The size and growth potential of China's consumer banking market has attracted many foreign players. But according to a new survey commissioned by US payments company First Data International, foreign banks would be wise to take the long-term view on China as the short-term outlook for profits in these markets is less certain.
Peter Blackett, vice president for ATM services at FDI Asia, puts a more positive spin on the findings. In a phone interview from Hong Kong, he told EngagingChina: “It's early days and most of the banks interviewed in the survey are very optimistic about the market and its long-term profitability.”
The survey, in partnership with the Economist Intelligence Unit, sees credit cards as the flagship product that foreign institutions will use to spearhead their drive into the consumer banking market.
While credit card usage in China is very low compared to developed economies of the west, the experience from other emerging markets has shown that the credit cards offer huge revenue potential from both interest and fee income.
For foreign banks focusing on the Chinese market, credit cards are an excellent entry product. That's because as stand-alone products, credit card issuers do not need to offer an account package or a local branch network to market to or serve cardholders, and of course, western banks have much greater experience in branding and marketing credit cards than China's domestic banks.
However, the report argues that domestic banks have made “remarkable operational advances” in the five years they have had to prepare for market opening, and they retain one major advantage: huge branch networks.
The first four foreign banks to obtain licences now have just over 100 branches between them and their networks are completely dwarfed by those of China's big domestic banks. For example, ICBC — see this EngagingChina story — has 18,000 branches while the Agricultural Bank of China (ABC) has nearly 25,000.
All of China's big four banks (ICBC, Bank of China, ABC and China Construction Bank) now have foreign stakeholders and while the latter could set up and operate autonomously in China, they nevertheless are likely to strengthen these strategic links with local players as that allows them to leverage the extensive distribution channels of the domestic banks to offer credit cards and the like.
“A lot of foreign banks are hedging their bets,” says Blackett (pictured left).
HSBC, for example, has a 20% stake in BOC and they have been collaborating in credit cards for the past three years — see this EngagingChina story for more.
In similar vein, Bank of America recently signed an MoU with China Construction Bank to collaborate in credit cards. CCB is the second largest credit card issuer in China, with a total of 6.3m credit cards, more than half of which were issued last year. Total retail sales volume was just over 40bn yuan and the average purchase amount was 14,600 yuan, the highest among all Chinese competitors, CCB claims.
Despite the apparent attractiveness of China's credit card market, Blackett says there are several barriers holding back its development , not least the cultural challenges. “China still has very much a savings culture and in that respect its unlike other countries. Foreign banks have to respect the local culture,” he says.
With more than 50m credit cards issued, more Chinese consumers are nevertheless coming to value the positive contribution that access to credit can make to their lives, as well as the flexible repayment options that credit cards offer. At the same time, banks that participated in the survey recognised the need for responsible lending — and strong risk management skills — as they develop their credit card programmes.
Blackett says more work needs to be done on the merchant acquisition front as convincing merchants to accept credit cards represents a “major challenge”. Eight out of ten retail bankers polled for the report say that local retailers' preference for cash is a “very significant” or “significant barrier” to operating cards and payment services. Nevertheless, Blackett, who lives in Shanghai, says the “ability to use credit cards is increasing day by day” in China's big cities.
FDI last year signed a deal with Standard Chartered to offer merchant acquisition services initially to seven markets in Asia including HK and Macau. Mainland China is seen as a “priority market” to expand this deal, but Blackett notes that China's domestic merchant acquisition in China is currently dominated by local banks and China UnionPay, China's largest bank card issuer.
The report concludes that much work needs to be done to promote a plastic card payment culture in China. More than anything else, a more extensive card network and infrastructure must be rolled out to promote consumer usage, and this is clearly an area where foreign payments companies such as FDI have a lot to offer.
Although foreign banks entering China's consumer banking market will have their work cut out, the opportunity is simply too big to ignore.
Elsewhere on the credit front:
PricewaterhouseCoopers predicts that total domestic credit in China could overtake the UK and Germany by 2010, Japan by 2025 and the US before 2050. India could also rise from relatively low levels today to emerge as the third largest domestic banking market in the world by 2040 and, in the long run, could grow faster than China. A new PwC report, Banking in 2050: How big will the emerging markets get? warns of a “war for talent” as leading banks in China and other emerging countries compete to attract staff with experience working for institutions in G7 nations.