The ongoing issue of allowing global payment brands in China makes me scratch my head. Protectionism is one thing, but there is plenty to learn about credit cards if you engage Mastercard and Visa. To allow Union Pay to grow, the Peoples Bank of China continues to create barriers for MC and V to compete in the market.
Here is an exciting piece from Standard and Poors, the global rating agency wondering if rapid growth will soon bust as the credit model is not quite established in the market. Mercator’s view is that if international brands were given the opportunity to compete, the Chinese credit card model would be stronger because of the cross-pollination that would occur, bringing risk management in line with the prospect of lending. The highlights:
- China’s outstanding unsecured consumer lending has expanded more than sixfold over six years.
- We expect strong growth to continue despite some moderation going forward.
- Regulators and major banks are taking steps to manage risks associated with credit cards (including cash loans).
- Keen competition will drive some players to expand aggressively; risks should not be underestimated.
A billion people in a captive situation is a marketers dream. However, the process must have the fundamentals of credit card lending: reliable credit management infrastructure, equally strong scoring and controls, and a collection process to ensure policies are properly administered.
S&P thinks the market will correct itself. I think there will be many expensive learning pains along the way.
- Rapid growth in credit-card debt in China is reminiscent of past expansions elsewhere in Asia. Those episodes ended badly for Hong Kong in 2002, South Korea in 2003, and Taiwan in 2006.
- The narratives of these cycles are fairly consistent. Financial institutions in search of the next growth driver turned to unsecured consumer lending; competition pushed them to take higher risks, with seemingly good profit during the expansion phase, but substantial credit costs when the cycle turned.
- S&P Global Ratings believes that some of China’s most aggressive credit-players could suffer a similar fate. That said, the country’s regulators are aware of history and, in our view, are taking steps to lower system-wide risks.
Well, run-scoring plays an important role. If you look at markets in Canada, the United Kingdom, or the United States, the most established credit card markets in the world, you find that FICO Scores play a role in credit management, from cradle to grave. The score plays an essential role throughout the credit lifecycle. On the front end, acquisition models live and die by the consistency of the FICO Score. As the account seasons, credit line management, the ability to expand or contract the relationship, uses scoring as a beacon, and if the account needs collection handling, the Score typically is a driving attribute for prioritizing the workload. Even then, should the card issuer be large enough to do an Asset-Backed Securitization, the Score is everpresent to grade the portfolio. (For more on ABS, see here)
Not so in the East, yet.
- Credit-score and credit-behavior models used by banks have not been fully tested by a consumer downcycle in China.
- We also anticipate that marginal players and latecomers to unsecured consumer lending are likely to compete aggressively, tapping into risker customer segments.
- Increasing business partnerships between banks and some types of fintech firms can also multiply asset-quality risk for some banks; in particular, banks with limited experience in unsecured consumer lending and/or inadequate capability in managing risks associated with a rapid increase in such exposures.
As with much of S&P’s investor research, the article is chock-full of charts that size and project the market. It is well worth the read.
Here’s a short takeaway about Credit Cards in China. Play fair. Learn from your competitors. This is not the first startup in the world, there is plenty to learn from the global credit card market.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
