Beyond cash: China’s emerging payments market


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First Data International commissioned the Economist Intelligence Unit to write Beyond Cash: China’s 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 findings and views expressed in this report do not necessarily reflect 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 firms 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.

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Beyond cash: China’s emerging payments market

  1. 1. Beyond Cash:CHINA’S EMERGING PAYMENTS MARKETRESEARCH SUMMARYwritten in collaboration with The Economist Intelligence Unit
  2. 2. ForewordWith over one billion bank cards issued in China and banks and regulators encouraging an increased number of merchant acceptancepoints, 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 theopportunities and challenges incumbents and new entrants face as they offer new payment options to consumers in this rapidlygrowing economy. As a result, First Data International commissioned this report to highlight the views of foreign banks and retailerson the prospects for China’s 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 forfuture revenue potential.First Data truly agrees with this assessment. As early market entrants to China ourselves we introduced the concept of outsourcinginto 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 processingexpertise from other markets for the benefit 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 todevelop 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 timeof development in the payments market.Pam PatsleyPresidentFirst Data InternationalFirst Data Beyond Cash: China’s Emerging Payments Market 3
  3. 3. Who Took Part In The Survey PrefaceA total of 152 banking executives worldwidetook part in this survey, all from banks either inChina or planning to enter the market by 2010. First Data International commissioned the Economist Intelligence Unit to writeAround 34% of respondents were based in Beyond Cash: China’s Emerging Payments Market, an in-depth review of theAsia-Pacific, 32% in Europe and 26% in NorthAmerica, with the balance from the rest of the burgeoning payments market in All respondents came from management With the exception of the “First Data Insights” sections in the text and sidebars of thepositions, with C-level executives accountingfor about 30% of the total and senior vice report, the views and opinions expressed herein are those of the Economist Intelligencepresidents, vice presidents, director, heads Unit. The Economist Intelligence Unit executed the online survey, conducted theof business units or heads of departments interviews and wrote the report. The findings and views expressed in this reportaccounting for a further one-third. In terms of do not necessarily reflect the views of the sponsor.size, firms were split roughly evenly betweenthose with revenue either above or below The research drew on two main initiatives:US$1bn; nearly one-quarter had revenue – The Economist Intelligence Unit conducted a wide-ranging online survey of 152of more than US$10bn. Retail bankersaccounted for 38% of the sample. 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 firms 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: China’s Emerging Payments Market 4
  4. 4. Table of Contents06 Executive Summary – Sound practice: five tips for foreign banks entering the Chinese payments market09 Introduction09 The evolution of the Chinese payments market – China’s card market at a glance: Cards issued and transaction volume – Boom time in China: GDP growth from 2005 to 201011 Opening up the market – Entry strategies – Partnering for success14 The potential opportunity – Holding an edge16 Operating a cards business in China – Payment fees and incentive structures – Slim margins: China’s interchange rates set by PBC – Card processing – Merchant card acceptance and ATM use – Do you take cards? Card acceptance on the rise in China20 Numerous challenges remain – Top challenges for payments – Risk management – Regulatory restrictions – Talent and IT – Savings culture24 Bringing merchants on board – Merchant acquiring – Co-branded cards – The network experience26 The outlook for the cards business in China – Short-term pain... – ...for long-term gain – The rise of e-commerce and alternative payment platforms30 Conclusion – Regulatory recommendations – China Merchants Bank: a model for the future?32 Appendix – The first wave? Foreign investment in mainland Chinese banks – Making the leap. Foreign banks with announced intentions to enter China’s retail banking sectorFirst Data Beyond Cash: China’s Emerging Payments Market 5
  5. 5. Executive Summary As China’s economy continues its robust expansion, and as its banking sector finally 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 China’s payment cards market has never looked better. Nowhere is this more so than in China’s emerging market for debit and credit cards. With more than 200m new cards issued last year alone, China’s 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 total—some 50 million—are 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 findings of our research are as follows: – Retail banks are very bullish on consumer banking in general—and 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 China’s personal banking industry, retail bankers were most optimistic about credit cards and bank accounts. Fifty-five 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 profits is less certain. When it comes to profits in the credit card market, our survey respondents are less confident. Forty-three percent agree that it would be difficult to make a profit 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 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 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: China’s Emerging Payments Market 06
