The Ms. Magic credit card from China Citic Bank (601998:CH) is dotted with Swarovski crystals and offers free beauty treatments and health insurance. Huaxia Bank’s (600015:CH) Pretty Lady card, co-issued with Deutsche Bank (DB), entices women with triple points for cosmetic purchases and fitness club memberships. Citigroup (C), which last year became the first U.S. bank allowed to issue its own solo logo cards in China, offers to waive its first-year annual fee of 300 yuan ($49) for Rewards cardholders applying before March or spending more than 20,000 yuan by the end of December.
They’re all part of a battle for affluent consumers in the world’s fastest-growing market for plastic, even as delinquencies have tripled in the past five years and profits remain elusive. “Credit cards are the ultimate growth area and also the battlefield for banks in China,” says Rainy Yuan, an analyst in Shanghai for Taipei-based Masterlink Securities. “Some may never earn a profit out of it, but they have to join the fight, as that’s the most efficient way of grabbing deposits and cross-selling other financial services.”
With interest rates fixed by the government at 18 percent annually, China’s banks can’t compete by lowering rates, so they differentiate themselves by offering merchant discounts and gifts, including Coach (COH) wallets, Hugo Boss (BOSS:GR) quilts, and free Starbucks (SBUX) upgrades to a larger coffee. Chen Junjun, a marketing manager at China Guangfa Bank, spends 10 hours a day, seven days a week trying to lure customers to his roofless booth outside a subway station in Shanghai’s Pudong district. Among the gifts he offers: a wireless mouse, storage boxes, and coffee mugs. “No annual fees, buy-one-get-one-free for Starbucks coffee, and you get a free Coach wallet, too,” Chen says to a female passerby. “If you have a job, you are qualified. If you have a credit card, you are qualified.”
Last year 46 million credit cards were issued in China, increasing the total in circulation to 331 million at the end of 2012. There are 536 million cards in the U.S. In part because of the expensive marketing efforts, only a few of China’s more than 30 major credit-card issuers, including China Merchants Bank (600036:CH) and Bank of Communications (601328:CH), have reported that their credit-card businesses are profitable. ICBC, the top issuer with 77 million cards as of Dec. 31, doesn’t disclose figures.
Fees paid by retailers to banks whenever a customer uses a credit card range from zero for schools and public hospitals to 1.25 percent of the purchase price for entertainment and catering. In the U.S., retailers are charged about 2 percent. About 3 percent to 8 percent of cardholders in China roll over their debts, generating interest charges, compared with about 40 percent in the U.S., according to Richard Huang, a Beijing-based partner at Boston Consulting Group. It costs 200 yuan to 300 yuan to issue one credit card in the country, Huang estimates.
The unfavorable figures aren’t likely to deter banks, given the expected scale of the market and the possibility of changing consumer behavior. China may have 1.1 billion cards by 2025, with issuers seeing revenue grow twentyfold and profit climb thirtyfold by then, MasterCard (MA) predicted in 2010, the last time it forecast the market. “People may have concerns over the course of China’s credit-market development,” says Huang, “but the growth potential makes all of them trivial.”