There is little doubt that credit card usage in China is growing at a rapid pace. As many as 15.6 million cards were issued in 2006 – an increase of 39% year-on-year – taking the national total to 50 million, according to China UnionPay.
The difficulty is making money from them.
“Credit cards still haven’t really taken off with the general population as incomes are relatively low,” said Charlene Chu, director of the Fitch Ratings financial institutions team in Beijing. “People who do have credit cards tend to pay off their balances every month. Building up debt just isn’t part of their behavior yet.”
Banks, facing the high overheads typical of the card business and deprived of revolving credit users, must issue a comparatively large number of cards to breakeven. Those who get involved now are waiting to make money off the more mature and credit-friendly market expected to develop in the long term.
China Merchants Bank (CMB) got in early, first issuing its renminbi-US dollar dual currency credit card in 2002. By the end of 2003, more than 800,000 were in circulation. In 2004, it went up to two million, followed by five million in 2005 and 10 million in 2006.
The bank is sitting pretty with a market share of around 40%. But such is the pace of credit card rollouts nationwide. Tang Zhihong, CMB’s executive vice president responsible for retail banking, is certain this figure will decline.
“When we did our IPO road show [late last summer], we said that we expected our share of the credit card market to decrease to 20-25% within three years. This doesn’t mean our profitability is also falling – it means that other banks are catching up and taking market share.”
Efforts are being made to provide the systems to cope with this expected growth. First, domestic banks must ensure they have the technology to handle the credit card business.
“There are really only a few systems in the world that can run tens of millions of cards,” said Nigel Lee, Asia president of First Data International, a credit card payment processing group with over 100 people working in China.
“It is very significant. If you go to India you will hear about other banks running similar systems that are completely unproven.”
First Data is also concerned about the relatively small number of merchants able to accept credit card transactions (188,000 were added last year, putting the total at 800,000). Even foreign banks, generally more enlightened when it comes to credit cards, appear to be doing little to encourage progress in this area. A survey of foreign bankers carried out by First Data and the Economist Intelligence Unit found that only 12% of respondents planned to develop merchant acquiring services.
It is China’s credit infrastructure that raises the most serious questions, though. Can the country get its checks and balances in place fast enough to match the growth in card users?
“My personal view is no, they will not,” said Lee. “A credit crisis will likely occur. The question is will it be catastrophic or manageable.”
Korea is often cited as an example of how to kick-start a credit card market but it can also serve as a case study of credit meltdown. Competition between banks became so intense that they began shifting balances between accounts, papering over the surge in defaults in order to carry on issuing more credit.
Lee noted that the China’s banking regulators have spent a great deal of time with their Korean counterparts to understand the crisis and ensure it is not replicated in China.
For its part, CMB claims to be in a better position than its competitors when it comes to managing credit. Tang puts it down to the huge amount of consumer data that has been collected through retail banking. This information is channeled into the bank’s credit bureau, enabling better informed lending decisions.
“Other banks have not accumulated this much data so it is harder to develop good scoring card models,” Tang argued.
Chu contests that historical data alone does not necessarily represent an advantage. To be truly effective, a credit database must be comprehensive, covering the whole country and all the financial institutions.
For China, such a system is years away. In some banks, they are still grappling with more fundamental aspects of the credit card business than scoring cards and, while usage will certainly continue to grow, it will not come without pains.
“Part of the challenge is getting banks to understand credit cards and this is more of a problem in China,” said Lee. “Where do you get the skills from? There is not enough knowledge throughout the whole business process.”