  6. 6. – 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 significant’ or ‘significant’ barrier in operating cards and payment services. In part, this is because retailers don’t yet feel much pressure from customers to provide payment card facilities in a society where cash is traditionally preferred. – Despite an opening financial 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 firm’s operations in China. Retail bankers in particular listed licensing risk (chosen by 43%) as a major concern, second only to political risk, highlighting the difficulties 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 China’s 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 berolled out to promote consumer usage. Along with this, databases of consumers’ creditand transaction histories require expansion. In addition, Chinese consumers must beencouraged 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 anenvironment that supports card payments. Although foreign banks entering themarket will have their work cut out, the opportunity is simply too big to ignore. Sound practice: five tips for foreign banks entering the Chinese payments market 1. Don’t arrive expecting fast profits. 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: China’s Emerging Payments Market 07
  7. 7. First Data’sRecommendationsRecommendations for Foreign Banks First Data International Insights�– Respect the culture – China is a very specific market with characteristics unlike most other countries�– Leverage best practice from your bank’s The size and rapid growth of China’s economy has led many foreign banks to enter operations in other countries (e.g. the market in the last five years. As shown by the result of this survey, two of the most marketing, risk, IT) profitable business segments - retail banking and credit cards – rank at the top of the�– Build in reasonable timelines for a return banks’ agenda. on investment�– Build and develop a dialogue with Banks surveyed view their investment as a long-term play. This is a wise strategy in a regulators and keep them updated on your progress market that is still in the early stages of development. However, both local and foreign�– Focus on customer service – it is still banks are conscious that this is an opportunity too big to pass up.. a major advantage for foreigners over local banks There are now over 1 billion payment cards in issue across the country. Although only�– Leverage banks’ focus on wealth 50 million of these cards are full revolving credit cards, it is not surprising that many management to deliver high-end card of the bankers surveyed see credit cards as one of the most promising products in products. High net worth customers are Chinese retail financial services. also a major source of fee income even if they don’t revolve their card balances Experience from other emerging markets in Asia, Central and Eastern Europe and�– Be prepared for competition – Chinese Latin America has shown that the credit cards offer huge revenue potential from both banks are learning very quickly. interest and fee income. In addition, banks can cross-sell other banking products toRecommendations for Local Banks credit cardholders, something that few banks in China are doing now.�– Consider remote distribution channels, not just branches For foreign banks focusing on the Chinese market, credit cards are an excellent entry�– Differentiate your product offering product. As standalone products they do not need to offer an account package or�– Use your branch network to exploit a local branch network to market to or serve cardholders. While most foreign banks market opportunities outside the four main cities are currently issuing cards in partnership with local banks, this may change as they�– Centralise your IT infrastructure and mine become more established in the market. your databases While Chinese banks face challenges in getting customers to activate and use�– Improve customer service their cards frequently, the growing card acceptance infrastructure will make this�– Ensure your technology is easy to use for customers with limited task easier. Banks surveyed rightly highlighted this as a major issue. However, it technological skills. is a challenge common to many other emerging payments markets. Interestingly,Recommendations for Both progress in the country’s main cities has been very rapid. Some 30% of allTypes of Banks payment transactions in big cities are now carried out by cards.�– Change the cultural perception on revolving credit From First Data’s experience of operating in China, one of the biggest challenges�– Leverage alternative distribution channels faced by banks is risk management. This is also a major finding of the survey. The�– Cross-sell – credit cards are a very useful introduction of data analytics solutions to help reduce card application fraud will product to use as a base for cross-selling or to sell to existing customers provide tremendous benefit to the industry. Banks also need to monitor transaction�– There are a limited number of skilled information and develop strong collections capabilities. Knowledge sharing in this people with payments industry area has been a big part of the co-operation between Chinese banks and their experience – recruit talent, and foreign partners. This will certainly pay dividends in reduced credit losses and better retain them fraud prevention as the industry develops and transaction volumes increase.�– Build risk capabilities�– Build a card acceptance network – fast The report rightly points out the key role of merchants in developing China’s cards�– Look at opportunities to sell card products industry. As in many emerging markets, cash is still preferred and the favoured means to companies – commercial cards help of payment for many retailers and other merchants. Experience in other countries has companies manage cash flow, are a short-term source of funding, offer shown that the industry needs to engage with the merchant community to clearly management information on employee educate and communicate the benefits of accepting cards. These include higher expenses and help to manage transaction volumes, reduced cash handling costs and less risk of theft. suppliers better�– Learn from the credit crises that have hit As the survey shows, payment cards have a major role to play in the profitability of many emerging markets – ensure you have the Chinese banking industry and its on going development. The foundations for good risk management practices before you start lending to consumers a profitable cards industry have been successfully implemented. By focusing on�– Be prepared to work with regulators resolving the highlighted challenges such as expanding the card acceptance and pro-actively to help stimulate the market improving the banks’ risk management and marketing effectiveness the industry will for all players. be well set for further growth. First Data Beyond Cash: China’s Emerging Payments Market 08
