publicity campaigns (33%).

Numerous Challenges Remain


While there are many reasons for optimism, foreign banks entering China also
face signicant challenges and risks. In general, when polled about risks in the
Chinese market, survey respondents chose politically- and regulatory-related
issues as their prime concern. More than half (53%) of bankers polled for this
report selected political risk as the biggest existing or potential risk associated
with their rms operations in China.
For those banks planning to establish a payment card business in China, the key
challenges relate primarily to risk management, tough regulations, fraud and other
issues. Nearly 60% of retail bankers chose risk management regarding the scoring of
customer credit-worthiness as the biggest hurdle, far ahead of any other challenge.
Their second-biggest concern also related to risk management, specically the
recovery of money lent to customers (41%). Beyond this, overly burdensome regulations
(35%), fraud (26%) and problems regarding distribution, cross-selling and marketing
(24%) were high on the list.

First Data Beyond Cash: Chinas Emerging Payments Market

20

Top challenges for payments


What do you see as the major challenges facing Chinas cards and payments
industry for the next three years?
Retail bankers only
Poor protability

59%

Difcult risk management regarding


scoring of customer credit-worthiness

41%

Difcult risk management relating to


recovery of money lent to customers

35%

Overly burdensome regulations

26%

High incidences of fraud


24%
Problems regarding distribution,
cross-selling and marketing

21%

Cultural Issues (eg, poor customer


credit culture)

19%

High risk of default


19%
Poor retail infrastructure
(eg, card-accepting POS terminals)

12%

Poor banking infrastructure (eg, cash


machines, branches)

12%

Strong competition from domestic


Chinese rivals

5%

Other

0%

10

20

30

40

50

60

70

80

90 100

Risk management
One of the key issues relating to risk management is the limited availability of credit
data. The shortcomings of local risk assessment practices are reected in the survey
results, with 41% of respondents ranking local practices as either poor or very poor
and another 39% ranking them as only fair.
Banks continue to rely heavily on in-house risk assessments deploying subjective criteria
that may or may not be effective. At more sophisticated institutions, credit-checking
systems appear to work adequately. China Merchants Bank, for example,
claimed non-performing loans (NPLs) for its credit card unit of just 1.53%
in 2006, compared with an international average of 56%.
However, many domestic lenders continue to use less sophisticated, and in some
cases quite inadequate, risk-assessment practices. Risks stemming from the card
business are a major concern of Chinese banks and their risk control capabilities
leave much to be desired, says Lin Bian, deputy general manager at the Beijing
branch of China Merchants Bank. Others agree. Guoyong Shen, an executive of
CITIC Bank, comments: In their efforts to grab more market share, the domestic
banks have placed disproportionate stress on the quantity of the cards issued at
the expense of the quality.

First Data Beyond Cash: Chinas Emerging Payments Market

21

First Data Insights


Know Your Customer
Risk management skills in Chinese
banks are rated fair or poor by a
majority of foreign banks
Often perceived by foreigners as the
Achilles heel of the Chinese retail nancial
services industry, effective risk management
will play a crucial role in building a protable
cards business.
There are positive signs that Chinese
regulators are taking risk management
seriously. On 9 March 2007, the Chinese
Banking Regulatory Commission (CBRC)
ordered issuers to strengthen risk
management practices.
All issuers were instructed to know your
customer and know your business, and
to make thorough investigations to verify the
identity of people applying for credit cards.
To combat application fraud, issuers must
make clear to applicants what supporting
documentation is needed. Banks were also
advised to ask cardholders who wanted to
apply over the Internet to download the form
and mail it with supporting documents.
In addition, the CBRC warned banks to
set credit limits only after fully assessing
the applicants ability to repay. Crucially,
in an effort to avoid cardholders taking
on too much debt, the CBRC said that
banks should not issue any further cards
to customers whose credit lines with other
lenders already exceeded the total ceiling
that the client should be granted. Banks
should not activate cards unless they are
sure of the identity of the cardholder.
If fully implemented, the CBRCs measures
would be in line with international best
practice, well positioning the Chinese cards
market to manage risk as the industry
continues to grow.
An example of what can go wrong when
there is poor risk management in the cards
industry occurred in South Korea during
2002. Poor lending policies, ineffective
credit management and an inability to
collect overdue debts led to a crisis in the
countrys consumer lending industry. Losses
totaled millions of dollars and a number of
the countrys leading consumer nance
companies had to be recapitalised or sold
off at huge discounts.
Thankfully, examples like this are rare.
Chinese regulators are wise to take action
now to ensure that the countrys cards
industry is not exposed to such risks.

