[Editor's Note: After our post on counterfeiting (and we thank you all for the wonderful audience reaction), we are forced to admit to a fascination with the "look-alikes" in Chinese business that aren't exactly what they seem to be. Today, we turn to the credit card. Credit cards are a financial tool of recent invention in the West, but in China are much like newborn babes in swaddling clothes. But is there really a living baby in there or a doll made up to look like one?
Despite many obstacles, the Chinese internet community is active, well-educated, opinionated, agressive and very often spot on. Business is not a suspect topic -- but consumer discontent is some form of revolt, no matter how one may cut it. This article by Wu Xiang-hong (吴向宏), a financial blogger, takes the Chinese credit card industry to task. While some of Wu's comments are inexact, he clearly has done his research. We went jaw agape upon reading the allusion to the American Truth-in-Lending Act and Regulation Z, which cap consumer liability in case of unauthorized usage. One would venture to suggest that most American consumers have no knowledge of this law and the benefits it confers upon them. (Many buy the outrageously expensive credit insurance -- completely valueluess -- that issuers routinely flog to the unknowing.)
Wu's post has been reprinted countless times on many Chinese internet sites, resulting in hundreds of comments, generally in agreement.]
The Beautiful Lie of Chinese Credit Cards
In the U.S. and other developed western nations, you needn’t worry when your credit card is lost. American law stipulates that one need only report a credit card stolen within 24 hours (or after discovery of theft), regardless of the amount of the theft, and the cardholder’s loss is capped at $50. Similar law exists in England, stipulating the cardholder’s loss at £50. The remaining portion above that amount becomes the bank’s loss, unless the bank can prove obvious error by the merchant. Actually, many banks implement terms that are even more favorable than the law allows. Not only do they allow more time to report a stolen card, they also take the loss on the $50. That is to say, the bank uses its own credit as a guarantee for all credit card consumption.
In China, all loss owing to the theft of a credit card is borne by the consumer. This makes us aware of the fact that, even though a small plastic card called a “credit card” is running around on the Chinese market, there is no bank guarantee behind it. In all frankness, there is no “credit” in our “credit cards,” and can’t possibly be discussed on even terms with those of the developed nations. The latter truly has a magical feel to it, almost as if one sees the bank when one sees the card itself.
I must elucidate this point because in China the phrase “international norm” is invoked in order to justify bank fees. As an example, in the midst of the brouhouha over annual fees for bankcards in the past two months, some declared that annual fees for bankcards were an “international norm.” Recently, during a similar brouhaha in Shenzhen and other cities where issuers refused to process cards, we also heard a similar tune. Merchants believed that bank processing fees were too high and demanded fees be lowered. The Chinese banking industry retorted that international processing fees run at 2% and that Chinese banks were only half that. So you still want us to decrease fees?
[For detail regarding the Shenzhen brouhouha, see this article.]
Their use of the “international norm” was inaccurate. At the beginning of the year, many experts (including the author) pointed out that most international bank cards do not charge annual fees. The argument that the so-called annual fee is an “international norm” can not be established. And this time, their use of “international norm” is slimy. In the U.S., card processing fees for retail merchants run as cheap as $0.20 plus 1.6% of the transaction, generally averaging around 2%. But the rate for debit cards is as low as $0.40, that is to say, 0.4% for every $100. How can this possibly “average around 2%?” Don’t forget, the bank cards currently used in China are primarily debit cards (requiring a PIN number), which should permit a lower fee rate.
But these details aren’t the core of the problem. The core is the basic standard required for doing business, which is, “you (should) get what you pay for.” If you hope to bring fees in line with international standards, then the content and quality of your product and service must also. In the life of Chinese business, we encounter many things like this – the price tracks international standards, but the content does not.
Our so-called “credit card” is, unfortunately, a beautiful lie. Today, within China, much of the PR makes the public believe that the primary value of credit cards is in allowing people to consume before paying and to overdraw. Looking more closely, the PR attributes the reasons for China’s laggard credit card industry to “Chinese not having the custom of buying first and paying later.” This is completely misleading. It is a fact, even if we look at the origins of the credit card, that overdrawing is only one of its complementary functions.
The core of the credit card business is that the bank’s credit functions as a guarantee for the safety of the transaction between the consumer and the merchant. Use of a credit card can actually be more annoying than the use of cash. On what basis does the consumer and the merchant turn down the annoyance of swiping a card and willingly spend money needlessly on such things as processing and annual fees? The first reason is precisely the safety a credit card provides. Aside from the risk of theft, as we spoke of previously, there are other safety aspects to the transaction. For example, in many transactions, the consumer must first pay or leave a deposit before seeing the product or service. At certain times, the product or service is unsatisfactory, even perhaps defective. In such a situation, purchasing goods in a developed nation, the consumer can return the goods completely risk-free. The bank will reverse the charge, crediting the consumer’s account, or the bank will resolve the problem with the merchant. This system of credit safety is important for many consumer formats, such as TV, telephone and mail-order purchasing. In China, mail-order transactions are the province of fraudsters who blow smoke and wind. In the credit transaction system, the banks remove those fraudulent merchants from the ranks of those who may accept credit cards.
Merchants also enjoy a guarantee of safe transactions. For example, an individual rents a car with a credit card and wrecks it. The merchant can within limits first obtain recompense from the bank. Even if amounts exceed the individual’s ability to pay, even as much as to bankrupt a person, the bank is the only one who sustains the loss. Further, the travel, entertainment and leisure industries commonly take reservations, in which the merchant risks a no-show. But if the consumer uses a credit card to make the reservation, the merchant can receive payment from the card when the consumer does not hold to his end of the bargain.
From the time China’s banks established our credit card industry, they’ve continued to hide from risk, continually refusing to provide credit guarantees. In the very beginning, consumers were required to put up money as security against the issuance of a credit card. Up until today, a Chinese credit card is nothing more than a debit card allowing payment to be postponed. Even more, the quality of service is very far from international standards. Upon what basis can it demand fees similar to those commanded internationally?
