Despite rapid digitisation of payments in China, credit card usage will reach new heights by 2020

Despite the rapid digitisation of payments in China, credit card usage has expanded again since 2015, We expect growth for credit cards in issue between 2015 to 2020 to come in at a compounded annual growth rate (CAGR) of 22% compared to 14% during the period 2010 to 2015. Credit utilisation rate has also increased steadily, as credit card outstanding balances has grown faster than the credit limits.

The number of credit cards per capita was up from 0.15 in 2010 to 0.47 at the end of September 2018 (Figure 1). China’s credit card market is far from saturated, and thus there is still plenty of room to grow.

China’s credit card market still has further potential to grow

Fig 1. Number of credit cards per capita in China compared to India, Thailand and Malaysia

Total number of credit cards in issue was up by 27% in 2017, the highest growth rate since the global financial crisis. We expect credit cards in issue rose 31% yoy in 2018 (Figure 2). The digital micro payments have enjoyed rapid expansion, while total number of credit cards in issue stagnated since 2010 and saw a dip in 2015, which can be partially attributed to the increased risk control amid economic slowdown and the impact of rapid development of mobile payment and internet finance. Meanwhile, credit card penetration was relatively high in China’s first and second-tier cities, and the credit card ecosystem was underdeveloped in smaller cities and rural areas. In addition, encouraging cardholders to use their credit cards more became the priority, instead of following the past practice of issuing more credit cards.

China’s credit card market heating up once again

Fig 2 Number of credit cards in issue

Chinese authorities have encouraged growth of consumer credit to promote consumer spending and 

stimulate the economy in recent years. In addition, the transformation of household consumption patterns and the rapid expansion of consumer credit demand have provided an opportunity for the strong development of credit card business. The increase in demand for big-ticket items such as automobiles and home appliances has led to the higher demand for credit card instalment payments among Chinese consumers. Meanwhile, since late 2017, the regulators have tightened rules on online microlending business, which has benefited banks’ credit card business. 

On the supply side, as regulatory pressure on the lucrative wealth management business of Chinese banks intensified in recent years, it squeezed banks’ fee income and profits. As a result, banks have refocused on credit cards. They have been making continuous efforts to improve their credit card business in terms of products, distribution channels and technological innovation.

There has been a notable shift towards credit card loans (Figure 3), and contribution of credit card business to bank profits also has gone up. China Merchants Bank (CMB)’s revenue related to credit cards was up by 24.9% in 2017 and 22.1% year-on-year in the first half of 2018. The bank’s revenue from credit card business accounted for 24.9% of total bank revenue in the first half of 2018, up from 15.2% in 2014. 

Banks renew focus on credit card business

Fig 3. Contribution of credit card loans to total bank loans (%) 

Trends in credit card business

Chinese banks continue to innovate in regards to functionalities and customer experience in particular in credit card installments. Bank of China (BOC) has been promoting scenario-based instalments products such as instalments for payments related to automobile leasing, second-hand cars, “easy-rent”, weddings and births. China Construction Bank (CCB) provided business owners of “Long Card Ready-Pay Loans” with a package of financial solutions incorporating “instalment + concessions + bonus points + merchant acquiring + customer acquisition” to bolster the instalment programs. 

In addition, co-branded credit cards have been launched to improve credit card product lines. For example, in 2018, Agricultural Bank of China (ABC) issued co-branded credit cards with ChinaTelecom, and CMB cooperated with the Internet enterprises to launch a variety of co-branded credit cards, such as Hema Fresh, Tmall Store, Today’s Headline, etc. CMB launched in 2017 a co-branded gaming card with  "Arena of Valor", which is the largest mobile Game in China, with over 150 million users. The card applied the game pattern of winning points to link customer's virtual performance in the game with real world benefits. On the day in which the card was launched it created a single card application history with more than one million applications. It was the highest-profile co-branded card product in 2017 in China.

Banks offer lucrative sign-up bonuses and rewards and diversified rewards programs. Ping An Bank’s Car Owner Credit Card offers benefits such as 12% cashback on petrol purchases at 10,000 gas stations in over 50 cities, free-of-charge roadside assistance services within 30 kilometers and personal accident insurance that covers up to a maximum of  $16.2 million (RMB1.1 million) for all persons in the car by leveraging on the car owners eco-system built up by the Ping An Group. In addition, the cardholders can also enjoy offers related to car wash services, parking and vehicle repairs and maintenance.