But why is this? One of the main problems is that Western-style consumer banking
is simply so new. Even some larger banks, for example, have yet to adopt modern
accounting practices such as net present value, instead relying on book value or on
national loan guarantees that are probably not enforceable in the event of a loan default.
The currently low default rates reported across the consumer-lending sector in China may
well be masking underlying problems. This could be because, despite reforms, old habits
die hard. Altering working practices engrained by decades of government-directed
lending, especially at the largest banks, will take a long time. Bank staff can therefore
be slow to categorise debt as bad even when they should. As an executive at
one card issuer says: In the consumer nance business, banks have not yet fully
embraced the idea that delinquent debts are simply a cost of doing business,
so they tend be more conservative about delinquency defaults, not only with
the cardholder but also with the merchants.
Furthermore, with the consumer lending market emerging so rapidly and from such a
low base, current statistics may not be very instructive. China Merchants, for example,
reported that credit card lending in 2006 increased to Rmb155m (US$20m), up from
just Rmb78m (US$10m) the previous year. With growth this fast, the majority of loans
are so new they have had no chance to turn sour, thus distorting statistics. As the same
executive says: To look at the default ratio, you really need a substantive period of time.
In the high-growth stage of the market like we have in China, a more meaningful time to
look at those gures is two or three years from nowthe denominators are growing so
fast, sometimes you cannot tell the true long-term pattern.
This issue is clearly recognised among bankers surveyed for this report. Asked what
the Chinese market needs most to support cards-payments infrastructure, half selected
better availability of consumer credit-history data. But progress is being made in this
area. Credit databases covering specic cities have been in place for several years and
are operated by both local and foreign entities, such as Experian. However, in January
2006, after a trial period, the PBC launched a new nationwide database that tracks the
credit histories of some 530m people, along with tens of thousands of businesses. The
database tracks consumer bill payment histories on loans and credit cards, as well as
taxes, mortgages and utility payments, along with other data.
Nevertheless, the impact of this database has been patchy. While better-managed
banks make good use of these records, the records are often incomplete. A senior
executive at one foreign credit-card issuer comments: The truth is that the credit
bureaus take time to build their data and require diligent reporting of information
by issuers and other lenders. At this moment [they are] not at the level of more
developed countries like the US, so the limited information they provide isnt
adequate for an issuer to make a full credit assessment.
As this data expands, banks will have an increasingly useful tool at hand for when
they make credit risk decisions.
Regulatory restrictions
Another of the key challenges faced by banks is that of regulatory restrictions on
their actions. Retail bankers see licensing risk as a major concern, highlighting the
difculties associated with getting permission to expand into new regions or markets.
This issue crops up as a practical problem when trying to expand a bank branch
network, for example. It is not that easy to create or extend a branch network, says
BBVAs Mr Galatas. Unlike in other developed countries, the Chinese authorities
must approve every opening or closure.

First Data Beyond Cash: Chinas Emerging Payments Market

22

First Data Insights


Know your market and know
your customer

But for all bankers polled, licensing risk is second only to political risk dened as, policy
and regulatory issues that could signicantly affect a companys operations in the
country. Market analysts are nevertheless optimistic that the environment is improving:
I think the average bank is positive on the general regulatory environment, on where
it is, the direction it is moving, says Alistair Scarff, a banking analyst for Merrill Lynch.
distribution channels to compensate for their lack of extensive branch networks.

Strong cultural appreciation of the


market is seen as one of the biggest
contributors to success
The development of the payment cards market
in each country is heavily inuenced by the
countrys culture, attitude toward money, and
the evolution of the local banking sector. China
is no exception.

Talent and IT
Despite Chinas enormous population, talent is another issue that must be addressed.
Local banks and foreign banks all compete for a relatively small number of people with
relevant education and experience. There are plenty of very bright people with good
academic qualications, but there is a shortage of those with experience of these
newer areas of banking, says RBSs Mr Shelley. So one of the big challenges we
have is training up sufcient numbers to enter these new market sectors.

Attitudes to credit in China are changing


quickly, especially among the younger
generation. Five years ago when First Data
entered the Chinese market and established
its operations centre in Shanghai, credit cards
were still a new concept. Depositing money
in banks and using cash to make purchases
were commonplace, and brought people a
sense of security. People were beginning to
get familiar with using cards, but mainly debit
or quasi-credit cards.

Demand for skilled staff is strong. Among foreign banks alone, HSBC recently
announced plans to increase its 3,000 Chinese staff by another 1,000 both this year
and next, while Citigroup plans to add 1,000 more this year and the Bank of East Asia
plans to add some 500-1,000. Standard Chartered is also believed to be planning
substantial increases in skilled staff.

Now, all banks in the China market are


competing for credit card wallet share. Credit
cards have been widely accepted by Chinese
consumers in bigger cities. With the dramatic
economic growth, people are starting to
practice the principle: Use tomorrows
money to satisfy todays needs. However, the
credit card usage group is still the lower-aged
groups varying from 20 to 40 years old.

