China's emerging bank card market could unleash an unprecedented tidal wave of plastic consumers.

Nowadays, Chinese consumers are inclined to buy a wallet or purse that can hold as many bank cards as possible, rather than worry about cash capacity. And, of course, they pay for that new wallet with plastic.

According to Chai Hongfeng, vice president of China UnionPay, as of the end of the first quarter of 2004, 690 million bank cards had been issued in China, an average of one for every two people. The number of franchised businesses under the bank card regime amounts to 540,000, and that of bank card issuers has increased to 140 nationwide from 80 when the China UnionPay was founded. This includes 16 Hong Kong banks. In the first four months, interbank card business was worth 187.6 billion yuan ($22.6 billion), a year-on-year increase of 103 percent. "Interbank card-based deals are steadily rising, and the bank card industry in China is promising and has broad market prospects," said Chai.

The number of families with annual incomes of $5,000 to $12,000 has now risen to 45 to 60 million, and the middle-income population has reached the international standard for a rapid development period in the use of bank cards, said Feng Weiquan, senior vice president of MasterCard Asian-Pacific Region and general manager of MasterCard Greater China. He predicted that in the next year or two, the number of people who use credit cards will rise explosively, especially in medium and large cities.

In light of the upcoming 2008 Olympics and to elevate the image of Beijing as an international metropolis, the capital city's government plans to remove barriers for consumption by cards by the end of 2004.

According to this target, by the end of this year, more than 50 percent of business institutions that have fixed operational locations and annual turnover of more than 500,000 yuan ($60,386) will be capable of providing card services. All the important commercial zones and districts, star-rated hotels, important tourism sites, and retail businesses and catering firms near the Olympic venues will be able to handle card-based business; the government expects that by 2008, 90 percent of the city's businesses will be card-capable.

Interbank transactions in Beijing and transactions between Beijing and other cities should reach 99 and 90 percent, respectively. The proportion of sales by card within total sales of all consumer goods is expected to rise from five percent in 2001 to around 20 percent, and the number of automated teller machines will increase to 3,000.

In Shanghai, a city with a population of over 16 million, every person owned at least two bank cards by the end of 2003. Of every 14 bank cards issued in China, one is issued by a commercial bank in Shanghai, and a quarter of the country's interbank card transactions took place there.

Shanghai's customer-savvy department stores and banks have begun jointly sponsoring card-purchase lotteries. It is not unusual for Shanghai consumers to win an insurance policy or a cellphone by buying with cards. In a three-year-long card promotion being held by 17 card-issuing financial institutions in the city, the prizes are worth a total of five million yuan, and the grand prize winner will drive home in a new Polo car worth 120,000 yuan ($14,493).

By 2005, more than 50 percent of business institutions, tourism spots, restaurants and other service providers in Shanghai will be able to do bank card deals. By then, card consumption will account for 25 percent of the total sale of consumer goods.

Hu Weiren, a Shanghai-based economist, said the common use of bank cards is a sign of the dynamic financial activity in the region. As the city that first opened bank card businesses in China, Shanghai is the center of the industry in the nation.

Some businesses, however, are not happy with bank handling fees for card transactions. In June, the dispute escalated to a two-day boycott of card sales by 35 department stores in Shenzhen.

Although the central bank has implemented a new regulation on income distribution of interbank card transaction deals, in which the central bank believes it has granted many advantages to businesses, it has not ended the friction between businesses and banks on handling charges.

Another big problem is card-related crime. According to the central bank, such cases involve around 100 million yuan ($12 million) every year, and economic loss is preliminarily estimated to be around 30 million yuan ($3.6 million), a figure that is steadily rising. MasterCard's Feng Weiquan attributes bank card crimes mainly to technical defects in the magnetic strip, as criminals in the know can easily steal information on the strip with specialized equipment and then copy this to a new card.

Some commercial banks have already fought back against such crimes. The Industrial and Commercial Bank of China resumed the code system in card business, except Peony International Debit Cards, in November 2003, one and a half years after it switched to a signature system, reigniting the debate over whether signature or code is more secure. Some other banks have increased input to a theft detection system, which can inform the card owner of transaction information within a few seconds when a single transaction has come to certain amount.

But the risk remains. Bank card related fraud around the world makes up 1.5 percent of total annual transactions. The main reaction of the international community is to greatly expand the safety attestation of Europay MasterCard Visa (EMV), a de facto standard for debit and credit cards, jointly developed by Europay, MasterCard and Visa, and gradually replace magnetic strip cards with chip, or IC, cards.

In China, the central bank is stepping up the EMV program and amending rules on financial IC cards, but there is no clear timetable for widespread use of IC cards. The high cost of IC cards and necessary point-of-sale and ATM hardware is slowing the upgrade.

Another urgent problem facing the Chinese banking system is legislation on bank cards. China is seen by many as the world's largest potential credit card market. But Visa China's General Manager Xiong Anping says the redundant construction, vicious competition, underdeveloped risk management technology, lack of a social credit system and other prominent problems are flashing warning signs of risk. Card business could create new non-performing assets for Chinese banks.

Thus, at the national banking conference held in March, the China Banking Regulatory Commission (CBRC) indicated that it would take serious measures to cool down the "credit card heat" that occurred in 2003.

Huang Yiping, a chief economist with Citigroup, forecasts that after China completely opens its banking industry in 2006, the heat of competition between domestic and foreign banks will first be felt in the card business.

Current regulations on bank cards state that foreign banks cannot open foreign currency card businesses unless they have operated RMB card businesses for more than five years.

But nearly all foreign banks have urged China to hasten its opening of the card market. Standard Chartered, the Bank of East Asia, American International Group and Morgan Stanley have applied to the CBRC to issue foreign currency cards in China. In January 2004, the Bank of Shanghai and HSBC jointly issued a single-currency card.

On February 17, the Shanghai Pudong Development Bank (SPDB) and Citibank jointly launched cards, a big step for the market. The cards are the first in China that can be settled both in RMB and US dollars and are supported by international management and technology expertise. The cards can be used in the global networks of both Citibank and SPDB and be settled by VISA international, a membership association owned by more than 21,000 banks and other financial services companies worldwide.

But to Citigroup, the real breakthrough is that it can participate in the management of the Credit Card Center of SPDB, a rudimentary credit card joint venture, and keep separate accounts in the center. Citigroup expects the center to turn a profit in about two years.

The entry of world-class credit card issuers into China has brought challenges to domestic banks, as well as a positive effect in cultivating and standardizing the market.

(Beijing Review June 29, 2004)