Currently there are over 1.2 billion payment cards in circulation in China, which equates to just under 1 card for every man, woman and child. While this may seem like a large number, it pales in comparison to where the market could go. If cards in China were to reach the level of penetration that they have in the US (7.5 cards/person), there would be over 9.8 billion cards in circulation; even if they reached the level of penetration in Singapore (5 cards/person) there would be over 6 billion cards. Yet, there are challenges.
Although the number of payment cards in China is on the rise, usage is not. Statistics released last year by China Union Pay, China’s only domestic credit card organization, indicated that of all of the credit cards issued, only 10% were being used at least once a month. Further, even factoring in differences in GDP/capita, the amount being spent on credit cards is much less than in the US. The average Chinese card-holder charges US$151/year on their card whereas the average US holder spends just under US$11,000/year.
There are some fundamental cultural and regulatory issues which have been around for years that need to be overcome, but we see three areas not typically looked at that will drive growth in China’s payment card industry: loyalty, mobility and security.
Loyalty - Many of the loyalty programs in China have become commoditized over the past few years with most banks all having very similar reward programs. Further, people often apply for cards for the free gifts and then don’t end up using the cards at all. A card issuer that’s able to create a loyalty program that really differentiates the card and properly incentivizes card holders to use the card will stand to capture market share.
Mobility – The shift from contact-full to contactless to mobile payment methods is an evitable one – eventually payment cards will be integrated into an everyday device such as a mobile phone or a watch. The small number of competitors in the China credit card and the mobile service provider space will somewhat limited innovation but look for big things from UMPay (a China UnionPay / China Mobile collaboration) and from the mobile phone manufacturers directly. Mobile phones are nearly ubiquitous in China and once you are able to embed payment technology into a phone, uptake should increase dramatically.
Security – The implementation of the ‘pin and chip’ technology called EMV has virtually eliminated card-present fraud at the point of sale and has rapidly become the dominant standard in Europe. EMV will likely come to China as well. Remote fraud such as internet or telephone purchases is still an issue and isn’t overcome by EMV, but EMV should at least make consumers feel more secure about their transactions, and drive more growth.
Cards in Crisis
Another obvious hindrance to the uptake of payment cards in China is the current global economic crisis. Statistics recently published by the New York Times looking at the US credit card market showed decreasing credit card offers per household in the face of increasing write-offs and losses from credit card debt.
Although, it’s a bit unclear as to what the crisis’s impact to the Chinese payment cards business will be, we are starting to see the effects in the US and it is reasonable to assume that we will encounter some of the same challenges in China.
Ironically, one of the things going in China’s favour is the usage mentioned above. Although you do often hear the anecdotal story of a Chinese card holder charging up a nearly insurmountable credit card balance, for the most part, most cardholders aren’t using credit cards that much and have a strong tendency to pay off the bills immediately, thus avoiding accumulating interest charges and other fees. US consumers often carry a hefty month-to-month balance on their cards and this, in addition to the general decrease in asset prices, is putting US consumers in a very tight position. In China, although asset prices are falling as well, consumers typically don’t have the appetite for debt that their US counterparts have.
Conclusion
The Chinese payment card industry, much like the rest of the Chinese economy has developed dramatically over the past 20 years. The current economic crisis will likely slow growth down a bit, but innovations in loyalty, mobility and security will continue to drive growth and an industry that is already one of the most dynamic in the world.