Banking success rooted in retail expansion Across China, mid-tier banks are beginning to realise the tough decisions that must be made -- and made soon. To acquire capital -- whether domestic or foreign -- to fund future growth, they need better valuations. Currently, the assets held by Chinese banks are heavily skewed toward the commercial side of their businesses, with retail lending making up only a small fraction of all loans.1 Even more distressing, an estimated 25 percent of those loans are nonperforming.2 To drive profitability and improve overall financial health, mid-tier Chinese banks are increasingly dependent on the success of their retail banking activities. A more diversified portfolio helps dilute the impact of nonperforming assets, and signs of retail banking growth -- for instance, offering new retail products -- can encourage higher market valuations. In turn, these increased valuations allow banks to attract additional investors and gain the capital needed for expansion. Fortunately, banks' growing need to supply retail banking products is aligning with this increased market demand. The Chinese government has taken actions to stimulate economic growth through consumer spending, including a 20-percent withholding tax on savings deposits and creation of the "Golden Week" holiday, a week-long celebration of the country's birth.3 The DaVinci Institute highlighted the coming credit card boom in China as one of its top ten trends impacting the future of money at its October 2003 summit, predicting that Chinese consumers will adopt credit services at a rapid pace.4 Plus, an increasing money supply, a result of a steadily increasing trade surplus and actions required by Beijing to maintain the Yuan's peg with the U.S. dollar, has resulted in excess funds that must be put to use by banks.5 With consumer spending -- and the need for credit -- escalating, mid-tier banks now have an ideal market entrée: the credit card business. Complexity inherent in credit card business Although the business opportunity is attractive, running a credit card operation is a complex undertaking. Operational characteristics are more onerous for credit card businesses than those of other banking products:
- Transactions demand 24 x 7 availability.
- Transaction volumes are high -- with wide swings in volume.
- Authorisation decisions are complex and constant.
Since credit cards are among the most innovative banking products, they demand a fair amount of sophistication in terms of business practices and processing software. Operational procedures related to fraud detection, dispute resolution and charge-backs, for example, must weave through a complicated web of credit card association guidelines while tracing transactions from customer to merchant. Competitive market pressures force the need for quick development of new product combinations, which must be supported by flexible, cutting-edge application functionality.6 However, this sophistication comes at a price; some best-in-class packages, particularly in the fraud and credit risk management area, are simply too expensive for all but the very largest banks to own or license and operate. Tapping into the credit card opportunity So, how can your bank conquer the inherent complexity and capture your share of this major market? Based on our analysis of early forays into the Chinese credit card market and our experience working with clients in other geographies, this paper offers some suggestions that can help you realise the full potential of the opportunity before you. To read the full report, download the pdf file at the top of this page. | 