  8. 8. IntroductionFive years after joining the World Trade Organisation (WTO), China introducedregulations to open its retail banking market in December 2006, taking a majorstep towards the liberalisation of its financial services sector. Although somerestrictions remain, the change in the rules finally permits foreign banks toprovide renminbi-denominated accounts to the market.Many of the banks entering the market are looking at the potential of the burgeoningcredit card market. Of the 152 banks surveyed for this report, about eight out often rate the prospects for credit cards as either ‘highly’ or ‘somewhat’ promising.As might be expected, most foreign banks are targeting their activities at China’swealthier customers.“We think there is a big opportunity [for credit cards] because of the low penetrationso far,” says Manuel Galatas, head of Asia at a Spanish bank, Banco Bilbao VizcayaArgentaria (BBVA), which acquired a stake in CITIC Bank last November. “The Chinesehave on average less than one bank card per person, compared with 1.9 in Hong Kongand 3.87 in the US.” Mr Galatas adds that credit card payments account for just 1% oftotal consumer spending, compared with about 20% in the US.Foreign banks are not alone in targeting the market. Domestic banks also see greatopportunity, albeit often in partnership with foreign banks. “I believe the credit cardbusiness is most promising and will create more profits,” says Hong Lin, a deputygeneral 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 ofconvincing China’s swelling population of affluent but fiscally conservativeconsumers of the merits of switching paper for plastic.The Evolution Of The Chinese Payments MarketWhen the Bank of China issued the mainland’s first credit card in 1986, the eventpassed with little fanfare. Just 36 venues scattered around Beijing accepted thecard, and payments could be made only by way of China’s old Foreign ExchangeCertificates, an abandoned form of convertible currency that Chinese citizens couldnot legally possess.How times have changed. By the end of 2006, some 50m credit cards had beenissued in China, including 30m dual-currency cards, and a further 19m ‘quasi-cards’that combine the functions of debit and credit cards (see table: China’s card marketat a glance). Indeed, the number of credit cards in circulation at the end of 2006represents a 39% year-on-year increase. However, these figures are dwarfed by the scaleof China’s debit card market, which accounts for the majority of cards in circulation.First Data Beyond Cash: China’s Emerging Payments Market 09
  9. 9. China’s card market at a glance Cards issued and transaction volume Cards issued, Cards issued, RMB purchasing 2006 (m) total (m) volume transacted, 2006 (trn) Credit cards 30 – 15.6 Quasi-credit cards (combined credit and debit cards) 19 – Debit cards 200 1119 – Total 215.6 1175 1.89 Source: China UnionPay, Xinhua. The surge in credit card issuance illustrates the buzz across China’s 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 China’s 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$3,790 in 2010 (see table: Boom time in China). Boom time in China GDP growth from 2005 to 2010 2005 2006 (a) 2007 (a) 2008 (a) 2009 (a) 2010 (a) GDP (US$ bn, at current market prices) 2,278 2,689 3,209 3,794 4,390 5,089 Real GDP growth (%) 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 (a) Economist Intelligence Unit estimates. Source: Economist Intelligence Unit. With strong prospects for growth and a population of more than 1 billion, China’s consumer banking sector has unsurprisingly drawn the attention of foreign banks. They are attracted not only by China’s 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 profits come from consumer lending, the current market can be seen as a near-vacuum waiting to be filled—one of the last great land grabs in the Chinese economy. John Shelley, the executive vice president who directs the Royal Bank of Scotland’s recently-established private-banking partnership with the Bank of China, comments: “This is not a short-term game, but it’s tremendously exciting, a huge opportunity for the banks that can focus and go about it in an organised way.” One report projects that China’s domestic credit market will grow from just US$2.8trn in 2004 to US$45trn by 2050.First Data Beyond Cash: China’s Emerging Payments Market 10
  10. 10. First Data InsightsOf the banks surveyed for this report, the majority (57%) are already active in It’s A Long-term PlayChina, while a further 43% plan to enter between now and 2010. For these banks 84% Percent of respondents arein general, access to a larger customer base and the rapid growth of the middle optimistic about the prospects forclass are China’s key attractions. For retail banks in particular, lending potential in credit cards in Chinathe consumer-credit market is high on the list (24%), on a par with opportunities tolend to either Chinese companies or foreign companies in China—and far ahead of Foreign banks give long-term prospects of the credit card industry in China a strongthe mortgage market, selected by just 7%. A significant minority (12%) also see the vote of confidence, but recognise that it is adistribution capabilities of large local banks as a key attraction. long term play. Right