In addition, IT systems remain unsophisticated. Risk management, for instance,


requires both good IT systems and staff with relevant experience. According to Mr
Scarff, Chinese banks dont yet have the systems to manage the signicantly higher
volume of data required for credit card services. Banks must evaluate customer
credit, monitor card use, and adjust credit ratings as time goes on. Each of these
steps requires technology, market knowledge, and credit evaluation expertise.
These are the key challenges.
Savings culture

Within this group of people, the 3040 age


group is relatively conservative compared to
the younger 2029 age group. This older group
of people are mainly middle-management
white-collar managers. Although they nd
credit cards convenient and use them on a daily
basis, they behave as transactors, not revolvers.

One nal challenge is simply culturalChina has yet to become a consumer-oriented


society. Even the approximately 76m Chinese that have annual incomes over US$5,000
usually prefer to save their extra cash. This scally-conservative tradition, reinforced today
by incentives to build up precautionary savings to cater for individual medical, pension
and housing expenses previously paid by the state, extends to a general aversion to
assuming debt. When asked about barriers to growth in the market, the underdeveloped
or immature consumer credit culture in China was rated highest by retail bankers, above
tight regulatory restrictions and an undeveloped back-end banking infrastructure.

The younger group is called the Post 80s


as most of them were born after 1980. This
group is the revolver group. As a matter of
fact, the consumer behaviour of this group
is more Western than Chinese. Banks
love revolvers. However there is a thin line
between cardholders revolving their balances
and becoming a bad debt risk. As a result,
Chinese banks should welcome the Post
80s cardholders but tighten up their risk
policies and pay more attention to these
cardholders behaviour scores and tendencies
to prevent their credit from going bad.

Even local banks recognise the cultural aspects of card acceptance. The major
problems besetting the development of the credit card business in China derive from
the conicts between the consumption culture of individual Chinese customers and
[payment cycles] of credit cards, explains Hua Chen, an executive within the bank
card division of Shanghai Pudong Development Bank.
The result is that few Chinese card users currently carry revolving balances on their
cards, preventing card issuers from levying the interest payments on outstanding
balances that are the mainstay of prots in other markets. According to McKinsey, a
consultancy, just 2% of domestic credit card users describe themselves as frequent
revolvers (borrowers that carry forward an outstanding balance from one month to the
following months bill), and 85% pay off their bills in full every month.

First Data Beyond Cash: Chinas Emerging Payments Market

(continued on next page)

23

First Data Insights


Payment cards are relatively new in China,
whereas the Chinese peoples strong tradition of
saving goes back generations. Making the shift
from cash to cards will take time. Developing a
culture where people feel comfortable in using
revolving credit or other consumer lending
products will take much longer.
The signs are promising. Amazingly, at 2%
of the cards market, China has a higher
proportion of revolving credit card volumes than
most continental European countries, where
borrowing is concentrated on bank overdrafts. If
Chinese banks want to develop a strong credit
card lending culture they will need to look to
organisations from credit card heartlands like
the United States, Canada and United Kingdom
for guidance. Leading credit card issuers from
these countries are already active in China, as
are a handful of European consumer nance
specialists like Cetelem, the subsidiary of
French bank BNP Paribas.

At the same time, the levels of debt local consumers are allowed to assume remain
low. Current regulations mean that all Chinese credit cards are subject to a lending
ceiling of Rmb50,000 (about US$6,500)a limit that prevents most consumers from
running substantial balances. Card issuers point out that today many card users
in China can afford higher limits (and need them too, for example when travelling
abroad). However, although the government is considering an increase of this
spending cap, it has given no indication of when this may happen.

Bringing Merchants On Board


If the Chinese market for payments is going to truly take off, a key prerequisite
will be for retailers to provide customers with the facility to pay by card. This is
particularly challenging in a country like China, which has large numbers of small
retailers, and provides particular problems for card issuers trying to boost use of
POS terminals in the marketplace. This is not simply a numbers gamesmaller
merchants are likely to be less sophisticated and harder to educate about the
benets of credit card payment facilities.
Once infrastructure is in place to service local customers, merchants should be
more receptive to adopting similar POS equipment that services credit cards too.
Of the various merchant types, those selling consumer goods see the heaviest
credit card trafc, with relatively little usage in the service sector. This preference
is reected in the survey results, where almost eight out of ten retail bankers see
department stores as the most promising target for card operators. Beyond this,
hotels (52%), supermarket chains (47%) and restaurants (43%) are seen as the
next most promising targets for payment card operators.
Retail outlets
In your view, which retail outlets in China are the most promising targets for
payment-cards operators?
Retail bankers only
Department stores

78%

Hotels

52%

Supermarkets

47%

Restaurants

43%

Travel agencies (including airlines)

24%

Petrol stations

16%

Entertainment Venues
(cinemas, sports complexes, etc.)

