Chinese credit cards: RBS set to bridge cultural gap

16th June 2006
By Emily Tonkin

Bank of China and Royal Bank of Scotland are to enter China's booming credit card market.

The partnership between the Royal Bank of Scotland and the Bank of China has progressed from an ownership stake to issuing credit cards. This is set to be a highly profitable strategic move by RBS as China's financial services develop.

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In August 2005 the Royal Bank of Scotland group (RBS) initially bought into Bank of China (BoC) alongside Merril Lynch and Ki Ka-Shing. Together they bought a 9.6% stake in BoC with RBS contributing $1.6 billion to the deal giving it a stake of 5.2% and consequently full control of the stake on behalf of the other partners. The recent float of BoC has diluted RBS's holding to 4.4%, however it has also seen a significant rise in the value of its stake with the rise in share price.

As part of RBS's ownership entitlements, it will issue credit cards with BoC in China, including issuance to BoC's existing client base. While there is no disputing RBS's experience in credit card markets at home, it is fair to say that China's credit card market is very different to the UK's. Not only is the population of China more than 21 times that of the UK, its financial services market is in the very early stages of development. Perhaps the biggest hurdle for credit card issuers in China will be the lack of credit history available on each consumer.

With a population of 1.3 billion and strong GDP growth expected to continue - eventually trickling down to the poorer communities - China's credit card market is set to be massive. However, perhaps there should be some concern in regards to the risks involved. Issuers may need to be reminded that the concept of credit is new to many Chinese and it will require significant investment to educate the country as to the risks of credit cards and personal debt.

Also, without credit histories, many issuers attempting to carve out market share will most likely issue cards to people who would otherwise be declined, which will lead to unseen levels of bad debts. Overall, while China's credit card market may be too good to ignore for RBS, some conservatism in issuance may prove profitable in the long run.
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