Beyond cash china’s emerging payments market

Beyond Cash: CHINA’S 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 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 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 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 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: China’s 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-Pacific, 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, firms 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: 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 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 › June 2007 First Data Beyond Cash: China’s Emerging Payments Market Table of Contents 06 Executive Summary – Sound practice: five tips for foreign banks entering the Chinese payments market 09 Introduction 09 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 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: 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 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 first wave? Foreign investment in mainland Chinese banks – Making the leap Foreign banks with announced intentions to enter China’s retail banking sector First Data Beyond Cash: China’s Emerging Payments Market 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 – 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 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: five tips for foreign banks entering the Chinese payments market Don’t arrive expecting fast profits The opportunity is huge but the China market is a marathon, not a sprint 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 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 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 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 First Data’s Recommendations Recommendations for Foreign Banks �– Respect the culture – China is a very specific market with characteristics unlike most other countries �– Leverage best practice from your bank’s 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 don’t 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 flow, 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 China’s economy has led many foreign banks to enter the market in the last five years As shown by the result of this survey, two of the most profitable 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 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 financial 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 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 country’s main cities has been very rapid Some 30% of all payment transactions in big cities are now carried out by cards From First Data’s experience of operating in China, one of the biggest challenges faced by banks is risk management This is also a major finding of the survey The introduction of data analytics solutions to help reduce card application fraud will provide tremendous benefit 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 China’s 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 benefits 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 profitability of the Chinese banking industry and its on going development The foundations for a profitable 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: China’s 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 financial services sector Although some restrictions remain, the change in the rules finally 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 China’s 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 profits,” 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 China’s swelling population of affluent but fiscally conservative consumers of the merits of switching paper for plastic The Evolution Of The Chinese Payments Market When the Bank of China issued the mainland’s first 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 China’s old Foreign Exchange Certificates, 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: China’s 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 figures are dwarfed by the scale of China’s debit card market, which accounts for the majority of cards in circulation First Data Beyond Cash: China’s Emerging Payments Market 09 China’s 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 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$3,790 in 2010 (see table: Boom time in China) Boom time in China GDP growth from 2005 to 2010 2005 2006 (a) 2007 (a) 2008 (a) 2,278 2,689 3,209 3,794 4,390 5,089 10.4 10.7 10.2 9.3 8.6 8.1 Population (m) 1,307 1,314 1,323 1,331 1,336 1,342 GDP per capita (US$ 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 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 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 financial services industry, effective risk management will play a crucial role in building a profitable cards business There are positive signs that Chinese regulators are taking risk management seriously On 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 applicant’s 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 CBRC’s 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 country’s consumer lending industry Losses totaled millions of dollars and a number of the country’s leading consumer finance 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 country’s 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 finance 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 figures is two or three years from now—the 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 specific 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 isn’t 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 difficulties 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 BBVA’s Mr Galatas Unlike in other developed countries, “the Chinese authorities must approve every opening or closure.” First Data Beyond Cash: China’s 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 defined as, policy and regulatory issues that could significantly affect a company’s 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 influenced by the country’s culture, attitude toward money, and the evolution of the local banking sector China is no exception Talent and IT Despite China’s 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 qualifications, but there is a shortage of those with experience of these newer areas of banking,” says RBS’s Mr Shelley “So one of the big challenges we have is training up sufficient 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 tomorrow’s money to satisfy today’s 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 “don’t yet have the systems to manage the significantly 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 30–40 age group is relatively conservative compared to the younger 20–29 age group This older group of people are mainly middle-management “white-collar” managers Although they find credit cards convenient and use them on a daily basis, they behave as transactors, not revolvers One final challenge is simply cultural—China 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 fiscally-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 conflicts 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 profits 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 month’s bill), and 85% pay off their bills in full every month First Data Beyond Cash: China’s Emerging Payments Market (continued on next page) 23 First Data Insights Payment cards are relatively new in China, whereas the Chinese people’s 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 finance 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 game—smaller merchants are likely to be less sophisticated and harder to educate about the benefits 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 traffic, with relatively little usage in the service sector This preference is reflected 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% 10 20 First Data Beyond Cash: China’s 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 firms 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 so Banks from the Asia-Pacific 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 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 significant 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 flow, 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 first, where the job is much easier Rabobank’s 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 five years “It’s 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 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 benefits 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 People’s 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 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 financial challenge to migrate merchants from cash to card-based payments much less difficult 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: China’s 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 benefits 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 “Significant 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 reflection of criminal learning curves lagging card usage growth