China Joins the Plastic Fantastic

03/18/2013 7:00 am EST


Credit card use in the world's second-biggest economy has been slow to catch on...but as strong consumer growth continues, shoppers are turning to non-cash payments, writes Clifford Coonan of The National.

China's Construction Bank recently announced it had signed a deal with the English Premier League football club Manchester United for exclusive rights to offer an official branded credit card to more than 100 million customers in a three-year deal.

It is powerful evidence that the world's second-largest economy is embracing the flexible friend—that strong growth in consumer spending is translating into an explosion in the number of credit cards.

Credit cards have been in China since 1985, but have been greeted with a certain skepticism. The sight of people paying for expensive items with wads of cash is not unusual, and trust in the transactional arena is still not high.

The biggest note in China is a red, 100 yuan ($16.09) note, and each payment of a large sum is counted through a machine several times, then recounted by hand. It's a tortuous process that harkens back to market fairs and haggling and old-school capitalism.

However, changing lifestyles, urbanization, and the swelling economy are altering old habits when it comes to using plastic. Nielsen China reckons by the end of this year, there will be 360 million credit cards in China, and more and more of them are being swiped at ATMs and payment machines in the Dragon economy.

That is expected to expand at a double-digit rate in coming years. China will probably overtake the United States as the largest market for cards by 2020, with about 900 million, according to a MasterCard (MA) forecast from September 2010.

Statistics from the People's Bank of China showed that about 3.4 billion bank cards had been issued by the end of the third quarter of last year, up 21.2% year-on-year. Among them, 3.08 billion were debit cards, up 21.4% year-on-year, and 318 million were credit cards, up 18.8% year-on-year.

Driving the expansion has been the flourishing Chinese retail landscape, with shopping malls springing up all over the place, and with the rise of online shopping on portals such as Taobao.

The government has also introduced staff credit cards for government departments, to be used for expenses such as travel and conferences. This makes the transactions easier to monitor, and helps with a recent government push to improve transparency among public officials.

The big players in China's electronic payment industry are China UnionPay, Visa (V), and MasterCard.

Hai Ling, the president for Greater China of MasterCard Worldwide, told the Xinhua news agency the rise in credit cards in China has been driven to some extent by trends such as the emergence of e-commerce.

"You cannot stick cash into a computer. So plastic payment [and] electronic payment become really, really important. Drivers also include China's economic growth. The government is extremely committed to the growth of China, so the emergence of the middle class, urbanization, I think all of this bodes very well for the electronic payment business," says Ling.

It hasn't all been plain sailing, and there has been a rise in the number of people not paying their debts. One recently graduated university student, who gives his surname as Wang, says he was sued by a bank for owing 3,000 yuan.

"I didn't mean to try and default on paying back the money, but since my income is only 1,000 yuan a month, I thought I would have to wait until I graduated to pay back the debt," he says he told the court.

A judge surnamed Wu in Nanchang court says he had seen 28 cases related to credit card debt this year, compared to just six last year. "Years ago, many banks issued credit cards too easily to college students, which makes it a high risk for the banks that they won't pay back," he says.

The Web site quoted figures from Beijing's Xicheng court from last May that showed there had been a strong rise in the amount of personal consumer debt, especially with those owing more than 100,000 yuan. And the age of cardholders was mostly between 23 and 35.

There have been other teething troubles among consumers unused to how credit cards function. A special committee of the China Banking Association recently issued revised measures for China's bank card industry that require:

  • banks to keep cardholders informed about their credit card service details, such as various fee rates and possible risks
  • banks are required to remind cardholders at least three days before the repayment due date through bills, text messages, e-mails, phone calls, or letters
  • banks also have to be tolerant of those repaying a little late, usually with leeway of three days

China's UnionPay, a state-owned enterprise, is one of the largest payment processing companies in the world and makes up about 30% of credit cards issued globally. Last year, the World Trade Organization (WTO) found China was discriminating against foreign bank card suppliers in favor of China UnionPay.

The WTO said Beijing was breaking WTO rules by requiring all yuan-denominated payment cards issued in China to work with the network belonging to China UnionPay (Cup), as well as requiring every merchant and ATM to accept Cup's cards. This restricts credit card companies such as Visa, MasterCard, and American Express to foreign currency transactions.

The foreign firms must also give a cut of every credit or debit card transaction to Cup and the card's issuing bank. In most other countries, the foreign card issuers pay only the bank because they use their own network. Combined with the high cost of interbank transfer charges, it has been difficult for the credit card companies to make any money in China and the market is dominated by domestic lenders.

MasterCard says the rules make opportunities for the company "all the more interesting," and that it looks forward to continuing to grow its business in China.

But unseating Cup is going to prove quite a challenge. It is part-owned by the big four state-controlled banks of ICBC, China Construction Bank, Agricultural Bank of China, and Bank of China, and it is run by a former vice governor of the central bank. It already operates in more than 110 countries, and claims to be the third most-used card in terms of transactions.

Last year, Citigroup (C) became the first Western bank to issue credit cards in China without co-branding from a local financial institution. The cards are denominated in yuan or dollars and accepted worldwide. Cup will process payments within China, while MasterCard and Visa will handle cards internationally.

China has been given a "reasonable" period to bring its laws in to line with WTO rules, so enforcing the WTO ruling could take several years.

It may be that the sight of big wads of cash and whirring counting machines are a feature in China for some time to come.

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