[Is There Profit in China’s Foreign Credit Card Market?]made in China

发布时间:2020-03-26 来源: 感悟爱情 点击:

  Recently, a survey by Lafferty Group, a provider of business information on global retail banking, has attracted much attention in China. The survey claims that Western banks that are rushing into the Chinese credit card market may find that it’s impossible for them to make profits in China before 2010.
  Lafferty found that in 2005, Chinese banks suffered a pretax loss of $84 million on their credit card business. If the present trend continues, the loss is expected to jump to more than $1 billion by 2010. According to James Buckley, an analyst at World Cards Intelligence, Lafferty Group’s online source for critical market and competitor intelligence on credit cards and consumer lending, China is a sharp contrast to other fast-growing credit card markets, such as Mexico, which produced a profit of about $1.5 billion in 2005.
  “It’s a surprise that although Western banks have invested $25 billion into China’s banking sector, aiming to build up the business of consumer finance, there is no sign that these banks are able to make profits now or in the near future,” said Buckley.
  To the Western credit card companies, China remains a promising market, which has a population of 1.3 billion and whose GDP in 2005 exceeded 18 trillion yuan based on a steadily growing economy. International credit card companies have already made sufficient preparation for the day when the restriction on foreign banks’ engagement in the credit card business is nullified, on December 1, 2006. As early as December 2002, Shanghai Pudong Development Bank (SPDB) and Citibank signed a credit card business agreement, under which the two will jointly set up a new credit card company, with each possessing 50 percent of the shares. The company’s high-level managerial personnel will be provided by Citibank.
  On the one hand, by cooperating with SPDB, Citibank is able to begin the credit card business in China ahead of others by avoiding restrictions on foreign banks. On the other hand, SPDB is able to seize this opportunity to import advanced techniques and experience to enhance its own managerial level and make up for its weak individual finance business. A 2005 report by SPDB shows that by the time this report was finished, 200,000 credit cards that are jointly produced by SPDB and Citibank had been issued in 2005. The Sino-foreign cooperation model set by SPDB and Citibank had now been widely followed by other companies.
  Apart from foreign credit card companies, Wal-Mart, the largest retailer in the world, is planning to issue its own credit card in China. This card will be a joint product of Wal-Mart, GE Capital of the United States and Shenzhen Development Bank. The Wal-Mart credit card will be the first credit card issued by a foreign retailer in China.
  Against the bleak prospect of profit, are credit card companies naively rushing into the Chinese market? Is it possible for them to succeed in their “gold rush” in China?
  
  How to make money?
  
  According to statistics from McKinsey & Co., at the beginning of 2006, credit card users in China soared to 12 million from just slightly over 3 million at the beginning of 2003. Nearly 20 million credit cards have been issued. However, foreign credit card companies seem to have benefited little from such a booming market. Lafferty believes that a generation’s time is needed for foreign banks engaged in China’s credit card business to win big profits. The Chinese banking market is different from that in Latin America or other growing markets that are able to produce large amounts of profits within a shorter period of time.
  This pessimistic prediction is based on “the totally different economic condition” of the Chinese market, which has a high proportion of clients who bring no profits, as they pay off all their debts every month. Even commercial clients pay small fees, which themselves are falling.
  According to Feng Weiquan, Senior Vice President and General Manager of Greater China branch of MasterCard International, credit cards in China currently have three direct profit sources: Annual fees, handling fees and overdraft fees from “frequent revolvers.”
  Clients who are frequent revolvers do not need to pay off all the debt on the credit card at one time; they only need to pay off a monthly minimum. This has greatly relieved clients of the pressure of heavy debts, and has also stimulated domestic consumption.
  Of course, while providing this service, clients are required to pay a certain proportion of loan interest to banks, which can become quite large amounts. In line with statistics from McKinsey, in mature card markets--the U.S. market for instance--interest income accounts for two thirds of all profits related to the credit card business.
  In China, however, annual fees are the major income source for credit card issuers, which compose 55 percent of the total income on average. Second is overdraft interest income, accounting for 22 percent. Third is the handling fee, making up 16 percent. Other income accounts for 7 percent.
  Those familiar with China’s banking sector believe that there are two reasons that have led to low overdraft interest income in China’s credit card market: One is that China’s credit card market is not fully developed, and few people are in the habit of spending tomorrow’s money. Second, due to the outdated credit system, card issuers tend to adopt a stable method in carrying out their business. The stable and low-risk incomes from annual fees are thus quite popular with Chinese banks, while the overdraft business--which may incur big losses--is quite limited. “The Chinese are used to ‘just making ends meet,’ and the lack of frequent revolvers has become a bottleneck that has restricted credit card issuing in China,” said Feng.
  According to a report on China’s credit card market in 2005 issued by McKinsey, more than half of the card users in China will not bring profits to card issuers. Only 2 percent of the clients are frequent revolvers who delay debt payment. If this trend continues, all the credit card issuers will suffer from losses, and Lafferty predicts that banks will suffer from a big loss of $1.03 billion in 2010.
  Nevertheless, a number of personnel from the banking industry told Beijing Review that the Chinese credit card market is not doomed to meet such a dark fate. After a certain period of effort, it’s quite possible that there will be a breakthrough in credit card incomes for the issuers.
  Pan Yingli, Director of the International Finance Research Center of Shanghai Jiao Tong University, said during an interview that if a nation has a large aging population, the credit card market would surely wane. China, however, has a high proportion of the population aged 25 to 45 while the whole population is more than 1.3 billion, so there is great room for credit card business to achieve further development, according to Pan. A manager with a foreign bank, who refused to reveal his name, pointed out that the “credit card is a long- and medium-term investment. It took three to five years for card issuers to make profits in many other countries. Take the credit card business in India for example. It cost the banks eight years to reach a balance. In the long run, the more clients that are attracted in the early period, the more profits will be produced in the late period. Despite the book loss at present, all the banks are still competing for more clients.”
  