16%

Other

2%
0

10

20

First Data Beyond Cash: Chinas Emerging Payments Market

30

40

50

60

70

80

90 100

24

First Data Insights


Merchant acquiring

Convincing the Merchants

A relatively low proportion of banks appear interested in providing merchants with


the necessary services that would permit them to accept card payments (merchant
acquiring). Just 12% of bankers polled for this report say their rms are already
offering such services, but 34% plan to introduce them within the next three years.
However, more than half (54%) responded that they have no immediate plans to do
so. Banks from the Asia-Pacic region appear keener to engage in this area than
others: nearly 70% of Asian banks indicate they will provide such services, while just
45% of European banks think they will do so. Perhaps this comparison highlights the
generally more cautious approach being taken in China by banks from Europe.

Merchants preference for cash transaction is a signicant barrier to developing card acceptance
China is not alone in facing the challenge of
developing a merchant acceptance network.
Almost every other emerging market in Europe,
Latin America or Asia has the same problem.
Banks in countries like Spain have managed
a massive migration of cash transactions to
electronic payments. They have treated the
investment in building an acceptance network
as a business that will generate steady cash ow,
not as the provision of a public utility, such as the
road and rail networks.

Banks offering the necessary services are targeting the richest parts of the country
rst, where the job is much easier. Rabobanks Mr van Empel says his company
invested in a rural co-operative bank in Zheijiang province which has seen growth
of 15% over the past ve years. Its a prosperous province with lots of [small and
medium] enterprises and most shops accept debit cards. In his view, it has
been an easy province to persuade merchants to accept cards.

Accepting credit cards will enable merchants


to do business with many more customers. It is
in the interest of all banks to develop the card
acceptance network, both to reduce the cost
of accepting cash payments and to gain from
the revenue benets of increased card fees and
interest income offered by credit cards.

Co-branded cards
One trend that has gained increased popularity over the past year has been for
banks to issue co-branded cards in conjunction with merchants. Such deals not only
help to retain customers by allowing the development of loyalty bonus programmes
that provide rewards for card usage, they also help both issuers and merchants to
develop brand images and target their services at particular demographic markets.
Major credit card players have now formed as many as 20 of these co-branded
engagements each. Notable deals include a November 2006 deal between Wal-Mart
and HSBC/BoComm and a Citibank/Shanghai Pudong Development Bank card
issued with Japan Airlines in March this year.

Installing a POS (point of sale) network will


reduce the cost of handling cash for both
merchants and acquirers. It will also reduce the
risk of robbery and give the merchant a payment
guarantee. Electronic transactions also ensure
that there is a record of each transaction, thereby
reducing the size of the black market and the
problem of tax evasion.
Merchant acquiring is a critical component
of the cards business and core to its future
development. Industry regulators have high
expectations for the rapid growth of the card
acceptance network. For example, the Peoples
Bank of China expects payments by bankcards
to have reached 30% of all payment transactions
in large and mid-sized cities by 2008. At present,
there are over 810,000 points of sale at 520,000
merchants accepting China UnionPay cards.

From the retailer perspective, those appealing to wealthier consumers are more
likely to be courted by the banks, not only to provide card services, but also to offer
co-branded cards. We have been approached by a number of banks [to offer a
co-branded card], but we have not made a decision about whether that would be
the right approach, says Albert Chan, managing director of a fashion retailer, Ports
International, which operates with some 300 domestic stores represents the largest
number of foreign-invested outlets in China. We are considered a very prestigious
fashion brand in China and the people who are fashion conscious tend to also be
bigger spenders, and so banks do want to associate with companies like us.

Compared to many other markets, merchant fees


in China are low, with a net average merchant
service charge (MSC) of 1%. This makes the
nancial challenge to migrate merchants from
cash to card-based payments much less difcult
than in some other emerging markets where
MSCs can be over 3%. The big challenge is to
convince merchants that accepting cards is good
for their business and then training employees to
accept card-based payments.

The network experience


The experience of merchants interviewed for this report in using local POS systems
was generally positive. Different cities have different rates of usage, depending on
whether the banks are able to push their ideas onto their customers, says Mr Chan.
Generally, though, the system works very well.

(continued on next page)

First Data Beyond Cash: Chinas Emerging Payments Market

25

First Data Insights


As Chinese banks build their acquiring business,
they should be aware of some major trends
impacting their own market and the industry
generally:
Merchant acquiring is becoming a commodity
Acquirers need sophisticated and scaledriven processing
Regulators are taking a much closer look
at the card industry, especially interchange
rates and MSCs
Establishing a robust merchant base will
bring benets to the government taxes
will be captured to improve the overall
economy. For example, the Korean
government gives incentives for merchants
and cardholders to adopt the use of cards.
- Intense price pressures are eroding margins;
- The need for sustained, large capital
investment will continue.
For international merchants such as Wal-Mart,
Pizza Hut, Tesco and KFC there are opportunities
to reduce costs through centralised and/or multicountry acquiring.

