Caution Is the Key to the Chinese Card Market

Everyone in banking seems to want a piece of China. And why wouldn't they? The Asian nation isn't only an economic powerhouse, but contains a quarter of the world's population. Just think of the customer acquisition opportunities. However, if you're a non-Chinese provider of financial services, the barriers to your entering this market are many.The Communist government is known for setting limits on foreign FS companies, setting conditions like their having to work with a local bank in order to do business in the country, an infrastructure that leaves much to be desired and a very different attitude toward financial services among the populace.

Gartner principal research analyst Christophe Uzureau issued an interesting research note that discussed the opportunities and challenges of this market to the card industry. Cards, he says, are a great instrument for foreign banks looking to expand their presence in China given the fact that they often have very limited branch networks there. Furthermore, the 2008 Beijing Olympics present the perfect situation for card issuers to capitalize on the Chinese market.

Sure, China is the next frontier, but issuers can't expect to jump in and be welcomed with open arms. According to Uzureau, the Chinese card market "is still in its infancy with an infrastructure in the making. Furthermore, payment providers, both banks and payment service providers, face a market where policy and licensing risks are significant."

Not only are there technological limitations, but merchant acceptance is low and regulations can be a challenge to interpret, he added.

Furthermore, this market might not be the money-maker foreign banks expect. "Overall, the Chinese credit card market is unprofitable due to consumer attitudes toward credit cards, poor customer segmentation, fraud and fierce competition," said Uzureau.

This reminds me of a similar statement I heard during a separate meeting I had at RDS with TowerGroup's Bob Hunt. We were discussing China and he said, "The Chinese are savers." Very true. Overcoming this kind of deeply engrained mentality will be tough for the card issuers. Even more than the technology infrastructure, to me, this is probably their biggest hurdle. However, things are changing in China as the middle class grows and they become used to being consumers. So hope certainly isn't lost for foreign card companies.

Other recommendations Uzureau made for the card industry to navigate the Chinese card market include the following:

Foreign banks: • Enter this market for the long term and with the anticipation of significant investment with little or no immediate return. • To deal with licensing risk and to obtain the right licenses to expand, demonstrate to the regulator how you can contribute to the development of the Chinese card market. • Use payment operations to drive an in-depth understanding of Chinese consumers' demand for retail-banking products and services. • Don't restrict your card partnerships to banks. Differentiation comes from new co-branded programs with companies that provide access to customers' data. Payment service providers: • Support data integration requirements of banks, and provide processing platforms that can support multiple payment instruments. • Plan for an on-site team to build the relationship with Chinese domestic banks to ensure that solutions support local payment system requirements and to translate new payment concepts to the Chinese market.