Digital application has become the major channel of credit card customer acquisition for Chinese banks. More than 70% of newly issued credit cards were applied online at China Minsheng Banking Corporation (CMBC). Many banks have offered users a dedicated credit card mobile application, such as CMB Life APP, which has continued to outperform the credit card mobile application of other Chinese banks, with the number of monthly active users reaching 35 million. In addition, Wechat has become one of the most important channels for banks to interact with their credit card customers. Many banks have introduced Wechat mini programs, and credit card application and other services such as coupon redemption were enable in their WeChat mini programs. The “China Merchants Bank” WeChat Official Account had accumulated 13.1 million followers as at the end of June 2018. 

On the rise are also virtual credit cards Whereby a virtual account is derived from the Bank Identification Number (BIN) code on the bank card. It does not have a physical card, but can be used for payment settlement. Alibaba and Tencent announced plans to issue virtual credit cards in partnership with China CITIC Bank in 2014, but China’s central bank halted the issuance due to concerns over customer security. In 2017, some banks launched their virtual credit card business, such as ABC, BOC, Bank of Communications (BoCom), CCB, China Citic Bank, CMB and Shanghai Pudong Development Bank (SPDB). BoCom’s Mobile Credit Card was introduced in April 2017, and the issuance reached 3 million within a year. 

Leading banks in the credit card business

Industrial and Commercial Bank of China (ICBC), CCB and CMB remain market leaders in terms of core indicators, including the cumulative number of credit cards issued and outstanding credit card debt (Figure 4). On average, China’s big four banks have issued more credit cards, due to their extensive branch network. ICBC is the largest credit card issuing bank in china and issued 156 million credit cards as at the end of June 2018, but CCB has greater outstanding credit card balances. Besides of these three banks, BOC’s cumulative number of credit cards issued also has exceeded 100 million. CCB is the most successful mega bank in growing its card business since 2011.

ICBC, CCB and CMB are the largest credit card issuers in China

Fig 4. Credit card business of major Chinese banks in CIF (#)  (June 30, 2018)

National joint-stock commercial banks recorded stronger growth. During the period of 2011 and 2017, the cumulative number of credit card issued by China Everbright Bank(CEB) and its outstanding credit card balances grew at a compound annual growth rate (CAGR) of 26% and 51%, respectively (Figure 5). Besides, banks like China CITIC Bank and Industrial Bank were also leading growth plays. 

In terms of credit card outstanding balance per card, national joint-stock commercial banks also took the lead. With $1,326 per card at the end of June 2018, Shanghai Pudong Development Bank (SPDB) ranked first among the banks we studied, followed by CMBC ($1,192) and CEB($1,033), while credit card outstanding balance per card for ICBC and ABC was only $610 and $628, respectively. 

Credit card business of national joint-stock banks grew faster 

Fig 5. Growth of major Chinese banks’ credit card business in number of cards in force

Risk management of credit card business

Most Chinese banks posted lower credit card non-performing loan (NPL) ratios in 2017 (Figure 6). The improvement in overall quality of  Chinese banks’ credit card loan portfolio following the deterioration between 2012 and 2016 is mainly driven by banks’ strengthened comprehensive risk management system and the securitisation of non-performing assets related to credit card business. The securitisation programs issued by banks helped them with the write-offs and disposal of credit card NPLs. 

Banks also made efforts to improve the onboarding policies such as early real time monitoring and attention to high-risk segments. They increasingly leverage AI and machine learning tools to improve  the mechanisms for full life cycle risk monitoring.

In the first half of 2018, some banks’ credit card NPL ratios showed a marginal uptick.This can be partially attributed to the introduction of the new rules to clean up the fast-growing cash loan and online micro lending market at the end of 2017. 

In terms of performance on the NPL ratio indicator, China CITIC Bank ranked the best among major Chinese banks we studied as at the end of June 2018. Its credit card NPL ratio was down from 1.24% at end-December 2017 to 0.98% at end-June 2018, lower than CCB’s credit card NPL ratio at 1.09%. CCB’s quality of credit card loan portfolio had been the best among these banks between 2011 and 2017. 

Chinese banks made improvement in the quality of credit card loan portfolio 

Fig 6 Credit card NPL ratios (2011-June 2018)

In conclusion, we expect strong growth in credit card business for the major Chinese banks. Banks increasingly focus on micro segments and theme cards where critical scale can be achieved but also partner with fintech companies and large non bank payment providers to stay competitive. An increasing number of credit card customers are interacting with their banks through digital channels and more innovations in regards to functionalities and customer experience are expected.  Meanwhile, banks are continuing their efforts to improve credit card customer acquisition and management and also strength risk management.