According to Albert Shiung, head of Visa International's China operations, the company's biggest competitor is not any of the other credit card brands.

"My rival is cash. There is still a lot to do to nurture a card market in China," he said.

While the upbeat promise of the credit card business has inspired many industry practitioners to go for a potential bonanza, China is still a cash-based society.

Aside from in big cities and coastal areas, it is always cash that counts in most of the shops across the country. The majority of the population still believe that using cash is the only safe and secure method of purchasing products and services.

So far, China has issued about 10 million cards with revolving credit. That means, in China, only one person in 130 has a credit card.

To tackle China's untapped and potentially lucrative credit card market, foreign and domestic banks have launched many major initiatives to introduce the new concept of plastic payment to the local population, particularly the emerging "middle class."

International credit card organizations such as Visa are clearly front runners in the marketplace. Visa is a global association of some 21,000 financial institutions, which links banks, consumers and merchants together through a sophisticated payment processing platform, and handles annual worldwide sales volume of over US$3 trillion. While Visa does not issue cards, its members have issued more than 1.2 billion Visa debit cards, credit cards and other payment products globally that are accepted in more than 24 million locations in over 150 countries and regions.

According to Shiung, Visa's 22 member banks in the Chinese mainland have issued 6.14 million Visa international cards in China so far, tripling last year's figure for the corresponding period. This week Beijing is also becoming, for the first-time in history, the venue for a meeting of Visa's six regional boards of directors and the international board of directors. The gathering of about 300 representatives of the world's biggest banks is expected to generate new perspectives on how to position the Chinese market in its global strategy.

Visa definitely has a positive view on business in China. Shiung said it is estimated that 100 million credit cards will be in circulation in China's market by 2010 and Visa hopes to keep a market share of 70 per cent.

China's role as the host of the 2008 Olympics in Beijing and its unprecedented economic growth point to a great need for a modern national payment system.

"Tens of thousands of visitors are going to flock to China from across the world for the Olympics and they will expect to pay in a way that is safe, convenient, and that they can trust. Only by having a modern payment infrastructure can China fully utilize the market potential," Shiung said.

In addition, retail banking competition in China is heating up as the country, according to its commitment to the World Trade Organization, will fully open up its banking market by the end of 2006.

"We eagerly look forward to working closely with the authorities to build a lively and open competitive market where players can contribute to the benefit of all parties concerned, lowering service costs and delivering a better service for consumers," Shiung said.

Analysts anticipate a booming market ahead as the development of the credit card industry will affect more than just the banking industry.

On May 9, in a joint statement endorsed by nine ministries and commissions, China issued a set of guidelines in support of the rapid and healthy development of the electronic payment industry, stating that its development will benefit the country and the people.

Government departments, led by the People's Bank of China, aim to create favourable conditions for card usage. By 2008, 60 per cent of all retailers with an annual sales volume of at least 1 million yuan, or US$121,000, will accept plastic. "Most key business areas and streets, star restaurants, and important sightseeing areas will be served by credit card accepting businesses," said Shiung.

Consumer spending on bank cards is also expected to account for 30 per cent of retail sales, a huge increase from its current less-than 3 per cent stake in big and medium-sized cities .

Shiung said the joint statement highlighted a clear message that the development of the card industry goes far beyond just the financial services industry.

The endorsement of nine government departments - the People's Bank of China, National Development and Reform Commission, Ministry of Finance, Ministry of Commerce, Ministry of Public Security, Ministry of Information Industry, State Administration of Taxation, China Banking Regulatory Commission and State Administration of Foreign Exchange - shows that the electronic payment industry matters a great deal for the whole of society.

The main advantage of the card business, according to Shiung, is that it helps reduce cash circulation and transaction costs.

As China is a huge country with the world's largest population, the total amount of cash in circulation is enormous, a situation which entails heavy cash transaction costs.

