During the past year, prepaid use in China’s rapidly growing economy has seen a boom in the transportation and communications sectors and other closedloop markets. However, governmental regulations are still blocking any development in open-loop markets.
One hundred thirty million prepaid cards were in circulation in China in 2006, up 19.3% from 109 million in 2005, according to statistics from London-based research company Euromonitor International Plc.
That made China the country with the biggest share of Asia’s 436 million prepaid cards in 2006. However, because of China’s regulatory restrictions, only nonfinancial institutions are allowed to issue prepaid cards,
effectively limiting cards to closed-loop products.
“Currently, closed-loop prepaid card usage still makes up the overwhelming market share—and this ratio will last for a couple of years,” says Xing Song, an analyst with Beijing-based research company Analysys International.
The China Banking Regulatory Commission said in an August 2006 announcement that “[e]ach bank shall not, jointly with any commercial institution, distribute anonymous co-branded stored-value cards which are sold by business operators and for which invoices are issued.” That rule effectively prohibited banks and commercial institutions from distributing co-branded stored-value cards.
According to the Commission, the restriction on commercial banks against issuing prepaid cards is to reduce risks to the financial system. The Chinese financial system is still in the early stages of development. However, the true goal of the restriction is to reduce corruption, according to many industry observers.
“The real purpose is to prevent the possibility of using anonymous gift cards to give bribes,” says Song.
In China, bank cards must be registered under the applicant’s real name. Prepaid cards, however, are
anonymous and don’t require registration, so their use cannot be tracked. Meanwhile, the regulatory restrictions have forced prepaid service providers, both domestic and global, to focus only on closed-loop markets in China.
“First Data is currently working closely with a number of global retailers looking to offer closed-loop prepaid cards in China,” says Peter Blackett, Asia vice president for ATM, prepaid and mobile solutions at First Data Corp., of Greenwood Village, Colo. “First Data believes the prepaid market has considerable
potential in China.”
Clearer regulations about prepaid use in the open-loop environment would only help increase the use of prepaid programs in China, he adds. Another global payment card technology provider, U.S.-based Total System Services Inc. (TSYS), also says that its strategy for China is in line with existing regulations.
“We are keen to expand that business as opportunities and market conditions permit,” says David Duncan, managing director with TSYS Asia Pacific. “If and when the regulatory environment becomes more receptive to open-loop prepaid cards, our strategy would adjust accordingly.”
Prepaid cards issued overseas that work through card networks can be brought into China by travelers and used here. For example, China Unionpay, China’s national card payment operator, has an agreement with Travelex to launch a Unionpay-branded prepaid card, but the card is not available in China—only in other countries.
“The card is only issued overseas, but you could use it throughout the China Unionpay network, including the Chinese mainland,” says China Unionpay spokesman Tu Bo. The regulatory constraints affect other card companies as well.
“As we have to cooperate with local banks to issue any Visa-branded bank cards in China, the restrictions on banks also mean that we can’t do any prepaid card business here,” says a Visa spokesman.
As the exclusive sponsor for the Olympic games, Visa has issued prepaid cards for previous games, such as in Athens and Sydney. The local-currency prepaid cards had been very convenient for overseas athletes and visitors looking to make payments during their visit, he says. However, there will be no such prepaid cards issued in Beijing for the 2008 Olympics.
Visa has been able to issue only a set of commemorative prepaid cards in Hong Kong for the Beijing Olympic Games, in association with Bank of China (Hong Kong) Ltd. in May. The bank, an affiliate of state-owned Bank of China, is also one of the sponsors of the Beijing Olympics.
In addition to the regulatory issues, open-loop prepaid card vendors—in common with all other card issuers — would have to overcome the Chinese preference for cash.
“The real fact is that deep inside, there is not a strong demand for non-cash payment among Chinese consumers, especially in the case of small-sum payments,” says Song. “China is still a cash-based-transaction economy.”
Some of the preference may be cultural. For example, it is common in China to give cash as gifts at weddings and other occasions. But there are infrastructure limitations, as well.
According to a June survey by First Data and the Economist Intelligence Unit, 83% of 152 global banking executives surveyed say infrastructure improvements are the biggest factor when it comes to increasing card payments in China.
“A more extensive card acceptance network is critical,” the report says. “Merchant acceptance is still at a low level outside China’s major cities.”
Eight out of 10 bankers polled say local retailers’ preference for cash was a “very significant” or “significant” barrier to operating cards and payment services.
In part that impediment remains, study authors say, because customers have not begun pressuring retailers to accept cards for payment. That appears likely to change, however, as payment cards become common for many purchases, such as transportation and communication services, and rising demand could spur regulatory changes as well.
According to Wenli Yuan, a Beijing-based analyst with Celent LLC, a Boston-based research firm, more adjustments are required to the regulation of prepaid business in China, for both the closed-loop and open-loop markets.
“Although current prepaid card issuers are not financial institutions or banks, they do don the role of banks and take charge of the settlement,” says Yuan. “For the market to grow at a steady pace, complete and appropriate regulations are key.”
A sign of cards becoming more common for everyday purchases came earlier this year, when the Beijing Municipal Administration and Communication Card Co. Ltd, a government agency that issues the Beijing public transit card, began allowing cardholders to make contactless payments with the card in small sums at more than 1,000 convenience stores in Beijing.
“Once the consumers realize the convenience in using prepaid methods, such as in the case of the public transit and mobile-phone prepaid cards, there will be some adjustment made on the rules for open loop, especially in the retailing industry, as it will be the largest market for prepaid card usage,” says Song.
(Article originally appeared in Prepaid Trends, which has since ceased publication.)