Others argue that the payments network has its hiccups, but is constantly improving.
Reliability is not as good as elsewhere in the world, notes the CFO of a major British
retailer that is expanding rapidly in China. It is getting better though. Local banks
generally agree, although acknowledge that more still needs to be done. Signicant
headway has been made in the UnionPay project, yet much still remains to be done to
popularise cross-bank and cross-region payment by bank cards and raise the success
rates of such transactions, says Guoyong Shen, an executive at CITIC Bank.
Inevitably, concerns about reliability are more prevalent in rural locations than in the cities.
Also, declined cards are usually unlikely to be called in from the retailer, especially
those in more remote regions, as they seek to avoid the costs of a long distance call.
There are no regional call centres you can use to verify transactions manually, says
one executive at a major foreign retailer operating in China.
Merchants also report a relatively low incidence of credit card fraud, possibly a reection
of criminal learning curves lagging card usage growth. One banker pointed out that
current POS systems allow for SMS notication of sales transactions within minutes
of their completion, which has helped to cut down rates of fraudulent use.

The Outlook For The Cards Business In China


There is much optimism about the payment card business in China, but both foreign
and local banks have much work to do. For foreign banks, establishing a credit business
is a daunting challenge. And for both local and foreign banks, the next steps will involve
stimulating mass acceptance, and then, hopefully, developing prots.
At the same time, however, the credit card market is evolving rapidly. At the end of 2006,
[credit cards] accounted for only 3% of total cards that have ever been issued in China,
explains an executive at one large card issuer. But they actually account for a third of
transactions, not in terms of volume, but in terms of number of transactions conducted at
the point of sale. So credit cards at the moment are the fastest growing payment product
in China. As one analyst explains it, considering their share of the market, it was a clear
indication that credit cards outperformed debit cards by wide margins.
To grow their market share in this expanding credit card market, foreign banks
seek to capitalise on their greater experience. When asked to choose key contributors
to their success, 45% of the retail bankers surveyed chose name recognition/brand
image, 40% selected distribution, typically done in conjunction with a local partner, and
38% chose product innovation.

First Data Beyond Cash: Chinas Emerging Payments Market

26

Contributors to success
What has been (or what do you expect will be) the biggest contributors to the
success of your business in China?
Retail bankers only

Name recognition/Brand image

45%

Distribution capabilities

40%

Product innovation

38%

Assistance of local partners

29%

Technical expertise

22%

Strong cultural appreciation of the market

21%

Customer service expertise

19%

Global scale

16%

Human resource management

14%

Good government relations

12%

Good governance

12%

Other

2%
0

10

20

30

40

50

60

70

80

90 100

Short-term pain...
However, few card operations involving foreigners are looking to break even any time
soon. China Construction Bank, for example, whose own-brand operation boasted
6.34m users at the end of 2006, recently stated that its proposed credit card joint
venture with Bank of America aimed to be protable within seven years from launch.
There are several reasons for this poor protability outlook. One is the simple need for
economies of scale. Phang Yiew Kiat, deputy CEO and head of consumer banking at
China Bohai Bank, in which Standard Chartered has taken a 20% stake, comments:
Our experience had shown that a bank has to build a credit card portfolio of greater
then a million cards to be economically independently viable. In China, that number is
signicantly higher, in the multiple millions. Among other reasons, one critical element
is the merchant fee and [CUP] is driving it at 1% for most transactions and your
issuer gets a maximum of just 0.7%
Another reason is that although banks may be issuing credit cards liberally, consumers
dont always use them. In reality, according to bankers interviewed for this report, the
number of Chinese credit cards in active use varies around only 35-50% of those issued.
Finally, average credit card spending remains low at about Rmb8,000 (US$1,000)
per card annually in 2005, according to CUP. One reason for this may be that
customers are signing up for cards in order to take advantage of bank promotions
rather than with any long-term intention to use them.

First Data Beyond Cash: Chinas Emerging Payments Market

27

First Data Insights


The 3 Keys to Protability:
Volume, Portfolio and Usage
Innovation in product development and
delivery will be key for driving protability
in the Chinese credit card market
The card business is a volume business.
Besides volume, banks also look forward to a
portfolio with a good portion of revolvers. With
both of these in place, banks need to boost
up usage to maximize protability.
What can make a bank possess these three
critical success factors? The answer could be
many things, but above all, they are branding,
product and service.
When Industrial and Commercial Bank
of China (ICBC) issued its rst American
Express card in China in 2004, the product
was positioned as a lifestyle accessory for
successful people in China. This is still a
very suitable description for all card products
aimed at the top of the Chinese market.
While the vast majority of cards aimed at the
mass market are standard products with ATM
or POS functionality, segmentation is becoming
increasingly important at the high end of the
market. The leading local banks have launched
innovating products with loyalty programmes,
co-branded cards, and revolving credit gaining
increasingly widespread acceptance.
Whatever the type of product, marketing
is important throughout the credit card life
cycle. Marketing initiatives are used not only
to increase the acquisition rate but also to
boost card usage and retain customers.
Banks in China are developing value-added
features and targeting market segments
with different products.

