Charge!

In 2002, 20-year-old Xie Ning took part in an international study exchange program as a student from Peking University to study in Europe. He also decided to take the chance to travel across the continent during summer vacation.

It was his first time abroad. But to his disappointment, he found all the hotels including economic youth hostels required a credit card to make reservations. At that time, he did not have a credit card and did not even know what a visa card looked like. It was the busy travel season, and without any reservations, Xie had to stay in railway stations for two nights, and sometimes pay the hefty price of $150 for a one-night hotel room.

"It was a very awkward traveling experience," Xie recalls. "For the first time I realized one can do nothing without a little card in a modern world. But back in China, it was something merely owned by the affluent or white-collars."

There are many Chinese young people who now have two or three credit cards in their pockets, yet shared stories as Xie's a few years ago.

It was not until 2003 that China started to witness a credit card boom. Though the number of credit cards in the mainland has doubled each year for the last five years, for a quite long time the credit card's development was slow and sluggish.

The first card

It was not until 1978 did Chinese have a chance to see what a credit card looked like.

One day in the autumn of 1978, a foreigner came to the office of Zhang Lianli, who then worked at the international business department of Bank of China (BOC).

"Why can't I use my credit card here? Why can't I withdraw cash?" the American traveler nervously asked Zhang, holding a card at hand.

It was the first time Zhang saw a bankcard. "What the hell is that? How can it be a substitute for cash?" Zhang was very curious about the little card.

Since the birth of the credit card in the United States in 1950, plastic cash quickly gained popularity outside of China and Zhang continually received queries from foreign travelers, about why they couldn't use the cards here

He spent a month writing a report to his leader and a few months later, the top management of BOC decided to introduce a credit card.

In 1979, BOC's Guangdong branch signed a contract with Bank of East Asia (BEA), agreeing to use the BEA credit card on the mainland. Soon, three other branches of BOC in Shanghai, Nanjing, and Beijing signed similar contracts with overseas banks including BEA, HSBC and Standard & Chartered Bank.

But the mainland did not start to issue its own credit card until 1985. In March, BOC's Zhuhai branch issued the first BOC card. It was also the first bankcard in China and also functioned as a credit card. One year later, the Industrial and Commercial Bank of China (ICBC) issued another one. Sooner, other major banks including the Agricultural Bank of China and China Construction Bank also follow suit.

But a sluggish banking service system and a tradition of savings hindered the development of credit cards in China.

Not until China joined the WTO, did banks realize the importance of credit card service. On May 17, 2002, ICBC set up the first credit card center in Beijing. In October, the China Merchants Bank set up another card center in Shanghai.

Statistics from a credit card service firm 51 Credit.com and a research firm Analysys International shows that by the end of 2007, China had 90 million credit cards, and the number of cardholders was 30 million. In big cities such as Shanghai or Beijing, four out of 10 consumers now own at least one credit card, and half of bankcard holders own at least two or more credit cards.

Compared with 500 million of credit card in the United States, given China's huge population, the country still has very low penetration rate. A McKinsey report released in September 2007 says it signifies a huge potential for an industry that would mean 13 billion yuan in profits by 2013.

Credit card use is growing at a dazzling speed, especially among young urbanites.

Aside from shopping, young people are using credit cards for traveling, hotel bookings, withdrawing cash, or paying in installments.

Users also enjoy the so-called "added value" these little cards bring to them - often banks will offer gifts and discounts for using the cards.

"Why bother to carry cash. One should always try to use his credit cards as much as he can," Xie, the Peking University graduate who now works at a consultant firm in Beijng says. Xie has four credit cards and never carries more than 100 yuan in his wallet.

Xie is one of those Chinese young people who have adopted Western spending habits. He just returned from a tour of Hong Kong in June. By using his China Merchants Bank credit card, he enjoyed a discount, merely spending 2,099 yuan for a round-trip ticket and three nights in a four-star hotel. Last year, Xie used the same credit card service to enjoy a discounted five-day vacation on the beach in Sanya.

"For Chinese consumers in their 20s, spending tomorrow's cash to fund today's needs is a big new trend. Today's Chinese consumers are clearly not interested in saving for a rainy day, a common practice in their parents' generation," says Bega Ng, director of Financial Services Research of the Nielsen Company in China. A Nielsen report, which surveyed 11,500 Chinese consumers in 18 cities in 2007, showed that consumers aged between 18 and 24 are the most active users of credit cards in the city.

Development and challenges

Facing the large potential market, banks have been racing to issue credit cards since the business shifted into high gear in the country in 2003.

The competition has intensified with card issuers bombarding the market with cash bonuses and other gifts to win over consumers. Banks try to attract more customers by offering various perks, cooperation with stores, airlines, hotels and even universities.

There are cards designed for different niches - cards for women, cards for businessman, cards for students, sports lovers or music fans. There are also cards targeting different classes - besides the common dual-currency credit card, there are gold cards, platinum cards and a no-limit credit card targeting top-end consumers.

There are cards designed with cartoons or traditional Chinese patterns, and there are also cards with special sizes.

Some cards also serve a special purpose. For example, in association with China National Petroleum Corporation, the country's largest oil company, ICBC issued a special credit card, with which drivers can enjoy favorable discount when buying gasoline.

The growing wealth of the Chinese people has added allure to the credit card business. However, most banks are losing money in their credit card businesses as a large portion of the cards have apparently never been used since they were issued.

A report issued by 51 Credit.com and Analysys International shows that only 20 to 40 percent of the credit cards issued are put into use with a large amount of cards "sleeping".

For one reason, a traditional conservative spending culture is making the credit card business in China much harder. "Chinese feel more comfortable with the practice of spending the money they really own," the McKinsey report points out.

It says that 94 percent of credit card holders pay off the balance of their cards before they have to make any interest payments. "The interest rate is so high, there is no need to pay any extra money," Zheng Fei, a newspaper editor tells China Business Weekly. Zheng pays his debt regularly before the monthly deadline.

On the other side, though people have accepted the use of credit cards, the environment for their use is not well established. Although one can always use credit cards in big shopping malls and restaurants, credit card readers are seldom found in markets. Many also find it frustrating visiting shops that do not have card-reading machines, and have to walk a fair distance to find an ATM.

Despite these challenges, the Chinese credit card market presents enormous potential for profitsg for both local and foreign financial institutions. With continued robust consumer spending, a growing outbound tourism market and the desire for new life-style experiences, the urban acceptance and penetration rates of credit card usage will continue to grow.

Among mainland banks, China Merchants Bank leads in the credit card business and is currently the only commercial bank to have made a profit in the segment. CMB credit cards currently accounted for 35 percent of the credit card market in China. One thing is certain, the credit card business is becoming increasingly important in contributing profits to lenders' incomes.

As China makes efforts to open its financial industry wider, overseas banks are also expected to take a share of the booming credit card market, though most of them are now only allowed to offer co-branded cards by cooperating with local partners.

In May, Hong Kong-based BEA became the first overseas bank to issue a debit card in the mainland and it is expected to issue its first credit card on the mainland within the year.

"Consumers will benefit from increasingly intense competition among local and foreign banks, who are beefing up their promotional efforts to get their credit cards into the wallets of the millions of Chinese big spenders," Ng of Nielsen Company says.

(China Daily 08/25/2008 page2)