What's In China's Wallet?


With China on track to become the world's third largest consumer market by 2025, the inevitable happened: Credit card offers started filling mailboxes. But something is making it difficult for Visa (NYS: V) , American Express (NYS: AXP) , and MasterCard (NYS: MA) to profit from China's electronic payments market. China itself.

Hey, big spenders?
China long has been notorious as a country of savers, not spenders. And when they did spend, they used cash, not credit cards. And if they did choose to use a credit card, well, they couldn't -- at least before 2002. That's when China got its first -- and only -- national electronic payment network.

That network, called China UnionPay, was set up by the Chinese Central Bank, or CUP. CUP has not made it easy for foreign banks -- like Citibank (NYS: C) , which partners with CUP -- to exploit fully China's consumer credit card potential. They cannot, for example, issue local cards unless they are co-branded with the UnionPay logo, and all transactions must be processed on the UnionPay network. That means the foreign companies cannot offer their cards in the local currency.

A country of cards ...
This is quite frustrating to foreign credit card issuers because, in the cities at least, credit card use is exploding. Between 2003 and 2008, credit card accounts grew from 11 million to 124 million. A whopping 230 million cards were issued in 2010. That number could even surpass 300 million by 2013. Remember, the current population in China is 1.33 billion, so there's quite a bit more room to grow.

But, there are even more obstacles to getting profit out of Chinese consumer debt. The fees that merchants pay the credit card companies for each swipe through a card reader are relatively low. On top of that, UnionPay gets a cut of those fees.

The thing, though, that cramps real profit making for credit card companies is consumer common sense. Chinese cardholders prefer to pay off their debts at the end of the month rather than carry balances forward and pay high interest rates. That must drive credit card companies bananas.

How to appeal ...
If there will be a payoff for credit card companies in China, some major changes in Chinese spending customs must occur. Perhaps, a company could encourage those changes by taking an unusual advertising angle -- hygiene. As a Chinese consumer told the Washington Post recently, he prefers to use his credit card instead of cash because "it's ... clean. Cash has lots of bacteria."

Maybe it's for the best that Capital One (NYS: COF) has not entered into China's consumer credit market. Remember their commercials starring hordes of barbarians? I shudder to think of that crowd pouring over the Great Wall screaming, "What's in your wallet!" That could set U.S.-China relations back a quarter of a century.

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At the time thisarticle was published Fool contributorDan Radovskyowns no shares in the mentioned companies.Motley Fool newsletter serviceshave recommended buying shares of Visa. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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