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The McKinsey Quarterly 2004 special edition: China today

It helps if the partnership is structured so that the foreign bank is viewed as helping the Chinese one to improve its performance through new skills or new technology. If the foreign company seems to be depriving the Chinese bank of something it has—such as market share or ownership— support from the regulator could be less forthcoming. The key to making a card partnership work is making it function seamlessly within the Chinese banking system, so that the operating license belongs to the Chinese bank, the cards bear its brand, and card balances appear on its balance sheet. In reality, though, the foreign player will probably run much of the card operation.

Foreign credit card issuers are likely to encounter many challenges when setting up partnerships. A would-be Chinese partner, for instance, may need a year or more to reach internal consensus on the deal. The foreign issuer must then structure the agreement to ensure that it is exclusive and for the long term; otherwise there is a risk that the Chinese bank will either take the operation in-house or find another partner after a few years, when the venture starts reaping substantial profits.

Given the uncertainties surrounding regulation and partnerships, a foreign bank might create a portfolio of options covering a range of entry methods and products. HSBC has negotiated a partnership with Bank of Shanghai, teamed up with Ping An Insurance to acquire a small bank in Fujian province (in southeast China), and entered into final partner- ship talks with the Shanghai-based Bank of Communications. Although it remains to be seen which of these will ultimately succeed, HSBC’s portfolio of partnerships covers the attractive segments of retail banking and insurance and focuses on players with a strong presence in the more attractive coastal cities.

While it may be several years before the credit card market takes off in China, foreign banks that wait until the market opens up in 2007 may find that they are too late. Partnerships with local banks will be critical for foreign ones that want a toehold now, especially since several of the most desirable Chinese players are already tying the knot with foreign partners.

David von Emloh is a principal and Yi Wang is an associate principal in McKinsey’s Shanghai office. Copyright © 2004 McKinsey & Company. All rights reserved.

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