One banker pointed out that current POS systems allow for SMS notification 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 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 profits 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: China’s Emerging Payments Market 26 Contributors to success What has been (or what 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% 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 profitable within seven years from launch There are several reasons for this poor profitability 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 significantly 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 don’t 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: China’s Emerging Payments Market 27 First Data Insights The Keys to Profitability: Volume, Portfolio and Usage Innovation in product development and delivery will be key for driving profitability 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 profitability 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 first 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 profit prospects look bleak for the foreseeable future has not diminished bank confidence over the longer term Few credit card issuers expect to make a profit in their first 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, affluent people start to use cards, the proportion of those using them in ways that are profitable to card issuers will naturally increase (although whether they will prove to be good credit risks is another matter) Indeed, the trend reflected in official figures 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 China’s most affluent 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 China’s 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 flexible 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: China’s 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 first 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 world’s 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 Rabobank’s 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 We’ve 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 financial 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 profits Almost 40% of respondents say that they neither agree nor disagree with the statement that it will be difficult to achieve profitability 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 China’s central bank, the People’s 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 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 confirmation of the transaction within seconds Although still subject to security concerns, the system has major potential, given its simplicity and low cost—and 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: China’s 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 profitable 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-flung networks by teaming up with a local partner, they still face a barrage of risks—economic, 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 Lynch’s Alistair Scarff says, “China’s 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 benefits 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 sacrifice the quality of their assets by pushing forward too hastily First Data Beyond Cash: China’s Emerging Payments Market 30 Regulatory recommendations China’s 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 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 Protect bank sector health by creating and implementing sound accounting and asset management practices Remove or reduce bureaucratic impediments to bank expansion plans Raise credit card borrowing caps from current low levels 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 profitably in China It has taken the domestic credit card market by storm since becoming the first Chinese bank to issue dual-currency cards in conjunction with Taiwan’s 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 nation’s 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 profitable during the year (its fourth since launch), with earnings of Rmb100m (US$13m), making it the first bank in China to operate its credit card division profitably, according to domestic press reports Targeting younger, wealthier consumers, business has thrived due to smart marketing campaigns such as co-branding with youth-oriented brands, like Hello Kitty, or specific market niches, such as an online travel agent, Ctrip In addition, the bank has benefited from superior customer service and the largest credit card centre in China, which has generated half its customer base by using direct marketing campaigns By concentrating on using an Internet-based servicing platform that allows clients to manage accounts online, the bank has reduced costs and managed to overcome the disadvantage of its relatively small branch network of about 500 branches First Data Beyond Cash: China’s Emerging Payments Market 31 Appendix The first wave? Foreign investment in mainland Chinese banks As of April 2007 Chinese bank Foreign investor Stake purchased (%) US$ (m) Industrial and Commercial Bank of China Goldman Sachs, Amex, Allianz Group 8.45 3800 China Construction Bank Bank of America Temasek Holdings 5.1 2500 1460 Dalian City Commercial Bank Bank of Nova Scotia International Finance Corp (IFC) 19.9 1747 – Bank of China Royal Bank of Scotland Merrill Lynch, Li Ka-Shing Temasek Holdings UBS Asian Development Bank 10 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 15.98 208 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 19.9 215 54 Bank of Shanghai HSBC IFC 63 47 Bank of Nanjing (fka) Nanjing City Commercial Bank IFC BNP Paribas 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 financial weakness of GDB First Data Beyond Cash: China’s Emerging Payments Market 32 Chinese bank Foreign investor Stake purchased (%) US$ (m) United Rural Cooperative Bank of Hangzhou Rabobank IFC 10 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 Making the leap Foreign banks with announced intentions to enter China’s 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 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: China’s Emerging Payments Market 33 First Data Corporation 6200 South Quebec Street Greenwood Village, CO 80111 303.967.8000 www.firstdata.com [...]... 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 Top challenges for payments What do you see as the major challenges facing China’s cards and payments industry for the next three years? Retail... assets by pushing forward too hastily First Data Beyond Cash: China’s Emerging Payments Market 30 Regulatory recommendations China’s 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... banks First Data Beyond Cash: China’s Emerging Payments Market 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... 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 BBVA’s Mr Galatas Unlike in other developed countries, “the Chinese authorities must approve every opening or closure.” First Data Beyond Cash: China’s Emerging Payments Market 22 First Data Insights Know your market and... payments on outstanding balances that are the mainstay of profits 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 month’s bill), and 85% pay off their bills in full every month First Data Beyond Cash: China’s Emerging Payments Market. .. direct mail campaigns, product development based on flexible 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: China’s Emerging Payments Market 28 First Data Insights The rise of e-commerce and alternative payment platforms For example, in February 2007 Bank of Communications... interchange rates reflect varying risks that different types of transactions may represent First Data Beyond Cash: China’s Emerging Payments Market 17 Slim margins China’s interchange rates set by PBC Merchant type Issuer interchange reimbursement fee China UnionPay service fee Public hospital and public school 0 0 Supermarket, airline, tour operator, gas station 0.35% 0.05% Other retailers (department stores,... sometimes takes a long time, but once a decision is made I’ve been very impressed with the speed with which they execute.” First Data Beyond Cash: China’s 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 firm’s... 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: China’s Emerging Payments Market 21 First Data Insights Know Your Customer Risk management skills in Chinese banks are rated fair or... 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 First Data Insights Finding Ways to Reach Out Prospects for products How do you view the prospects for China’s personal banking industry? Branch networks are effective distribution channels for payment cards – the internet and direct ... dwarfed by the scale of China’s debit card market, which accounts for the majority of cards in circulation First Data Beyond Cash: China’s Emerging Payments Market 09 China’s card market at a glance... 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... banks with announced intentions to enter China’s retail banking sector First Data Beyond Cash: China’s Emerging Payments Market Executive Summary As China’s economy continues its robust expansion,