Betting Big on Credit Cards

"Chinese people are carrying bigger, fatter wallets," joked a senior foreign bank executive at a financial seminar. "The wallets are filled with credit cards."

By 2006, Chinese card issuers had fired off a total of 56 million offers. While that breaks down to only 0.04 cards for each of the 1.3 billion Chinese people, the credit card market in China is expanding at an amazing rate. For instance: the number of standard credit cards increased by 83% in 2004, and over 100% in both 2005 and 2006.

Behind the exponential growth is a massive investment surge in credit card business in China's banking industry. In the international market, credit cards are offered by just a small proportion of banks, while in China, 27 banks and financial institutions have launched credit card businesses. It seems that any Chinese bank will provide credit card products as long as they are qualified for card issuance.

Credit cards are extremely profitable products for banks. Data shows that foreign card issuers can earn 20-40% retail revenue from credit card business. In fact, credit card operations contribute a substantial amount to a bank's bottom line. At Citibank, credit cards account for 33% of net profits, while American Express rakes in 70% of its profits from its credit cards.

But what will the credit card frenzy mean for Chinese banks? As credit card sales representatives bombard pedestrians and office workers, it costs a Chinese bank over RMB120 (US$1.6) for each new account. With such high investments up front, few Chinese banks are actually making profits from credit card operations. Although the growth of China's credit card market over the last four years is comparable to that of the US market over the past 30 years, Chinese banks are having a much tougher time squeezing cash from their credit card operations.

From infancy, to rapid growth, to maturity, and finally to saturation, the Chinese credit card market will only allow for the existence of several large players, and that means many banks will eventually be sidelined.

Chinese banks will have to decide if they plan to use credit card businesses as part of their core competitiveness and how to make their particular credit cards competitive. In fact, the flurry of credit card marketing activity in China has actually helped some Chinese banks get onto a more market-based track and differentiate in the market.

From this perspective, credit cards are more than just another financial product in China's banking industry and the climate of competition that they have created has profound significance.

This is the leader of a special coverage on www.cbfeature.com.
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