now, credit cards are a marginally profitable business for mostMajor attractions to market issuers, with the programmes of someWhat were/are the major attractions for your firm in deciding new entrants still invest in China? At present, the Chinese cards marketRetail bankers only depends heavily on fee income while interchange rates have already fallen to levels more common in highly developedAccess to a larger customer base 67.2% credit card markets. However, the mix of profitability in the Chinese cards industryRapid growth of the Chinese middle class 55.2% may well change in the future. This wouldOur regional clients expect us to have a presence happen if the Chinese government decided to 25.9%in China relax its interest rate policy, allowing issuers much more leeway on the interest rate theyLending potential to Chinese companies 24.1% charge for credit card lending.Lending potential to foreign companies in China 24.1% The industry’s big problem is that so few cardholders currently revolve their balances.Lending potential in consumer-credit markets 24.1% This leaves the credit card industry in China without one of its major sources of revenueDistribution capabilities of large local banks 12.1% and profits. The challenge for issuers in China is to develop pricing and marketing strategiesTaking advantage of the historic WTO-related 8.6% that can sustain profitability over the long opening Banks in China need to realise that interestLending potential in mortgage markets 6.9% income is not the only revenue they shouldOther be looking for. Fee income is also important. 1.7% Payment products offering valuable sources of fee income include: 0 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 flow and expenses more effectively, commercialOpening Up The Market cards generate substantial fee income for issuers – Charge cards (e.g. issuing fees, late payment fees, etc)New rules introduced in December 2006 under the terms of China’s 2001 – Money transfers – these account for up toaccession to the WTO now allow foreign banks to incorporate locally and to create 40% of fee income at some Central andretail businesses. Indeed, if foreign banks want to enter the credit card market they East European banksmust incorporate locally. – Foreign exchange fees.As this report was being written, an initial group of four banks had already receivedapproval to incorporate locally, and a further eight were still completing officialpaperwork. Several more had plans to incorporate in the near future (see Appendixfor a full list). Although this first wave of entrants must still wait for final amendments todomestic regulations, and final 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: China’s Emerging Payments Market 11
  11. 11. Entry Strategies Banks that have already entered the market have clearly defined 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 BBVA’s 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 first 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 HSBC’s 19.9% stake in Shanghai-based Bank of Communications (BoComm) the following year. Both investments were made with the specific goal of kick-starting co-branded credit card units in an environment where neither Chinese partner had significant 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: China’s Emerging Payments Market 12
  12. 12. First Data InsightsSurvey respondents also acknowledge the importance of branch networks when it To Partner Or Not To Partnercomes to marketing and distributing payment cards. Nine out of ten retail bankers polled Although a very attractive marketfor the report rated branch networks as either ‘highly’ or ‘moderately’ effective, with direct for foreign banks, there is no clearlyselling the only other channel that was positively rated, by 80% of respondents. Alternative favoured market entry strategy.channels, including the Internet, e-mail, postal campaigns and telemarketing, were ratedas effective by less than half of bankers. The message is clear – most respondents say that the main attraction of the Chinese market for them is access to the country’s hugeMarketing/distribution channels customer base. Far less obvious from theHow effective do you consider the following marketing and distribution channels survey is a clear preference among foreignfor payment cards in China to be? banks for a specific route to market entry. Almost all first and second-tier banks are nowBranch Networks 35% 52% 6% 7% in strategic alliances with foreign partners. Credit cards are often the first product on whichDirect Selling 25% 49% 17% 9% both partners work together, but an increasing number of foreign banks are now preparing toTelemarketing 11% 24% 55% 10% launch their own credit cards in China.Postal Campaigns 12% 27% 48% 13% There are three ways that banks usually enter the China market: (1) direct investmentE-mail Campaigns 11% 29% 50% 10% in a bank; (2) partnership with a bank; (3) being a wholly owned foreign entity (WOFE)Internet 12% 41% 36% 11% that conducts business by themselves. As “all roads lead to Rome”, all three ways can 0 10 20 30 40 50 60 70 80 90 100 provide a bank a start to its business in China. Both central and local governments Highly Effective Limited Effectiveness are very supportive of both partnerships and of WOFEs establishing operations in China. Moderately Effective Don’t Know Our experience of entering into the China market is initially-go-alone. First Data has hadThe benefits of partnerships for local banks are equally clear—the chance to learn success in bringing international expertise intothe ropes from experienced counterparts in areas where they are weakest, such the China payment market. After five years ofas credit and risk management, development of IT systems, and cross-selling being in the market, we are also looking intoand other marketing strategies. One senior executive at China Construction Bank establishing partnerships in different areas of electronic payments business.explained that his bank’s alliance with Bank of America has helped to developtheir