Visa backs plastic payments (China Daily) Updated: 2005-05-27 09:50
According to Albert Shiung, head of Visa International's China operations,the
company's biggest competitor is not any of the other credit card brands.
"My rival is cash. There is still a lot to do to nurture a card market in
China," he said.
While the upbeat promise of the credit card business has inspired many
industry practitioners to go for a potential bonanza, China is still a
cash-based society.
Aside from in big cities and coastal areas, it is always cash that counts in
most of the shops across the country. The majority of the population still
believe that using cash is the only safe and secure method of purchasing
products and services.
So far, China has issued about 10 million cards with revolving credit. That
means, in China, only one person in 130 has a credit card.
To tackle China's untapped and potentially lucrative credit card market,
foreign and domestic banks have launched many major initiatives to introduce the
new concept of plastic payment to the local population, particularly the
emerging "middle class."
International credit card organizations such as Visa are clearly front
runners in the marketplace. Visa is a global association of some 21,000
financial institutions, which links banks, consumers and merchants together
through a sophisticated payment processing platform, and handles annual
worldwide sales volume of over US$3 trillion. While Visa does not issue cards,
its members have issued more than 1.2 billion Visa debit cards, credit cards and
other payment products globally that are accepted in more than 24 million
locations in over 150 countries and regions.
According to Shiung, Visa's 22 member banks in the Chinese mainland have
issued 6.14 million Visa international cards in China so far, tripling last
year's figure for the corresponding period. This week Beijing is also becoming,
for the first-time in history, the venue for a meeting of Visa's six regional
boards of directors and the international board of directors. The gathering of
about 300 representatives of the world's biggest banks is expected to generate
new perspectives on how to position the Chinese market in its global strategy.
Visa definitely has a positive view on business in China. Shiung said it is
estimated that 100 million credit cards will be in circulation in China's market
by 2010 and Visa hopes to keep a market share of 70 per cent.
China's role as the host of the 2008 Olympics in Beijing and its
unprecedented economic growth point to a great need for a modern national
payment system.
"Tens of thousands of visitors are going to flock to China from across the
world for the Olympics and they will expect to pay in a way that is safe,
convenient, and that they can trust. Only by having a modern payment
infrastructure can China fully utilize the market potential," Shiung said.
In addition, retail banking competition in China is heating up as the
country, according to its commitment to the World Trade Organization, will fully
open up its banking market by the end of 2006.
"We eagerly look forward to working closely with the authorities to build a
lively and open competitive market where players can contribute to the benefit
of all parties concerned, lowering service costs and delivering a better service
for consumers," Shiung said.
Analysts anticipate a booming market ahead as the development of the credit
card industry will affect more than just the banking industry.
On May 9, in a joint statement endorsed by nine ministries and commissions,
China issued a set of guidelines in support of the rapid and healthy development
of the electronic payment industry, stating that its development will benefit
the country and the people.
Government departments, led by the People's Bank of China, aim to create
favourable conditions for card usage. By 2008, 60 per cent of all retailers with
an annual sales volume of at least 1 million yuan, or US$121,000, will accept
plastic."Most key business areas and streets, star restaurants, and important
sightseeing areas will be served by credit card accepting businesses," said
Shiung.
Consumer spending on bank cards is also expected to account for 30 per cent
of retail sales, a huge increase from its current less-than 3 per cent stake in
big and medium-sized cities .
Shiung said the joint statement highlighted a clear message that the
development of the card industry goes far beyond just the financial services
industry.
The endorsement of nine government departments - the People's Bank of China,
National Development and Reform Commission, Ministry of Finance, Ministry of
Commerce, Ministry of Public Security, Ministry of Information Industry, State
Administration of Taxation, China Banking Regulatory Commission and State
Administration of Foreign Exchange - shows that the electronic payment industry
matters a great deal for the whole of society.
The main advantage of the card business, according to Shiung, is that it
helps reduce cash circulation and transaction costs.
As China is a huge country with the world's largest population, the total
amount of cash in circulation is enormous, a situation which entails heavy cash
transaction costs.