...for long-term gain


The fact that prot prospects look bleak for the foreseeable future has not diminished
bank condence over the longer term. Few credit card issuers expect to make a prot
in their rst few years, and are therefore unconcerned at the prospect of early losses.
Indeed, there are many reasons to be positive.
According to an executive at one card issuer, one cause of currently low revolving
balances in China is that banks have targeted wealthy, high-end customers in their
initial marketing strategies. Although these clients are sought after by banks for
other reasons, such as cross-selling opportunities, the high-end customers tend
to use revolving credit facilities less frequently. But once you start to go down the
demographic pyramid, the experience in other [Chinese markets], suggests that
revolving rates will go up.
In addition, although older card users may continue to spend conservatively, younger,
better-educated consumers tend to spend in ways more comparable to Western
consumers. This means that time is on the side of the banks. As more young,
afuent people start to use cards, the proportion of those using them in ways that are
protable to card issuers will naturally increase (although whether they will prove to
be good credit risks is another matter). Indeed, the trend reected in ofcial gures is
already strong. According to a recent survey conducted by China National Radio and
Beijing Sino Credit, 38% of credit card holders are now white-collar professionals in
the 26-33 age group. Meanwhile, total revolving balances in China increased 50%
to some Rmb15bn (nearly US$2bn) at the end of 2005, according to CUP.
Finally, some 35% of Chinas most afuent consumers are located in the big four cities
(Shanghai, Beijing, Guangzhou and Shenzhen) where foreign banks have already
established branches tends to mitigate the problem of the lack of branch networks
nationwide. By focusing on a handful of up-and-coming second-tier cities, they will still
be able to cover a large percentage of their target client base without having to expand
their branch networks across the country. Some of this will be achieved by tapping
into Chinas burgeoning e-commerce market (see box: The rise of e-commerce and
alternative payment platforms).

There are some marketing methodologies


widely employed in the United States, Canada
and some European markets that have not
been used in China. For example, balance
transfer, mass direct mail campaigns, product
development based on exible interest rates,
etc. We believe that with the further opening
of the Chinese market, these marketing
initiatives will play an increasing role.

(continued on next page)

First Data Beyond Cash: Chinas Emerging Payments Market

28

First Data Insights


The rise of e-commerce and alternative payment platforms

For example, in February 2007 Bank of


Communications (BoComm) launched a
co-branded programme with New World
Department Stores across 15 major Chinese
cities. With management and technical
support from its strategic investor, HSBC, the
programme was the rst to feature a card with
both chip and magnetic stripe technology.

Fully half of all bankers polled for this report believe that the prospects for online
commerce in China based on payment cards are either strong or very strong,
compared with just 18% who consider prospects to be weak or very weak.
When looking at the growth of Internet usage in the market, this is easy to
understand. China has become the second-largest Internet market in the world,
with around 10% of its population using the Internet. By the end of 2006, the
market had an estimated 137m Internet users, according to the China Internet
Network Information Centre, an increase of 23% on 2005. Of these, 104m used
broadband connections, with 17m using mobile phones to access the Internet.

In April 2007 China Construction Bank


announced that it would establish a card
company in association with Bank of America
(BofA), another example of knowledge
transfer between Chinese banks and their
foreign investors. BofA also brings with it the
premier product development, data mining
and segmentation skills of MBNA, the worlds
leading monoline card issuers before it was
acquired in 2005.

Driven by growing numbers of Internet users, more merchants offering online


payment options, and more banks investing in online payment infrastructure,
the online payment market grew more than 100% in 2006 to some Rmb32bn
(US$4bn), according to CUP, representing about 3% of the value of bank card
transactions for the year. Bankers, accordingly, are bullish. Rabobanks Mr van
Empel says e-commerce in China will increase rapidly in the future, because
Internet use is widespread. And retailers agree. There is a lower density of POS
infrastructure in China and I could see that this would lead to the development of
other types of electronic payment platforms, says an executive at a major British
retailer currently operating in China.

We can expect similar co-operation on


products such as commercial cards and
prepaid products, not to mention mobile
commerce where there seems to be major
need for mobile-based payment services
in provincial areas. The marketing initiatives
will also have to take into account the
changing consumer demographics, with
younger people being far more comfortable
with credit cards and preferring to use remote
channels than bank branches. Weve seen
this strong trend in emerging markets such as
Central and Eastern Europe as well as more
mature markets in North America.

Looking beyond cards


While online commercial transactions have expanded in line with this upward
trend in Internet usage, some innovative players have also moved to exploit
the grey area between real and virtual money to take advantage of the gulf
between the large number of Internet users and the relatively low number
of credit card holders. The Q-coin, a unit provided by the dominant instant
messenger service QQ, has gained popularity and can now be used to buy
a number of real goods and services online, such as phone ringtones.

