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The McKinsey Quarterly 2004 special edition: China today

It’s in the cards Credit cards are a prime example of the mutual benefits of partnership. Of the retail-lending products in China’s banking market, few will grow faster: according to our estimates, revenues from interest income and merchant

fees will rise by more than 50 per- cent annually, to reach $5 billion by 2013. Partnerships help foreign financial-services players to enter this attractive market quickly. Although the terms of China’s agreement with the World Trade Organization prevent foreign players from issuing local-currency cards on their own until 2007, if they wait until then attractive customers will probably already have one or more cards from domestic banks. Credit cards are a prime example of the benefits of partnership: of the retail-lending products in China’s banking market, few will grow faster

Even if foreign banks could offer credit cards on their own today, they have no existing base of local-currency depositors. About 80 percent of the Chinese consumers who apply for a credit card obtain it from their primary bank because paying the balance is much easier if they have autopayment facilities on a savings account. Working with a Chinese bank thus not only helps a foreign one circumvent regulatory hurdles but also gives it instant access to an established body of customers.

Branding is another area in which partnerships can be of particular value. Our research shows that current and prospective card customers place virtually no value on cards issued or co-issued by foreign banks. While this attitude may change over time as they establish their brands in China, even foreign banks that think they can act alone shouldn’t ignore it.

Tying up with a Chinese bank has additional important long-term benefits, such as access to the mass-affluent segment, which is much larger than the affluent one. Because a foreign bank can establish a presence in only one province a year, partnering with a Chinese institution could provide access to a larger network of branches in a much broader range of geographic markets.

The advantages of partnering seem evident for foreign banks. But why would Chinese ones want to partner with them to issue credit cards? After all, Chinese banks, with their enormous pools of retail customers, extensive branch networks, and established brand names, seem well- placed to seize the opportunity in credit cards on their own. But they are held back by the traditional Chinese reluctance to lend money without

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