expertise: “[Their] credit card management techniques and expertise helpedus enhance our own credit risk control capabilities.”Needless to say, partnering with local firms is not without its challenges—and risks.One concern is simply the number of available partners, which is steadily decliningas more foreign banks enter the market. Another is that deals can take a long timeto conclude. According to Gerard Van Empel, director of development at Holland’sRabobank, which finalised a 10% investment in Hangzhou Rural Cooperative Banklast November, the deal took several years to complete. Others warn about havingto deal with much bureaucracy, especially within larger banks.But those banks that have concluded successful deals with local Chinese banks havebeen encouraged by progress so far. “There’s a real desire and willingness to take onnew ideas,” comments RBS’s Mr Shelley. “We have long debates about individual points,and reaching a decision on something sometimes takes a long time, but once a decisionis made I’ve been very impressed with the speed with which they execute.”First Data Beyond Cash: China’s Emerging Payments Market 13
  13. 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 firm’s 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%). Profit/revenue prospects How optimistic are you about your firm’s revenue and profit growth prospects in China over the next three years? 2% 2% 1% Revenue Growth 29% 59% 8% 2% 4% 1% Profit Growth 29% 46% 27% 0 10 20 30 40 50 60 70 80 90 100 Highly Optimistic Neutral Highly Pessimistic Somewhat Optimistic Somewhat Pessimistic Not Applicable This uncertainty is especially true when it comes to generating profits. Although two-thirds of bankers say they are optimistic about their profit 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. China’s banks have made remarkable operational advances in the five 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 first 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 China’s ‘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 field across the consumer banking sector.First Data Beyond Cash: China’s Emerging Payments Market 14
  14. 14. First Data InsightsProspects for products Finding Ways to Reach OutHow do you view the prospects for China’s personal banking industry? Branch networks are effectiveRetail bankers only distribution channels for payment cards – the internet and direct sellingBank accounts 55% 28% 7% 10% are also well regardedDebit cards 45% 43% 5% 7% The opportunity to market and distributeCredit cards 55% 29% 9% 7% payment cards to 1.3 billion consumersCo-branded cards 30% 37% 18% 16% expected to have per capita income of $5,000 in the next 10 years is a majorPrepaid cards 26% 37% 25% 11% attraction for local and foreign banks.Mortgages 26% 49% 18% 8% Reaching many of these potential customersPersonal loans 33% 55% 7% 5% will be a challenge. Given the huge branchFinancial planning/wealth management 40% 26% 25% 9% networks of China’s largest banks, it is not surprising that 87% of survey respondentsPersonal investment services 40% 35% 16% 9% see branches as either highly or moderatelyVehicle financing 26% 47% 19% 9% effective distribution channels. However, this advantage could be leveraged 0 10 20 30 40 50 60 70 80 90 100 far more effectively. Up to now most bank branches have been run as autonomous Highly Promising Limited Prospects units or even separate businesses. Somewhat Optimistic Don’t Know Centralising and analysing the data in each branch could provide a ready-made credit card target segment for institutions of allNevertheless, when it comes to profits in the credit card market, the outlook is sizes. This would enable banks to segmentless certain. Fully 43% of respondents agree that it would be difficult to make a their customer base, develop productprofit in the credit card market over the next three years; 36% remain uncertain propositions and cross-sell card productsand just 21% disagree. to existing retail banking customers. Branches are not the only distribution channelHolding an edge for card products. China has the second largest number of Internet users in the world.Foreign banks believe they hold a significant competitive edge over their local rivals.This is especially true when it comes to risk management and product development, Offering financial services by mobile phone is another viable option, which would enablewhere 39% and 36% of retail bankers respectively rate the capabilities of domestic banks to get around the absence of – and theChinese banks as ‘poor’ or ‘very poor’. On most measures, the majority of survey cost of building - nationwide branch networks.respondents rate local banks as ‘fair’. However, when it comes to distribution, one-third This would be especially valuable in provincialof retail bankers rate their local rivals as ‘good’ or ‘very good’, higher than any other areas, where mobile phones are widely used.capability, given the substantial advantage of domestic Chinese banks in this area. Also, interesting distribution partnership models are developing in other markets thatRate local banks may be relevant to China. Some banks areIn your view, how good are the current capabilities of domestic banks in China, now partnering to share expertise. For example,with regards to the following aspects of consumer lending? one bank could manufacture a card product for distribution by a partner organisation.Retail bankers only This happenes in Europe where BarclaycardRisk management manufactures revolving credit card products 14% 40% 29% 10% 7% for distribution through Swedbank branches inProduct development 3% 16% 36% 33% 3% 9% the Nordic countries. As the trend for banks to do everything from manufacturing, distributionDistribution 12% 21% 45% 14% 9% and processing themselves becomes lessMarketing prevalent, this model will gain ground and could 3% 19% 41% 26% 10% be of major interest to foreign banks looking toCustomer relationship management 7% 14% 41% 31% 12% partner with local Chinese banks.Ability to derive income from 14% 45% 21% 2% 19%service feesAbility to derive income from 7% 9% 31% 31% 3% 24% (continued on next page)penalty charged 0 25 50 75 100 Very Good Fair Very Poor Good Poor Don’t KnowFirst Data Beyond Cash: China’s Emerging Payments Market 15
