China was Asia’s largest payment cards market in 2014, in terms of card transaction value and volumes, accounting for 73.2% and 38.6% respectively. Cash was the predominant payment instrument between 2010 and 2014, especially among the rural population which is yet to embrace other forms of payment
This was primarily due to a lack of knowledge of other payment instruments, such as payment cards, or little or no access to banking infrastructure.
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As the government and banks began to provide basic financial and banking services to the unbanked population, by expanding banking infrastructure, launching new branches and making efforts to change consumer payment habits, payment cards gradually became more accepted, with their use consequently growing over the past five years.
Furthermore, concentrated efforts by the government coupled with emerging investments in e-payment infrastructure led to a constant increase in the country’s banked population.
According to the World Bank, the percentage of the Chinese population aged 15 or above with a bank account increased from 63.8% in 2011 to 78.9% in 2014.
To speed up the provision of financial and banking services to the unbanked population, the CBRC granted a license to the two private banks, WeBank and MYBank, in 2014.
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By GlobalDataThese initiatives, along with changing lifestyles, a rise in the economically active population and per capita disposable income, the growing popularity of online shopping, the increased acceptance of cards at retail outlets and the adoption of contactless technology supported the growth of payment cards over the last five years. This trend is also anticipated to continue over the next five years.
CUP maintains its stranglehold in the Chinese payment cards market.
In China, CUP is the sole scheme provider of payment cards. According to central bank regulations, all banks and card issuers oper-ating in the country are required to route their Yuan-based transactions through CUP’s electronic payment network.
However, following a complaint filed by the US against China via the WTO with regards to discriminating against foreign companies in 2012, the WTO directed the Chinese government to open up its payment cards market to foreign operators.
Consequently in October 2014, the Chinese government announced its decision to allow foreign companies to set up their own payment card clearing businesses, effective from June 1, 2015.
This move by the Chinese government is anticipated to intensify competition in the Chinese payment cards market, and end CUP dominance as the country’s only authorised card clearing organisation. However, Visa and MasterCard have a long way to go before they can make a dent in CUP’s market share, as they need to build up infrastructure from scratch.
New regulations to impact the thriving e-commerce market
China is one of the largest e-commerce markets in the world, and it is becoming mature. The market increased at a CAGR of 56.99%, from $68.7bn (CNY465.1bn) in 2010 to $417.3bn in 2014.
The rapid adoption of smartphones, growing internet penetration, availability of secure online payment mechanisms, reduction in delivery time and growing preference for online shopping – especially among the rural population, on account of underdeveloped brick and mortar shops – led to this growth.
E-commerce operators such as Alibaba and JD.com are targeting consumers in rural areas. In order to capture the rural market and enhance customer convenience, online retailers are investing heavily in improving logistics infrastructure.
In June 2015, the Chinese government permitted foreign 100% ownership of e-commerce companies, which were previously accessible only to companies within free trade zones.
With the change in government policy, the e-commerce market presents itself as a profitable market for foreign companies.
In an attempt to protect consumer interest, privacy and limit online transactions with private third-party payment agents such as Alipay and Tenpay, the Chinese government proposed a new law: ‘Method of Network Payment Service Management for Third Party Payment Agents’ in August 2015.
While the new regulations attempt to put restrictions on private third-party payment agents, the government-owned payment agent, CUP will not be subject to the regulations.
Under the proposed draft law, daily and annual purchasing amounts through third-party payment agents will be dependent on the online system’s own security checking measures.
Contactless m-payments are starting to get a foothold in China
NFC-based m-payments are gaining prominence in China, as retailers and mobile operators actively promote NFC technology to improve their business.
Consumer preferences for secure payment services that allow them to purchase products are also gaining ground. Companies are also embracing this technology to benefit from the expansion of the m-payment market.
In June 2013, for instance, China Mobile and CUP launched NFC-based mobile wallet called CUP Wallet in 14 cities. Similarly, in partnership with CUP, Samsung launched a contactless m-payment service in October 2014 for Galaxy Note 4, Note 3 and Galaxy S4 phone users.
Prepaid card market offers growth prospects
The prepaid card market has been established in China for 10 years.
It is already mature, and there is high consumer awareness about prepaid cards and their benefits.
However, there are a limited number of prepaid cards that target frequent travellers, and the majority of prepaid cards are in the form of transport cards.
Prepaid cards are also extensively used by employers to reward their employees, especially during the festive seasons.
These cards are also preferred by the corporate market, as companies can claim them as a business expense and not need to report them on their taxes as an additional source of income.
Retail-specific gift cards are the main types of benefit card available in China.
However, in view of the increasing level of corruption using prepaid cards, this forced the government to implement stringent regulations and enforce more conditions on prepaid card use.
The central bank issued guidelines to regulate the prepaid card market in 2011.
The central bank issued e-payment licenses to select third-party payment service providers for the first time in May 2011.
Without the approval of the central bank, a non-financial institution cannot issue multifunctional prepaid cards.
To ensure strict implementation of these regulations, the central bank and the Ministry of Commerce launched an inspection of all prepaid cards circulating in the country at the end of 2011.
Additionally, the regulations stipulate that the face-value of prepaid cards with names of their owners inscribed on the cards must not exceed $813.90, while that of prepaid cards that do not have the owner’s name must be below $162.80.
The regulation also stipulated that all non-bank payment service providers are to obtain a license from the central bank in order to continue operations beyond September 2011.
Retailers in China were also instructed by the government to register the identities of the customers that they issue a prepaid card over the value of $1,627.80.
Furthermore, the validity period of prepaid cards must be at least three years.
Among other regulations for the Chinese prepaid card market, one major qualification is that prepaid card issuers must have at least $4.9m registered capital, and this registered capital requirement increases to $16.3m in case the card issuer operates in more than one locality.