The costs involved in cash transactions include all the expenditures for printing notes and forging coins, transporting and keeping cash safe and calculating and allocating cash amounts.

In addition, cash use also runs risks such as fake notes.

Still, many people opt for cash transactions. That is because central banks, commercial banks and merchants shoulder the huge costs of cash transactions in an intangible way.

What's more, Shiung said, the future trend is that costs of cash transactions will go up as labour costs associated with cash transactions will likely increase with the rising of economy. Costs related to electronic payment will tend to go down as telecommunications and electronic processing fees are currently on a downward trend.

Stimulating consumption is the second advantage credit cards offer society, this can then generate tremendous economic strength and resilient growth, Shiung said.

Credit enhances people's purchasing power, since people can purchase more goods and services more easily than they could if they have to withdraw money to make their purchases.

As spending power grows, so does demand, which in-turn means production has to increase and more jobs have to be created to meet the needs of the spending public.

According to Shiung, China cannot solely depend on exports to stimulate its economic growth. In the long term, domestic consumption will prove to be the driving force behind the economy.

A third benefit of credit card use is that widespread payment using cards can increase taxation income, and prevent money-laundering and other underground economic activities. In contrast to cash transactions, which barely leave any records anywhere, using cards for payment means that all transactions can be tracked and illegal activities can be greatly prevented.

Witnessing the government support and vast market potential, local banks are jumping at the chance to hype various features of their cards.

Industry participants are clearly encouraged by the sheer lack of presence of credit cards in a massive bank card market that is dominated by debit cards.

Noting the phenomenal issuance of credit cards in the market, experts highlight the significance of risk control mechanisms in the fledgling business.

Shiung said the biggest challenge facing the domestic banks is that the profitability of running a credit card business at the current, initial stage is not certain.

Credit card fraud aside, credit risks can also be acute as China lacks an integrated national credit-rating system.

Right now credit cards are still a relatively new business. But Chinese consumers will develop a strong appetite for them, as has been shown by the recent rapid adoption of auto and mortgage loans. Since Chinese banks have rushed to improve the banking infrastructure and begun to offer short-term credit loans, Chinese consumers will soon adopt credit services at a rapid pace.

At the very beginning of the process, most credit cards are issued to high-end customers, who are more affluent. But as the market continues to swell and competition between card issuers heats up, more and more cards will be issued to general consumers.

The urgent issue is therefore to quickly integrate a nationwide credit-rating system for individuals. The absence of a credit-rating system affects the pace of development for the credit card industry.

As it is by no means easy to establish an infrastructure of well-established credit bureaux in a huge country like China, card issuers can improve risk management by expanding selectively among China's booming urban centres, targeting specific customer demographics and developing early warning data on their customers' spending behaviour and borrowing patterns.

Credit bureaux, while still in an early stage of development, should still play an important role in the development of a sustainable rate of credit card usage. Local credit bureaux should be able to gather information drawn from debit card spending and usage patterns.

Another phenomena worth noting is that in China's fast-swelling plastics market, many card holders belong to the young generation.

It is believed that the young generation is always prone to new trends. But this can also drive some of them into hunting excessive luxuries and excessive spending beyond their means.

The "pay later" practices of plastic credit can make some young people overlook the hazards of credit risks, enjoying too much fun in splurging.

There are also concerns that, if the economy happens to enter a short-term slump, credit risks can also rise for banks since a large number of card holders could be temporarily short of money.

Corresponding to the scenario in the early development of card businesses, there is a great need to educate young people.

"It is important that the young generation, indeed all consumers, be aware of the importance of managing, and know how to manage, their finances, including their savings and their credit. This is a major task for card associations, government agencies, card issuing banks, parents and other concerned parties," he said.

"A responsible attitude to financial management is the foundation on which to build a healthy and sustainable payment industry."

But, "the trend is irreversible as the credit card business is set to grow rapidly in China," Shiung added.

(China Daily May 27, 2005)