  15. 15. First Data InsightsIt should be noted that Chinese banks have Operating A Cards Business In Chinanot used direct mail to market cards. However,several issuers have started to use lists boughtfrom list brokers. Also, Chinese banks areusing specialist service providers who do card Eight out of ten retail banks surveyed for this report either already offer basic bankacquisition to recruit new customers. accounts or plan to start doing so within the next three years. Beyond that, about three out of five either offer or plan to offer debit cards, with about two-thirds either alreadyFinally, other possible distribution channelsinclude non-bank partners, such as retailers offering or planning to offer personal loans and credit cards. These account for theand mobile phone providers. This would enable dominant products being offered by retail banks, with mortgages, wealth managementbanks to reach a much wider customer base. services and other retail banking services all trailing behind. Dominant product offerings Which of the following is your firm offering in China, or planning to start offering within the next three years? Retail bankers only Bank accounts 36% 45% 19% 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 financing 11% 37% 53% Credit/debit card merchant acquiring 11% 44% 46% 0 10 20 30 40 50 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: China’s Emerging Payments Market 16
  16. 16. ATMs were introduced in China 20 years ago, but they only became trulyconvenient in 2002 when CUP was set up and established a network that linkedthem all together. The CUP network facilitates any inter-bank card transaction madethrough an ATM or within a retail outlet. The only exception is for travellers in Chinacarrying a card issued outside of China, which is then processed through therelevant card company’s international network.Rival international card brands, such as Visa and MasterCard, can only issue cardsin China (via their member banks) that are denominated in another currency, suchas the dollar, euro or yen. Alternatively, their member banks can issue a singlecard that is dual-currency, including both a renminbi-denominated account anda foreign-currency-denominated account, in conjunction with CUP, so that thecard bears both brands. All this makes CUP the dominant player in the overallChinese 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, Visaand MasterCard are leaders, in terms of the number of cards issued, although CUPis working to catch up. By the end of 2006, there were some 3m “UnionPay” creditcards, a ten-fold increase on the previous year.The implication for banks setting up in China and wanting to issue renminbi-denominated cards is that they can only issue CUP-branded cards, unlessthey wish to provide foreign-currency-based cards. In addition, all transactionsconducted with any renminbi-based card, whether CUP-branded or dual-branded,will be conducted through CUP’s network.For its part, CUP is working to expand acceptance of its cards in the internationalmarket. By the end of 2006, it had concluded deals in 24 countries, providingacceptance for Chinese tourists or business travellers carrying a CUP card withinsome 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 structuresOne of the realities for banks issuing cards in China is the low fees that are set bythe central bank, the People’s Bank of China (PBC). The maximum interest ratefor card borrowing is set at a relatively modest 18.25% annually. By comparison,international practice commonly charges several hundred basis points more forless-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 interchangerate and paid by the merchant acquirers to the card issuers) is dictated by marketforces. In China, however, maximum interchange rates for all local-currencytransactions are set by the PBC. While these rates vary slightly depending onwhat type of product or service is being purchased (see table: Slim margins), theygenerate inefficiencies, according to an executive with a major foreign card company,because they do not reflect the actual cost to the issuer. For example, merchants arecharged the same rate for debit card and credit card purchases, despite the fact thatrespective transaction costs differ. Nor do Chinese interchange rates reflect varyingrisks that different types of transactions may represent.First Data Beyond Cash: China’s Emerging Payments Market 17
  17. 17. Slim margins China’s interchange rates set by PBC Merchant type Issuer interchange China UnionPay reimbursement fee service fee Public hospital and public school 0 0 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 0.7–0.8% 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 fixed 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 China’s 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 isn’t 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: China’s Emerging Payments Market 18
  18. 18. First Data InsightsThis view was reflected by other executives interviewed for the report. “We are The Foundation for Success Hasdeveloping our own credit card offering at the moment,” says Yaming Zhu, head of To Be Strongthe consumer clients division at ABN Amro Van Gogh Preferred Banking in China. Using best of breed IT capabilities will“We are likely to partner with one of the major credit card companies. We are be crucial to the development of China’sinnovative, but we are not interested in reinventing the wheel.” cards industry Survey results show that banks have twoMerchant card acceptance and ATM use major concerns about the cards marketWhen compared with international markets, relatively few merchants in China currently infrastructure in China – IT capabilities foraccept cards for payment although, the growth rate is strong. By the end of 2006, the transaction processing and settlementnumber of