Since the nascence of the credit card in China in the early 1990s, the Chinese have been making up for lost time. Starting out with nothing, China’s path to catching up has been steep: by the end of the third quarter of 2012, local banks in China had issued 270 million credit cards, up 20 percent from 2011, notes the Economist. Xinhua puts the number at 318 million, with over 3 billion debit cards issued, citing numbers by the People’s Bank of China.
UnionPay is the Goliath on China’s plastic scene. The company not only dominates China, but it also has 2.9 billion credit cards issued worldwide (45 percent of the global total), according to Business Week. Based in Shanghai, its funding shareholders are 85 Chinese banks. The Nilson Report says that in the first half of 2012, UnionPay leapt past MasterCard in the global share of credit and debit-card purchases to take the No. 2 spot behind Visa, with 23.8 percent of purchases, or $1.42 billion, compared to MasterCard’s 21.7 percent of global purchases, worth $1.29 trillion. Visa’s market share of purchases was 46 percent, according the report, cited in this South China Morning Post article. UnionPay is accepted in 135 countries, and more than 10 million cards have been issued in 17 countries besides China.
All ATMs and Chinese merchants use UnionPay’s network to process payments, as stipulated by the Chinese government. However, in July 2012, the WTO ruled against UnionPay in a dispute filed by the U.S. in 2010, citing discrimination against foreign payment companies, but it did not suggest specific changes. The WTO declined to label UnionPay as a monopoly, cited as a victory by the Chinese. At this point, it is unclear how the Chinese government intends to address the WTO’s ruling.
The WTO ruling does potentially open up opportunities for foreign card issuers in a market with immense potential. It is expected that China will overtake the U.S. as the largest market for credit cards by 2020, when it reaches 900 million cards, according to a September 2010 forecast by MasterCard.
The winds of change are certainly blowing towards increased credit use. As my colleague notes in this contextChina post, in 2012, Chinese online retail transactions totaled almost $210 billion. Additionally, the Boston Consulting Group in a 2011 report estimates that China’s credit card receivables could rise 40 percent every year, reaching $397 billion by 2015.
Despite the huge numbers, China remains a country of savers, with savings rates at times approaching 40 percent of income. Though not yet a major issue, as credit card usage grows, problems will certainly emerge, mostly relating to a lack of supporting infrastructure; for instance, the absence of credit bureaus to assess credit worthiness. Additionally, banks may be tested in the future if Chinese card holders amass large balances.
Regulations are also loosening somewhat. Last August, Citigroup was allowed to be the first Western bank to issue credit cards without co-branding with a local financial institution, according to Bloomberg. The new leadership, which will take the reins of power this month, is led by Xi Jinping, who has a pro-free enterprise resume, and a faction known as the princelings, who largely support the middle and upper classes and entrepreneurs. Recent signs also suggest that financial reform will continue, and may even be expanded. U.S. credit card companies may also be helped by brand consciousness of middle- and upper-class consumers, who are attracted by the worldwide prominence of major U.S. companies. Furthermore, there is wide consensus that the Chinese economy is dangerously unbalanced, and that increases in consumer consumption offer a solution. The Chinese government has been making moves to promote more individual consumption, such as decreasing savings account interest rates. All of these signs are positive for the future of foreign involvement in China’s credit card market.
However, challenges remain: a survey produced by PricewaterhouseCoopers in July 2012 found that credit card issuers need at least 20 million card holders to be profitable in China, due to interbank charges and fee restrictions. Bureaucratic red tape is still a problem in China, and banks in China, which have considerable political clout, have a stake in keeping out competition.
Published March 4th, 2013