  What is the market potential?
  
  Although McKinsey and Lafferty have painted the darkest prospect for Chinese banks, they still believe the enterprises can break even. According to Lafferty’s calculation, the credit card sector could earn $2 billion in pretax profits by 2010 if the following occurs: The card fees and fees paid by commercial clients are no less than those of last year, there is a sharp increase in customer accounts and interest-bearing debts, and the loss rate and interest margin reach average international levels. A similar prediction is made by McKinsey in one of its survey reports issued at the end of 2005, which indicates that China’s credit card business will greatly grow and become a large retailing credit product second only to the real estate industry in 2013. By that time, the credit card business, which currently accounts for 4 percent of the overall profits of the banking sector, will rise to 14 percent, amounting to 13 billion yuan.
  Recently the market shows some hope for credit card companies at sea. After 10 years of a hard struggle, Guangdong Development Bank, which entered the credit card market a bit ahead of other banks, reached breakeven in 2005. China Merchants Bank also achieved a profit and loss balance in its credit card business at the end of 2005 and a profit of 60 million yuan in the first quarter of 2006. Peng Qian, Assistant Manager of the Credit Card Center of China Merchants Bank, feels quite excited about this result. In his opinion, in 2006, China’s credit card business will begin to boom. The initial success of those Chinese joint-stock banks that have been involved in the credit card business for a long time, is also good news for foreign credit card companies in the Chinese market.
  Peng believes: “Foreign credit card companies will prove to be tough rivals for Chinese banks.” First of all, he explained, the promising Chinese credit card market is now short of leading issuers. Second, unlike the deposit business, the credit card business does not need a lot of branches around the country. The branches are in big cities. More importantly, because a computer network has linked Chinese banks, cards issued by any bank can be used at any ATM. As a result, Chinese banks and foreign banks begin at the same starting line, and the latter, with their rich experience and international influence, can easily leave the former behind.
  McKinsey’s survey of Chinese credit card users shows that 35 percent of “mass rich” consumers and rich consumers (the former refers to families with an annual income of $4,000-$6,500 and the latter families with an annual income of more than $6,500) live in the four major cities: Shanghai, Beijing, Guangzhou and Shenzhen. Foreign card issuers find that Chinese card users like new cards and they always transfer most of their expenses onto these new cards.
  Yang Ke is President of the Credit Card Center of China Minsheng Banking Corp. Ltd. In his opinion, when foreign financial institutions are allowed to issue credit cards independently in China at the end of 2006, they will become competitive rivals to Chinese credit card companies. He also reveals that quite a lot of foreign banks have their credit card processing systems set up in Hong Kong. As long as the policy restriction is removed, they will send experienced high-level managerial staff to China’s mainland, accompanied by large amounts of capital, and Chinese credit cards will be easily defeated.
  However, McKinsey believes that even if China’s banking industry is open to foreign banks on the whole, it’s not an easy job for foreign banks to manage the credit card business independently. The fact is that in China, 50 percent of card users come to have them by way of their companies or work units. By forging extensive relationships with company clients, card issuers are able to win business opportunity in these areas.
  In addition, McKinsey points out that when it comes to credit cards, foreign brands are nothing at all. It’s better for them to first cooperate with Chinese banks before they are allowed to compete in the Chinese credit market. At present, some well-known card issuers have already come to cooperate with their Chinese counterparts: HSBC and Bank of Shanghai have jointly produced the VISA USD credit cards. Citibank and SPDB produced the VISA dual-currency card. American Express and China Industrial and Commercial Bank jointly issued ICBC American Express cards. In this way, on the one hand, foreign credit card issuers are able to enter the Chinese market through big Chinese banks. On the other hand, Chinese banks are able to operate abroad by making use of the international network of these foreign banks.
  At present, foreign credit card banks can only issue cards by cooperating with Chinese banks, but when the restriction over them is removed at the end of 2006, they will have the independent right to issue cards, which will make the present cooperative partners rival in the credit card business. Zhong Jiwei, General Manager of the Credit Card Center of China Merchants Bank, predicts that the middle and high-income classes will be the major targets for both Chinese and foreign credit card issuers. Competition will focus on product function and service level, Zhong said. Because the targeted clients are relatively rich, or are rich consumers capable of paying off loans, only when the card design and service can meet and exceed clients’ needs can they succeed in competition. Liu Lizhi is in charge of individual financial business at the Bank of Communications. He indicates that the concept of client-centered service is undoubtedly followed by both Chinese and foreign banks. But clearly, he said, experienced foreign banks can beat their Chinese counterparts in putting this concept into practice, and so are more likely to be winners.

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