Until two years ago, foreign banks wanted desperately to gain exposure in China, hoping to take advantage of the rise of a credit culture among the fast growing Chinese middle class. But after years of effort, banks found that China’s entry into the World Trade Organization (WTO) did not ease their entry into the Chinese market and the “Golden Rush” did not seem to deliver the profits they had anticipated. Then when the recent global recession came, many foreign banks sold or reduced the size of their operations in China to help rescue their business at home.

While U.S. and European banks languished at home, busy dealing with consumers and regulators, Chinese banks, along with their peers in other BRIC (Brzail, Russia, India, China) countries, emerged as strong players in the financial crisis. The completion of the transformation from communist bureaucracies into some of the world’s largest banks by market value was symbolized by the recent initial public offering (IPO) of China’s Agricultural Bank; four of the world’s ten largest banks by market value are now Chinese, while there were none in 2004. This is an indication of how the big picture of the global banking industry has shifted.

The Chinese bankcard market has undergone a significant shift in the past a decade as well. At the end of 1993, only 4 million bankcards had been issued in China, but by the first quarter of 2010, there were 2.2 billion bankcards in China. During the same time period, the bankcard penetration rate rose from 1% to more than 32% of the total retailing value. Although the growing Chinese middle class and other economic factors are major drivers behind this growth, industry regulators and operators such as People’s Bank of China, China Bank Regulatory Committee, and China UnionPay’s (CUP) role in pushing for the industry infrastructure and acceptance is undeniable. 

On the other hand, profitability of their bankcard business remains an aspiration for most of the issuers in China. A low revolving rate, pricing competition and high solicitation costs made the business models that were tested internationally almost irrelevant. It has become widely recognized by Chinese issuers and industry leaders that they need to shift the strategic focus from volume of cards to the quality and/or profitability of customers.

The entry of Western banks into China has been largely crippled by limited network size and strictly regulated ownership in the Chinese banking industry. Though locally incorporated international banks have been allowed to provide RMB banking services to Chinese consumers since December 2006, the time required to receive approval for a bank branch or a product offering still means that foreign banks have no choice but to find their niche in order to compete with the larger, more established Chinese banks that have tens of thousands of branches.

Meanwhile CUP, a domestic bankcard network backed by the central bank in China, has been quite a success. In less than eight years since it was established, CUP has not only dominated the domestic market in China, but has also extended its acceptance network to 95 countries, capitalizing on existing infrastructure built by international schemes and the opportunities of Chinese tourists traveling abroad. ӬӬAfter years of frustration from being shut out of the Chinese market, and watching CUP chip away at its international market share, Visa recently banned its member banks outside of China from routing foreign transactions occurring on Dual Logo Cards (Visa/CUP) held by Chinese tourists directly to the CUP network. The conflicts between China and the U.S. we have observed in the textile and information technology industries have expanded into the bankcard industry.