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China's Credit-Card IndustryIs Set to Take Off

Overseas Banks May FalterOn Credit Cards if They GoIt Alone, Consultancy Says

By ANDREW BROWNE Staff Reporter of THE WALL STREET JOURNAL August 31, 2005; Page A7

SHANGHAI – China's credit-card industry is set for explosive growth, but foreign investors could stumble unless they find the right Chinese partner, according to a report by U.S. consultancy McKinsey & Co.

International financial giants like Citigroup Inc., Bank of America Corp. and HSBC Holdings PLC have been pouring billions of dollars into Chinese banks, and one of the main attractions for both sides is the prospect of developing revenues from credit cards.

An industry survey by McKinsey, which hasn't yet been released to clients, backed up optimism about the market, which is still in its infancy but growing exponentially. The report estimates more than 12 million credit cards have been issued in China, up from three million in mid-2003. (There are also hundreds of millions of debit cards that don't offer credit.)

Over the next decade, consumer credit will be one of the fastest-growing segments of the banking industry, and credit cards will be the most important product in that category after mortgages, the report says. By 2013, credit cards will account for 3% of total bank profits, or $1.6 billion, from zero at present, it says.

Foreign banks are prohibited from selling their own credit cards because, until the market fully opens at the end of 2006, they can't offer loans to Chinese individuals.

Even then, going it alone isn't a viable option for foreign banks, according to McKinsey. That is because as much as 50% of cardholders are signed up in factories and offices by sales executives who rely on their banks' extensive client networks to open doors.

In addition, most cardholders want the convenience of a large branch network because they pay off their monthly balance in full with cash at bank counters. Foreign banks are thinly stretched across a handful of large cities, and even after the banking market opens fully, their expansion will be restricted.

Moreover, says David Von Emloh, a Shanghai-based McKinsey partner, "the Chinese put absolutely no value at all on a foreign brand" when it comes to credit cards.

Foreign banks are more likely to succeed by selling cards into a Chinese bank's customer base. But that means finding a partner with the right mix of high-spending customers. City banks, which have attracted plenty of foreign interest, don't always offer the best-quality depositors, and their geographic scope is limited.

So far, HSBC has set up a card center with Shanghai-based Bank of Communications Co., which has a national network. Citigroup's Citibank has a card venture with Pudong Development Bank Co., a lender with a strong franchise in Shanghai -- the most attractive credit-card market in China -- but with a more limited national reach. Royal Bank of Scotland Group PLC is investing in Bank of China, one of the Big Four state-run commercial banks, and Bank of America is buying into China Construction Bank, another giant lender.

For now, China's credit-card market generates no profits, McKinsey says. Banks offer lavish gifts to lure customers, but because they lack skills to target the most-attractive prospects, much of this investment is wasted.

Most credit cards generate no interest income for banks, because of the practice by holders of paying off their balances outstanding each month. Credit-card issuers routinely waive annual fees. And merchants continually are forcing down transaction fees payable to card issuers.

Mr. Von Emloh predicts that half of all credit cards now on the market never will be profitable for the issuers. Chinese banks, he says, will rely almost completely on experienced foreign partners to build and manage their credit-card operations, and make them profitable.

posted by Henry @ 1:35 AM