Olympic organizers expect some 500,000 foreign visitors to flock to China for the 2008 Summer Olympics, which will be held Aug. 8 to 24 in Beijing, Qingdao, Hong Kong, Tianjin, Shanghai, Shenyang and Qinhuangdao. And they expect 1.5 million Chinese to attend.
As host of such a large party for so many outsiders, Chinaâs government is keen to present the country as one that has a modern, sophisticated economy, and not just an ancient society that has become factory to the world, observers say. To ward off a potential water shortage during the games, for example, Chinese engineers already (controversially) have begun to divert water from the Yellow River into a lake outside Beijing in a region where water has been depleted by drought, manufacturing, construction and population growth.
Keeping Olympic cities hydrated may be more important to the Summer Games than making sure locals and visitors can use cards to pay for expensive rooms, meals, souvenirs and the Olympic events themselves. But Chinese banks and payment partners from around the world are working overtime to expand Chinaâs card-acceptance infrastructure, especially in areas most likely to be visited by tourists attending the Olympics.
Though China has expanded its card-acceptance infrastructure dramatically in recent years, international network-branded cards issued by foreign banks work at only a fraction of the countryâs payment terminals and ATMs, industry sources concur. Besides some technical challenges, Chinese banking regulators only are beginning to open the banking system to outside issuers and partners. And they still are careful to make sure Chinese issuers and their official government payment card network maintain a home-turf advantage over visiting competitors, sources tell Cards&Payments.
Foreign visitors should be able to use their network-branded credit cards at Olympic venues, nearby national-chain hotels, and at larger, higher-priced restaurants and stores. But acceptance will not be as ubiquitous as in countries with more-established card networks.
âPeople coming from outside China probably carry some expectation of world-accepted card coverage,â says Willie Fung, MasterCard Worldwideâs general manager of Greater China. âBut thatâs not the case in China. Out of 1 million terminals, you are looking at 150,000 terminals that accept international-use cards.â
Competition is not the only factor affecting Chinaâs payment card infrastructure. There are technical challenges of unifying several bank networks that began as small, proprietary systems linking individual banks and the small number of merchants they served.
Gaps in national and regional network connections mean that even cards issued by a bank in one city often cannot be used at the bankâs ATMs in other cities, says Terry Xie, an analyst with Mercator Research Group LLC, a Waltham, Mass.-based consultancy. âIf you have a credit card issued by Bank of China in Beijing and you travel to Guangzhou and try to use it at Bank of Chinaâs ATM in Guangzhou, it doesnât work,â he says.
Payment cards have been in use in China for a few decades. But, as with Chinaâs recent construction boom, the action really started to pick up only a few years ago.
Large Chinese banks began issuing payment cards in the 1980s. Most acquired individual merchants to accept those cards, a practice that led to several closed-loop card networks between each bank and some of their accepting merchants.
âYou could walk into a merchant establishment and see, literally, 15 terminals sitting on the counter,â says David Duncan, managing director of the Asia-Pacific office for U.S.-based Total System Services Inc., or TSYS.
To unify and open disparate card networks nationwide, Chinese President Jiang Zemin in 1993 advocated a unified bankcard network called the Golden Card Project. In 2002, the Peopleâs Bank of China, Chinaâs Central Bank, launched the more-ambitious China UnionPay, now the countryâs only national bankcard network. Member financial institutions issue cards and acquire merchants to accept those cards. China UnionPay also is an electronic funds transfer point-of-sale debit network.
Only about 5% of the cards China UnionPay issues are credit cards, almost all of which are affiliated with international networks such as JCB, Visa, MasterCard, Discover or American Express. The cobranded cards work as China UnionPay cards inside China and on the networks of their partner card brands abroad.
The remaining 95% of cards UnionPay members issue work only as debit cards on UnionPayâs network or to draw cash from ATMs on the networks of a small, but growing, number of partners abroad, including JCB, European Savings Banks Financial Services and the Malaysian Electronic Payment System.