Many Chinese banks are making efforts


to accelerate product innovation, upgrade
service quality and drive market development
in retail nancial services. This will be
especially important in the cards industry
where the survey indicated great uncertainty
over the ability of the Chinese cards
industry to generate prots. Almost 40%
of respondents say that they neither agree
nor disagree with the statement that it will be
difcult to achieve protability in the next three
years. Another third of respondents (34% to
be exact) agree that it will be a challenge.

Plastic card payments are also less suitable in populous rural provinces,
with a less evolved card payment infrastructure, while e-commerce is also
unattractive, given limited Internet penetration. As a result, the development
of alternative payment channels is now being promoted by Chinas central
bank, the Peoples Bank of China.
One alternative is mobile phone-based payments, which are also growing
rapidly. Subscribers to m-commerce payment schemes doubled in 2006
to more than 5m customers, according to CUP. Banks see this as an ideal
medium for conducting marketing campaigns and wealth-management
business models. As pf 2005, some 4.3m customers at China Construction
Bank had signed up for mobile phone banking services.

Banks in China should also look to cross-sell


credit card products to customers, as well as
target credit cardholders with marketing for
other bank products. To do this successfully,
banks with Western partners can tap into an
available source of expertise.

More recently, a new type of SMS-based payment system has evolved. Users
simply send an SMS message specifying the mobile number of the payee, the
payment amount and their PIN, and receive conrmation of the transaction within
seconds. Although still subject to security concerns, the system has major potential,
given its simplicity and low costand the ubiquity of mobile phone services.
Other alternatives include a contactless mobile phone payment system, which is
being rolled out in Shanghai later in 2007. CUP has developed a digital TV set-top-box
payment service, which it plans to test as a trial in Qingdao this year.

First Data Beyond Cash: Chinas Emerging Payments Market

29

Conclusion
The general outlook for the cards business in China is positive, according to the
bankers surveyed for this report. However, both local and foreign banks have their
work cut out as they attempt to develop a protable cards business in the market.
At a basic level, much needs to be done to convince consumers and retailers
about the merits of switching from cash to card-based transactions. Doing so
will require long-term effort. Fully 86% of bankers polled agree that they must
educate consumers about payment cards now, before a widespread payments
infrastructure is in place.
In addition, although foreign banks can, to a certain extent, deal with the problems of
creating far-ung networks by teaming up with a local partner, they still face a barrage
of riskseconomic, political, regulatory and, most of all, from the market itself.
But although risks are high, the rewards for the winners will be equally large. Finding
the right balance will ultimately be key. As Merrill Lynchs Alistair Scarff says, Chinas
move toward increased card usage is a very positive one. It is positive for banks, as
a great source of revenue, and for customers, in terms of convenience and greater
benets and service. The potential for growth is there, but the challenge for banks
will be to grow in a measured and disciplined way. Banks will have to move quickly,
but cannot sacrice the quality of their assets by pushing forward too hastily.

First Data Beyond Cash: Chinas Emerging Payments Market

30

Regulatory recommendations
Chinas payment card market has been expanding rapidly over the past few years.
The introduction of greater competition from abroad is likely to accelerate this trend,
but increased help could also come from the government and market regulators.
1. Work to improve credit risk management and assessment capabilities, both at
card issuers and at credit rating bureaus. Ensure that data held by credit bureaus
is accurate and comprehensive.
2. Protect bank sector health by creating and implementing sound accounting and
asset management practices.
3. Remove or reduce bureaucratic impediments to bank expansion plans.
4. Raise credit card borrowing caps from current low levels.
5. Continue campaigns to encourage more merchants to offer debit and/or credit
card services, and to increase the value of urban non-cash transactions as a
proportion of total spending.
China Merchants Bank: a model for the future?
If ever an exception proved the rule, the example of Shenzhen-based China
Merchants Bank shows how credit card businesses can be run protably
in China. It has taken the domestic credit card market by storm since
becoming the rst Chinese bank to issue dual-currency cards in conjunction
with Taiwans ChinaTrust Financial in 2002. With the card operation running
smoothly, China Merchants severed the relationship with its partner and
has since transformed itself into the nations biggest credit card issuer,
with some 10m cards in circulation at the end of last year. Half of those
cards were issued last year alone and China Merchants projects its card
numbers will rise to some 15m by the end of 2007.
In 2006, according to its annual earnings release, the bank managed to double its
credit card base and realised Rmb10bn (US$1.3bn) in card revenue, up 123% from
the previous year. Credit card lending rose to 10% of total retail lending. The bank
claims its credit card operation became modestly protable during the year (its fourth
since launch), with earnings of Rmb100m (US$13m), making it the rst bank in China
to operate its credit card division protably, according to domestic press reports.
Targeting younger, wealthier consumers, business has thrived due to smart
marketing campaigns such as co-branding with youth-oriented brands, like
Hello Kitty, or specic market niches, such as an online travel agent, Ctrip.
In addition, the bank has beneted from superior customer service and the
largest credit card centre in China, which has generated half its customer
base by using direct marketing campaigns. By concentrating on using an
Internet-based servicing platform that allows clients to manage accounts
online, the bank has reduced costs and managed to overcome the disadvantage
of its relatively small branch network of about 500 branches.

