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Plastic China

According to a recent statistic published by China Union Pay, Chinese banks have issued more than 1.3 billion debit, credit and ‘quasi’-credit cards through the end of September.  This means that, on average, every man, woman and child in China now carries a piece of plastic.  Quite a staggering number and, at first glance, quite promising. 

However, what needs to be understood is what each of these cards actually are:  Of the 1.3 billion, about 95% are debit cards, 3% are credit cards and 2% are so called ‘quasi’-credit cards (no revolving balance allowed).  Now, while the banks are likely making some money off the debit and quasi-credit cards, as any bank can tell you, the real money is in the interest coming from revolving balances that you can only get from credit cards – and therein lies the rub. 

In the US, each person carries about 5 credit cards and a monthly revolving debt balance of US$8,500.  When we look at China, only 1 in 50 people carries a credit card and a monthly revolving debt balance of US$1,250. (normalised for GDP); a huge difference.  Obviously the maturities of the industries are different:  Americans had been leaving home with an American Express card for about 30 years before the Chinese got their first taste of credit cards in 1987, but beyond market maturity, the slow uptake really comes down to the attitudes of the people.

Chinese consumers in general are very conservative when it comes to money and feel more comfortable spending money that they really own, rather than using credit.  For this reason, uptake has been relatively slow;  if you don’t need the credit, why get the card?  In addition to slow adoption of credit cards, those who have them tend not to use them in the way the banks would prefer; i.e. many tend to pay them off in full every month, cutting off the most lucrative part of cards for banks. 

Times are changing though.  Although cash is still really king in China, now about 18% of retail purchases in China are completed with some form of plastic, up from 17% last year.  As of September, China had 183 banks issuing cards that could be used at 1.08 million points of sale of 650,000 specially endorsed outlets and 120,000 automatic teller machines.  Considering that there were about 26,000 points of sale and 2,500 ATMs in 1987. 

The growth is phenomenal and is likely to continue as quickly in the next few years especially with the Olympics on the horizon.  The Chinese government is eager to show the world during the Olympics how China has modernized and card availability and acceptance is a big part of that. 

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Comments: (2)

Elton Cane
Elton Cane - News Corp Australia - Brisbane 07 November, 2007, 12:59Be the first to give this comment the thumbs up 0 likes At the Fintech M&A event last week, Fred Sum, the CEO of Chinese payments firm PayEase, mentioned the 3% credit card penetration. To illustrate how far the payments business in China has yet to mature, he also mentioned that for many online purchases people still have to pay cash to the bicycle courier who delivers the goods. So obviously there is huge untapped potential in the Chinese market for greater automation and electronification of payments, but as you say, there are many cultural considerations that need to be taken into account.
A Finextra member
A Finextra member 08 November, 2007, 04:02Be the first to give this comment the thumbs up 0 likes Interest & charges on revolving balances are the major sources of income in key western markets (US, UK and alike), but situation differs in other regions. Where debit cards prevail and / or cardholders prefer to pay in full (mentality is a big factor) interchange fees and cheap/free credit balances can be more significant. Try to compare US to Germany or Netherlands and you will see quite a few differences. Those won't be caused by market (in-)maturity but rather by different customer behaviour / mentality etc.

In my opinion whether or not Chinese will adopt to the "revolving" concept won't affect the growth of card business that much. Whether with interest charges or QCC deposits or interchange / conversion fees the banks will continue their issuing business growth with current amazing rate for quite awhile. The real challenge is on the acquiring side: convincing "traditional" merchants to pay the fee for accepting cards is much harder than to penetrate young issuing market (banks are doing quite well in this area). On the acceptance side both numbers and maturity (including technological) have got huge room for improvement.
Zennon Kapron
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Zennon Kapron

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