According to Mercator Advisory Group analysis of data released by China UnionPay and the Peopleâs Bank of China, 353,000 nonproprietary payment terminals accepted payment cards in China in 2003. By 2006, that number had risen to 810,000, impressive growth but still only 0.4 terminals per 1,000 residents open to nonproprietary payment cards compared with 40 terminals per 1,000 individuals in the United States, according to Xie.
China UnionPay says that at the end of 2007, China had 1.18 million nonproprietary point-of-sale terminals (those open to payment cards from several issuers) and 120,000 ATMs deployed nationwide. Many smaller, closed-loop networks still operate between some individual banks and merchants in major cities.
Of course, Chinaâs effort to expand payment card acceptance is not just for foreign visitors to the Olympics, Paralympics, the Asia-Pacific Games of 2009 and Expo 2010, a Worldâs Fair-type event to be held over six months in Shanghai. Chinese banking officials want more Chinese citizens to benefit from the same convenient card-payment options as do citizens of affluent countries around the world.
âThereâs a focused effort in the Olympic cities,â says Joe Hurley, vice president of network strategic development for Discover Financial Services LLC. âBut theyâre committed to improving the infrastructure for the people of China, and cards make peopleâs lives a lot easier.â
Today, China UnionPay has 165 financial-institution members that issued some 500 million UnionPay-branded cards by the end of 2007, up 150% from 200 million by the end of 2006, according to UnionPay. Chinese cardholders usually pay off credit card balances in full each month. But those who revolve balances would pay an 18% annual interest rate mandated by the Peopleâs Bank of China, regardless of their credit history or rating. The central bank also sets credit limits at about US$1,000.
UnionPay also has been working with card and electronic funds transfer networks outside the country to try to expand acceptance of UnionPay cards in places Chinese tourists might like to travel, such as Hong Kong, Singapore, Germany, Switzerland, Egypt and the United States.
In one such reciprocal acceptance deal, Discover Network in May 2005 linked its Pulse electronic funds transfer network with China UnionPayâs network, which enables acceptance of UnionPay-branded debit cards anywhere on the Pulse network in the United States.
âCards in China typically have six-digit PINs, so one of the challenges was making sure our entire infrastructure in the Pulse network was capable of handling six digits,â Hurley says.
Theoretically, that means Discover, HSBC Bank, GE Money and other cards issued on the Discover Network should work throughout China UnionPayâs network as well, giving them an advantage over other foreign-issued cards.
But Xie says Discover cards do not yet work across UnionPayâs entire domestic network. âItâs a technical problem because the network is not perfect yet,â he says.
Other issuers, such as Citibank and Bank of America Corp., have deals with Chinese banks to accept each otherâs cards at ATMs in their home countries, but acceptance of foreign-issued cards still is limited to large cities such as Beijing and Shanghai, Xie adds.
Hurley maintains that visitors to China will be able to use their Discover cards anywhere on China UnionPayâs network by the time the Olympic games begin. âThey have the same coverage at all the hotels,â he says. âOur competitionâs networks have coverage at some of the hotels, certainly not all the hotels.â
Visa Inc. is the official payment card brand of the Olympics. As such, Visa, in partnership with Bank of China, has exclusive rights to card payments at Olympic venues during the games.
According to an agreement announced in January 2007, Bank of China will support Visa card acceptance for online or in-person Olympic ticket purchases and at Olympic-venue point-of-sale terminals and ATMs. Bank of China and Visa also are jointly promoting Olympic-themed cobranded credit cards.
A Visa spokesperson declined to offer interviews for this article, citing Visaâs quiet period leading up to its expected initial public offering (see story page 10).
Wenli Yuan, a China-based analyst for U.S. consultancy Celent LLC, says the Olympics are a good opportunity for Chinese banks to expand their card business. âSince Visa is the exclusive credit card sponsor, ... the biggest winner will be Visa,â she adds.
Chinese bank-issued cards will be usable only at official Olympic venues if they also carry Visa logos and Visa bank identification numbers. Outside official Olympic venues, MasterCard has been working to expand acceptance of its cards, and of cards in general, in major cities, Fung says. He says Chinese banks have issued 15 million MasterCard cobranded cards.