First Data Beyond Cash: Chinas Emerging Payments Market

31

Appendix
1. The rst wave? Foreign investment in mainland Chinese banks
As of April 2007
Chinese bank

Foreign investor

Stake
purchased (%)

US$ (m)

Industrial and Commercial


Bank of China

Goldman Sachs, Amex,


Allianz Group

8.45

3800

China Construction Bank

Bank of America
Temasek Holdings

9
5.1

2500
1460

Dalian City Commercial Bank

Bank of Nova Scotia


International Finance Corp (IFC)

19.9
5

1747

Bank of China

Royal Bank of Scotland


Merrill Lynch, Li Ka-Shing
Temasek Holdings
UBS
Asian Development Bank

10
5
5
1.6
0.24

3100
1500
1500
500
75

Bank of Communications

HSBC

19.9

1747

Shanghai Pudong
Development Bank

Citigroup

4.6%

67

Minsheng Bank

IFC
Temasek Holdings

1.6
4.6

23
110

Industrial Bank

Hang Seng Bank


IFC
GIC Special Investments
of Singapore

15.98
4

208
52

65

Huaxia Bank

Deutsche Bank
Sai Oppenheim

9.9
4.08

327

Shenzhen Development Bank

Newbridge Capital
GE Capital

17.98 (will drop)


7.3

Guangdong Development Bank

Citigroup3
IBM

85
4.74

3100
165

Bank of Beijing

ING Group
IFC

19.9
5

215
54

Bank of Shanghai

HSBC
IFC

8
7

63
47

Bank of Nanjing (fka) Nanjing


City Commercial Bank

IFC
BNP Paribas

5
19.2

8.3
87

China Bohai Bank

Standard Chartered

19.99

78

Hangzhou City
Commercial Bank

Commonwealth Bank of Australia


Asian Development Bank

19.999
4.99

778
30

Jinan City Commercial Bank

Commonwealth Bank of Australia

11

17

Xian City Commercial Bank

IFC
Bank of Nova Scotia

12.5
12.4

N/A
N/A

Ping An Bank

HSBC

27

N/A

150
100
(pending)

Citigroup was allowed an expanded stake owing to the nancial weakness of GDB.

First Data Beyond Cash: Chinas Emerging Payments Market

32

Chinese bank

Foreign investor

Stake
purchased (%)

US$ (m)

United Rural Cooperative


Bank of Hangzhou

Rabobank
IFC

10
5

31

Nanchong City Commercial Bank

Deutsche Investitions-und
Entwicklungsgesellschaft (DEG)
Sparkassen International
Development Trust

10

3.3

1.5

Ningbo City Commercial Bank

Overseas-Chinese Banking Corp

12.2

70

China Everbright Bank

IFC

4.9

19

Tianjin City Commercial Bank

ANZ Bank

19.9

120

Shanghai Rural Bank

ANZ Bank

19.9

252

CITIC Bank

Banco Bilbao Vizcay Angentaria

648

Qingdao International Bank

Hana Bank

72.31

25

Xiamen Commercial Bank

Fubon Financial Holding

20

62

Nan Tung Bank

Morgan Stanley

100

N/A

Chongqing Commercial Bank

Da Shing Bank

17

89

United Commercial Bank

Business Development Bank

100

205

Sources: KPMG; press reports.

2. Making the leap. Foreign banks with announced intentions to enter


Chinas retail banking sector
Early entrants (Incorporated as of April 2007)
HSBC
Bank of East Asia
Citigroup
Standard Chartered Bank

HQ
Shanghai
Shanghai
Shanghai
Shanghai

The next round (Awaiting approval as of April 2007)


ABN AMRO
Bank of Tokyo-Mitsubishi UFJ
DBS Bank
Hang Seng Bank
Mizuho Corporate Bank
JP Morgan Chase
Wing Hang Bank
Overseas-Chinese Banking Corp

Shanghai
Shanghai
Shanghai
Shanghai
Shanghai
Beijing
Shanghai
Shanghai

Plans for entry


Deutsche Bank AG
BNP Paribas SA
Overseas Bank
Citic Ka Wah Bank
Nanyang Commercial Bank
4
5

A joint venture between Hana Bank and ICBC, so Hana is allowed a controlling stake.
Could be acquired in its totality because it was already foreign-owned.

First Data Beyond Cash: Chinas Emerging Payments Market

33

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