The costs involved in cash transactions include all the expenditures for
printing notes and forging coins, transporting and keeping cash safe and
calculating and allocating cash amounts.
In addition, cash use also runs risks such as fake notes.
Still, many people opt for cash transactions. That is because central banks,
commercial banks and merchants shoulder the huge costs of cash transactions in
an intangible way.
What's more, Shiung said, the future trend is that costs of cash transactions
will go up as labour costs associated with cash transactions will likely
increase with the rising of economy. Costs related to electronic payment will
tend to go down as telecommunications and electronic processing fees are
currently on a downward trend.
Stimulating consumption is the second advantage credit cards offer society,
this can then generate tremendous economic strength and resilient growth, Shiung
said.
Credit enhances people's purchasing power, since people can purchase more
goods and services more easily than they could if they have to withdraw money to
make their purchases.
As spending power grows, so does demand, which in-turn means production has
to increase and more jobs have to be created to meet the needs of the spending
public.
According to Shiung, China cannot solely depend on exports to stimulate its
economic growth. In the long term, domestic consumption will prove to be the
driving force behind the economy.
A third benefit of credit card use is that widespread payment using cards can
increase taxation income, and prevent money-laundering and other underground
economic activities. In contrast to cash transactions, which barely leave any
records anywhere, using cards for payment means that all transactions can be
tracked and illegal activities can be greatly prevented.
Witnessing the government support and vast market potential , local banks are
jumping at the chance to hype various features of their cards.
Industry participants are clearly encouraged by the sheer lack of presence of
credit cards in a massive bank card market that is dominated by debit cards.
Noting the phenomenal issuance of credit cards in the market, experts
highlight the significance of risk control mechanisms in the fledgling business.
Shiung said the biggest challenge facing the domestic banks is that the
profitability of running a credit card business at the current, initial stage is
not certain.
Credit card fraud aside, credit risks can also be acute as China lacks an
integrated national credit-rating system.
Right now credit cards are still a relatively new business. But Chinese
consumers will develop a strong appetite for them, as has been shown by the
recent rapid adoption of auto and mortgage loans. Since Chinese banks have
rushed to improve the banking infrastructure and begun to offer short-term
credit loans, Chinese consumers will soon adopt credit services at a rapid pace.
At the very beginning of the process, most credit cards are issued to
high-end customers, who are more affluent.But as the market continues to swell
and competition between card issuers heats up, more and more cards will be
issued to general consumers.
The urgent issue is therefore to quickly integrate a nationwide credit-rating
system for individuals. The absence of a credit-rating system affects the pace
of development for the credit card industry.
As it is by no means easy to establish an infrastructure of well-established
credit bureaux in a huge country like China, card issuers can improve risk
management by expanding selectively among China's booming urban centres,
targeting specific customer demographics and developing early warning data on
their customers' spending behaviour and borrowing patterns.
Credit bureaux, while still in an early stage of development, should still
play an important role in the development of a sustainable rate of credit card
usage. Local credit bureaux should be able to gather information drawn from
debit card spending and usage patterns.
Another phenomena worth noting is that in China's fast-swelling plastics
market, many card holders belong to the young generation.
It is believed that the young generation is always prone to new trends. But
this can also drive some of them into hunting excessive luxuries and excessive
spending beyond their means.
The "pay later" practices of plastic credit can make some young people
overlook the hazards of credit risks, enjoying too much fun in splurging.
There are also concerns that, if the economy happens to enter a short-term
slump, credit risks can also rise for banks since a large number of card holders
could be temporarily short of money.
Corresponding to the scenario in the early development of card businesses,
there is a great need to educate young people.
"It is important that the young generation, indeed all consumers,be aware of
the importance of managing, and know how to manage, their finances, including
their savings and their credit. This is a major task for card associations,
government agencies, card issuing banks, parents and other concerned parties,"
he said.
"A responsible attitude to financial management is the foundation on which to
build a healthy and sustainable payment industry."
But, "the trend is irreversible as the credit card business is set to grow
rapidly in China," Shiung added.
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