JCB International began working with the Bank of China 30 years ago to implement and expand acceptance of its cards in major Chinese cities, particularly Beijing and Shanghai, where Japanese business travelers were most likely to visit, says Yutaka Nakazawa, JCB senior vice president and head of marketing for the Asia-Pacific region. Today, JCB co-issues 1.2 million cards with a half-dozen banks in China.
That longevity and Japanâs proximity to China give JCB an advantage over card brands from Europe and the U.S. that have a shorter history in China, according to Nakazawa. âChinese people really know the brand JCB,â he says.
Nakazawa says one problem JCB shares with other international card brands is that some merchants incorrectly insist users of foreign-issued credit cards enter PINs to complete transactions. âChina UnionPay cards, regardless of whether they are debit or credit, always require a PIN,â he says. âTherefore, merchants are really confused about how to take foreign cards because they want the PIN.â
MasterCard also is working with China UnionPay Merchant Services Co. to expand MasterCard acceptance among Chinese merchants. MasterCard has adopted some of the same acceptance tactics as in other parts of the world: using sweepstakes to nudge cardholders to use their cards and acquiring at least one major merchant in each retail category to create pressure for their competitors to accept cards, Fung says.
Cash, though, still is king in most of China, and merchants there are even less enthusiastic about the new concepts of interchange and verifiable (and therefore taxable) electronic income than are their counterparts in the U.S. and Europe, Fung adds.
Bank of China mandates that major merchants, such as Carrefour and the Chinese hypermarket TrustMart, install point-of-sale terminals to accept card payments.
In the past, banks did not have centralized acquiring operations. Instead, individual bank branches attempted to acquire nearby merchants, Fung says. Now, UnionPay Merchant Services has set targets for its larger member banks to increase merchant-acceptance locations.
Terminal, Pricing Issues
With three or four banks fighting to acquire the same merchants, UnionPay has divvied up geographic areas of cities as acquiring turf for various banks, which work directly with merchants, not through the independent sales organizations familiar in the U.S. The banks provide merchants with terminals from such manufacturers as France-based Ingenico, U.S.-based Hypercom Corp. and VeriFone Holdings Inc. (see story on page 30), Hong Kong-based Spectra Technologies Holdings Co. Ltd. and Blue Bamboo, a Shanghai-based division of Taiwanese terminal manufacturer Shera International.
Chinaâs central bank also sets interchange on domestically issued cards. Interchange for such merchants as hotels, restaurants and entertainment venues is 1.4% of the sale amount. The rate for air travel, fuel and supermarket purchases is 0.35% of the sale. For most other merchants, the rate is 0.7% of the transaction amount. Exceptions are payments at public hospitals and schools, where no interchange is applied, and real-estate and auto sales, where the rate could be as much as US$5.30 per transaction.
Interchange does not vary based on whether transactions occur online, in person or over the phone.
Xie says competition to acquire merchants resistant to accepting cards has led Chinese banks to charge merchants rates lower than the official ones for domestic card transactions. He estimates the average, blended interchange rate was less than 0.6% of the sale at the end of 2006.
Fung says such low rates are a challenge for many Chinese bank acquirers. âIn the past, all transactions were âon-us,â so acquirers didnât care about the rate because all the cards were their own,â he says. âWith interchange, especially international card interchange, some of the acquirers will lose money if they insist on charging this low rate.â
Despite the challenges of building a nationwide card network, Hurley says he is impressed with how much Chinaâs payments industry has increased open-network card acceptance in so short at time. âIn my view, going from zero four years ago to where they are today, theyâve been pretty successful,â he says.
Duncan says he does not believe the Olympics are the âwatershed eventâ for card acceptance in China. But the Games do provide a natural deadline for meeting many of the countryâs card-acceptance goals, and he believes China will be ready for the influx of tourists.
Like athletic teams from around the world, Chinaâs card-payment infrastructure will be out to prove its mettle in August.
(c) 2008 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
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