merchants accepting bank cards in China had increased by 34% from 2005, as well as the need to grow the card acceptance more than half a million (see table: Do you take cards?), according to CUP. During thesame period, the volume of cross-bank point of sale (POS) transactions increased by Outsourcing is a very attractive optionsome 57%. This increase in acceptance is surely helped by the increased competition for local banks, especially those concerned that the ‘best of breed’ in-house capabilitiesbetween merchant acquirers, which has driven down transaction fees. of foreign banks could put them at aNevertheless, the number of merchants accepting cards accounts for only about 4% major disadvantage.of the total, according to bank executives interviewed for this report. To some extent, Outsourcing also works for foreign banks,this reflects already razor-thin retail margins, meaning many merchants are reluctant to keen to keep costs to a minimum as theycut profits by giving a slice to card issuers. More fundamentally, however, slow uptake build up their cards simply a reflection of the novelty of credit card payments in a culture where cash is Legacy systems are non-existent in China sotraditionally king. Indeed, eight out of ten retail bankers polled for this report note that the country’s banks can enter the cards marketlocal retailers’ preference for cash is either a ‘very significant’ or ‘significant’ barrier in with best of breed solutions. However, there are challenges here too, such as:operating cards and payment services. – Lack of skills in many Chinese banks to runRetailers’ preference for cash complex card management systemsIn operating cards and payments services, how significant a barrier is Chinese – The ability of cardholders to adapt quickly toretailers’ preference for cash transactions? new means of paymentRetail bankers only – For smaller merchants the investment costs to accept cards are too high.Very significant 22% As far as transaction processing isSignificant 59% concerned, banks need to manage a wide range of issuing and acquiringNot significant 7% services, including authorisation, account management, and transaction management. Support services such as customer service,Don’t know 12% collections, fraud and risk management, embossing, statement printing and mailing 0 10 20 30 40 50 60 70 80 90 100 are also key elements of running a card programme.However, the Chinese authorities are pushing more merchants to accept cards, Whatever their approach, it is in the interestsespecially in major cities—and particularly in anticipation of the 2008 Olympic of Chinese banks to migrate clients to more self-service channels. Branch-basedGames. The central bank blueprint currently calls for at least 60% of merchants with services are expensive, especially in low-turnover of over Rmb1m (US$130,000) in China’s large and medium-sized cities population rural be accepting locally-issued bank cards in time for the Olympics. In addition, it Electronic channels (such as ATMs, pointcalls for bank card use to rise to 30% of retail sales in these cities, up from just of sale transactions, mobile and Internet10% in 2005. “We see an aggressive rollout in point of sale infrastructure, with payments) are much more secure and costexplicit targets set down in Beijing for the Olympics,” says Richard Williamson, a effective. However, banks need significantgeneral manager for Asia strategy within the Commonwealth Bank of Australia. card volumes to justify the deployment of self-service devices and to drive a more electronic-based strategy.First Data Beyond Cash: China’s Emerging Payments Market 19
  19. 19. Do you take cards? Card acceptance on the rise in China Merchants Merchants Card-accepting Card-accepting ATMs, added ATMs, total accepting accepting POS terminals, POS terminals, in 2006 payment cards, payment cards, added in 2006 total added in 2006 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 firm, 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 significant 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 firm’s 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, specifically 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: China’s Emerging Payments Market 20
  20. 20. Top challenges for paymentsWhat do you see as the major challenges facing China’s cards and paymentsindustry for the next three years?Retail bankers onlyPoor profitability 59%Difficult risk management regardingscoring of customer credit-worthiness 41%Difficult risk management relating to 35%recovery of money lent to customersOverly burdensome regulations 26%High incidences of fraud 24%Problems regarding distribution,cross-selling and marketing 21%Cultural Issues (eg, poor customercredit culture) 19%High risk of default 19%Poor retail infrastructure(eg, card-accepting POS terminals) 12%Poor banking infrastructure (eg, cashmachines, branches) 12%Strong competition from domesticChinese rivals 5%Other 0% 0 10 20 30 40 50 60 70 80 90 100Risk managementOne of the key issues relating to risk management is the limited availability of creditdata. The shortcomings of local risk assessment practices are reflected in the surveyresults, with 41% of respondents ranking local practices as either poor or very poorand another 39% ranking them as only fair.Banks continue to rely heavily on in-house risk assessments deploying subjective criteriathat may or may not be effective. At more sophisticated institutions, credit-checkingsystems 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 5–6%.However, many domestic lenders continue to use less sophisticated, and in somecases quite inadequate, risk-assessment practices. “Risks stemming from the cardbusiness are a major concern of Chinese banks and their risk control capabilitiesleave much to be desired,” says Lin Bian, deputy general manager at the Beijingbranch of China Merchants Bank. Others agree. Guoyong Shen, an executive ofCITIC Bank, comments: “In their efforts to grab more market share, the domesticbanks have placed disproportionate stress on the quantity of the cards issued atthe expense of the quality.”First Data Beyond Cash: China’s Emerging Payments Market 21
