What do you think of a credit card that charges 3,600 yuan (US$435) in annual fees?

For most salary-earners in China, that seems a bit distant and too luxurious. But it may be acceptable for an increasing number of rich people in the country.

The card, a dual-currency platinum credit card launched three weeks ago by China Merchants Bank (CMB), a Shenzhen-based joint-stock bank, in conjunction with Visa International, is so far the most "expensive card" offered by China's commercial banks.

It is also a watershed for the credit card business.

"We are targeting the very top layer of VIP customers," Xu Meijuan, assistant general manager of the Marketing Department of CMB's Credit Card Centre, said in an interview with China Business Weekly last week.

Xu, who took part in the development of the platinum credit card, admitted that it is not something designed for the majority of consumers but for a few "who care more about the quality of the service rather than the fee itself".

She said the service packages and benefits the platinum credit card offer are based on a thorough market survey conducted by the bank.

Travel benefits, for example, are a crucial aspect of the service, as many of its target customers are busy travellers, said Xu.

And indeed, the benefits do look appealing.

CMB platinum credit card holders can enjoy the "buy one, get one free" promotion when purchasing business-class tickets at five major airlines, including Singapore Airlines, United Airlines, Virgin Atlantic Airways, Finnair and Shanghai Airlines, over the next six to 12 months.

"One business-class ticket for international routes can cost more than 10,000 yuan (US$1,208)," said Xu. "In that sense, the value added in the platinum card membership exceeds the card fee itself."

Xu added that the bank would try to get a greater number of similar benefits for platinum customers in the future and put more global institutions on its list of credit card partners.

Mutual benefits

For some international carriers like Singapore Airlines, it is also the first time to promote such a preferential policy with a Chinese bank.

They have a common objective: to get more VIP customers.

Sources with Singapore Airlines said the company is expected to increase its capacity to Beijing by 50 per cent starting from June 1.

It will then fly three times daily between Singapore and Beijing, instead of the current twice-daily flights. It therefore needs to find more potential customers. And the VIP customer resources of CMB are obviously very attractive.

Other CMB partners in the platinum card business, including international five-star hotels, department stores, luxury restaurants, golf clubs, airports, medicare agencies and road-aid companies, are driven by a somewhat similar impetus. They are also giving away free accommodation, aid services, games of golf and a variety of discounts.

Such partnership is a common strategy applied by international card issuers and service companies, experts said.

They can share customers and bring each other more business.

Chinese banks should make the operation of their credit card business more internationalized, said He Ziyun, an associate professor of finance at the University of International Business and Economics.

And instead of unified services, they have to classify the customers and make their services more specialized, he said.

Cultivating the market

Currently, cultivating the Chinese market is a major task for the nation's credit card issuers.

And that needs the combination of international expertise and the local environment and resources.

China's domestic banks have been issuing cards for more than a decade. But until recent years, most of the cards issued domestically were debit or semi-credit cards.

The development of credit cards has accelerated since 2002 and 2003, when more domestic banks issued genuine credit cards and promoted these among Chinese consumers, whose living standards are improving steadily with the rapid growth of the Chinese economy.

Global credit card agency Visa International has estimated the number of international credit card holders will exceed 200 million by 2010.

Those with an average annual income of more than 30,000 yuan (US$3,623) are the main potential customers. Presently, only a small proportion of these people are using international credit cards, but demand for these will increase substantially as more people travel overseas, according to sources with Visa.

However, for most domestic banks, they still have a lot of catch-up work to do with global banking giants, whose credit card business has already become a main source of profit, though policy restrictions and a limited distribution network have greatly constrained their competitive edge in China for the time being.

Currently, no foreign banks are allowed to issue credit card independently in China, though a number of cards have issued locally with their Chinese partners.

Major revenue source

For most Chinese banks, from ordinary debit cards, semi-credit cards, international credit cards, to gold cards and platinum cards, they are following a somewhat similar path of market exploration, although the exact management style and strategy may differ.

For CMB, building up an international-level credit card centre is its future target.

The centre, with three out of the seven top executives recruited from overseas, including Singapore and the United States, already has an international management team, bank sources said.

In 2004, CMB's revenue generated from intermediary business surged 42 per cent to 1.6 billion yuan (US$193.2 million), its annual report said.

A major contributor to the growth is the bank's card business, bank sources said.

The bank issued more than 2 million international credit cards in around two years since the end of 2002, a remarkable scale for a medium-sized bank.

These cards contributed a total consumption volume of 13.6 billion yuan (US$1.6 billion) in 2004.

Sources with CMB said it is hoped that 1 per cent of the 2 million credit card users, or 20,000 people, can be upgraded to platinum customers. But that is only a rough estimate.

Currently, the bank has 58,000 VIP clients, or 0.2 per cent of its overall retail customers, who have a quarterly balance of more than 500,000 yuan (US$60,386). But their outstanding savings take up about one-third of the bank's total, making them a strong consuming group and source of profits.

When the interest rate gap between loans and deposits narrow for Chinese banks, their income from the traditional lending and savings business will also decline, said She Minhua, an analyst with China Securities.

Under such circumstances, those banks with stronger intermediary business will witness more outstanding performance. And CMB is an example of this.

Then the next step is to further classify the customers and diversify relevant products and services, She said.

Other banks, especially small and medium-sized ones, are also putting more focus on the card business and other intermediary services.

Guangdong Development Bank, for example, also claimed to have issued 2 million credit cards by March this year, adding that its credit card business is already making money.

But there is also a lot of investment is required.

Xu Meijuan of CMB said the bank had invested heavily in infrastructure, like technical systems, system maintenance and risk management schemes for the credit card sector.

"Given the immature credit culture in China and insufficient credit information here, we have to build up our own database and technical backup and rely on effective risk control to make money," she said.

The heavy input also helps explain the high fee for its newly developed platinum credit card.

Even for consumers in developed countries, such a US$435 annual fee standard for a credit card is not a small figure, especially as many international banks are, on the contrary, offering fee exemptions for gold card or platinum card holders in mature markets.

"But China has a different situation," said Xu. Its credit card business is still underdeveloped and specialized services for high-end customers are very limited and relevant costs are therefore much higher.

"We have to ensure our top customers can get the very best service and meantime we also have to make money out of the services so that they can be maintained."

(China Daily 04/21/2005 page4)