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Financial services for China’s newly affluent

collateral, by a lack of the skills needed to market credit cards to the more attractive customers, and by the difficulty of managing risk in a market where credit bureau data are largely absent outside Shanghai.

As an illustration of these problems, consider card issuance and risk control. About four million to five million cards now circulate in the Chinese market, but the number of active cardholders is probably only one-third that. This reality reflects the marketing approach of Chinese banks. Instead of targeting individuals, these institutions push cards to employees of their corporate-banking customers, without assessing the likelihood that the cards will be used.

The untargeted approach is unavoidable for many domestic banks because they have little centralized customer data and lack the modeling skills to mine what data they do have. Moreover, in many banks, risk control is decentralized and thus heavily dependent on the limited skills of the frontline staff in the branches. A bank could take an enormous hit if its portfolio of millions of credit cards turned sour because of an economic downturn or poor risk- assessment practices. In 2003 many of South Korea’s biggest credit card issuers had to write off enormous losses resulting from unfo- cused marketing tactics and lax risk controls.

Domestic banks could hire skilled people from Chinese-speaking markets such as Hong Kong and Taiwan. Some, including China Merchants Bank, have actually done so, but more will rely on alliances with foreign banks to acquire the skills needed to build and manage a credit card business. Foreign banks and credit card monolines (financial-services companies that focus solely on credit cards) have the risk-taking mind-set and the product-development, marketing, and risk-management skills that Chinese banks lack.

How to get in In credit cards as in other product markets, a foreign bank setting up a partnership must find a formula to assume operational control of the business while maintaining some flexibility for other partnerships. The formula must also be acceptable to China’s powerful financial regulator, the China Banking Regulatory Commission (CBRC).


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