  21. 21. First Data InsightsKnow Your Customer But why is this? One of the main problems is that Western-style consumer bankingRisk management skills in Chinese is simply so new. Even some larger banks, for example, have yet to adopt modernbanks are rated fair or poor by a accounting practices such as net present value, instead relying on book value or onmajority of foreign banks national loan guarantees that are probably not enforceable in the event of a loan default.Often perceived by foreigners as the The currently low default rates reported across the consumer-lending sector in China mayAchilles heel of the Chinese retail financial well be masking underlying problems. This could be because, despite reforms, old habitsservices industry, effective risk management die hard. Altering working practices engrained by decades of government-directedwill play a crucial role in building a profitable lending, especially at the largest banks, will take a long time. Bank staff can thereforecards business. be slow to categorise debt as bad even when they should. As an executive atThere are positive signs that Chinese one card issuer says: “In the consumer finance business, banks have not yet fullyregulators are taking risk management embraced the idea that delinquent debts are simply a cost of doing business,seriously. On 9 March 2007, the Chinese so they tend be more conservative about delinquency defaults, not only withBanking Regulatory Commission (CBRC)ordered issuers to strengthen risk the cardholder but also with the merchants.”management practices. Furthermore, with the consumer lending market emerging so rapidly and from such aAll issuers were instructed to “know your low base, current statistics may not be very instructive. China Merchants, for example,customer” and “know your business,” and reported that credit card lending in 2006 increased to Rmb155m (US$20m), up fromto make thorough investigations to verify the just Rmb78m (US$10m) the previous year. With growth this fast, the majority of loansidentity of people applying for credit cards.To combat application fraud, issuers must are so new they have had no chance to turn sour, thus distorting statistics. As the samemake clear to applicants what supporting executive says: “To look at the default ratio, you really need a substantive period of time.documentation is needed. Banks were also In the high-growth stage of the market like we have in China, a more meaningful time toadvised to ask cardholders who wanted to look at those figures is two or three years from now—the denominators are growing soapply over the Internet to download the form fast, sometimes you cannot tell the true long-term pattern.”and mail it with supporting documents.In addition, the CBRC warned banks to This issue is clearly recognised among bankers surveyed for this report. Asked whatset credit limits only after fully assessing the Chinese market needs most to support cards-payments infrastructure, half selectedthe applicant’s ability to repay. Crucially, better availability of consumer credit-history data. But progress is being made in thisin an effort to avoid cardholders taking area. Credit databases covering specific cities have been in place for several years andon too much debt, the CBRC said that are operated by both local and foreign entities, such as Experian. However, in Januarybanks should not issue any further cardsto customers whose credit lines with other 2006, after a trial period, the PBC launched a new nationwide database that tracks thelenders already exceeded the total ceiling credit histories of some 530m people, along with tens of thousands of businesses. Thethat the client should be granted. Banks database tracks consumer bill payment histories on loans and credit cards, as well asshould not activate cards unless they are taxes, mortgages and utility payments, along with other data.sure of the identity of the cardholder. Nevertheless, the impact of this database has been patchy. While better-managedIf fully implemented, the CBRC’s measureswould be in line with international best banks make good use of these records, the records are often incomplete. A seniorpractice, well positioning the Chinese cards executive at one foreign credit-card issuer comments: “The truth is that the creditmarket to manage risk as the industry bureaus take time to build their data and require diligent reporting of informationcontinues to grow. by issuers and other lenders. At this moment [they are] not at the level of moreAn example of what can go wrong when developed countries like the US, so the limited information they provide isn’tthere is poor risk management in the cards adequate for an issuer to make a full credit assessment.”industry occurred in South Korea during2002. Poor lending policies, ineffective As this data expands, banks will have an increasingly useful tool at hand for whencredit management and an inability to they make credit risk decisions.collect overdue debts led to a crisis in thecountry’s consumer lending industry. Losses Regulatory restrictionstotaled millions of dollars and a number ofthe country’s leading consumer finance Another of the key challenges faced by banks is that of regulatory restrictions oncompanies had to be recapitalised or sold their actions. Retail bankers see licensing risk as a major concern, highlighting theoff at huge discounts. difficulties associated with getting permission to expand into new regions or markets.Thankfully, examples like this are rare. This issue crops up as a practical problem when trying to expand a bank branchChinese regulators are wise to take action network, for example. “It is not that easy to create or extend a branch network,” saysnow to ensure that the country’s cards BBVA’s Mr Galatas. Unlike in other developed countries, “the Chinese authoritiesindustry is not exposed to such risks. must approve every opening or closure.” First Data Beyond Cash: China’s Emerging Payments Market 22