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The Green Sheet Online Edition

May 09, 2011 • Issue 11:05:01

China's prepaid market a different world

sellingprepaidIt may come as a surprise to some that the size of the prepaid card market in China is second only to the U.S. market. Terry Xie, Director, International Advisory Service at Mercator Advisory Group Inc., sized the market in China at $241.5 billion (1,593.65 billion Chinese yuan) in 2010, while prepaid in the United States represented over $250 billion in 2009. But that is essentially where the similarities end.

In a webinar entitled Prepaid Cards in China 2010, Xie compared Mercator's extensive research on the U.S. prepaid card market to its recent investigations into China and found that the two markets exhibit remarkable differences. Other than the respective sizes of their closed-loop gift card segments (21 percent in the United States to 23 percent in China), China's pie graph is dominated by segments that are relatively small stateside.

Payroll and benefit cards (combined into one category) top the chart in China (28 percent), followed by phone cards (23 percent) and gas cards (14 percent). None of those categories register double digits in the United States.

"Different market dynamics and different financial services industry development, as well as the different market demand for prepaid card products in these two countries, actually make them look very different from each other," Xie said.

Benefit and gift cards

In China, employers make substantial use of benefit cards to reward employees, especially on major holidays and special occasions, such as Chinese New Year and the Mid-Autumn Festival. The cards are popular because employers can report them as business expenses for tax purposes, and employees do not have to report them on their taxes, according to Xie.

While the load volumes on retailer-specific gift cards are similar in the two markets, they are used differently. In the United States, gift card giving is family- and friendship-based; in China it's all about business, with professionals rewarding their business partners with the cards, Xie said.

From a merchant perspective, where closed-loop gift cards may represent only 3 to 5 percent of revenue for big-box retailers in the United States, in China such store-issued cards can account for upward of 30 percent of retailers' annual sales, Xie said. Because merchants do not have to report gift card proceeds to the government, they often reinvest the profits (including gift card leftover amounts known as breakage) into their businesses, he added.

Furthermore, gift cards in China are sold in higher denominations than in the United States, typically in the $30 to $40 equivalent range, Xie said, with merchants usually able to customize load amounts. In addition, with no load limits imposed on retailers, loads can go as high 100,000 yuan (roughly $15,000).

Phone and gas cards

China's telecommunications market is dominated by three mobile network operators: China Mobile Ltd., China Unicom Ltd. and China Telecom Corporation Ltd. Xie estimated 60 to 70 percent of all mobile phones in China are prepaid, with a broad distribution network of prepaid phone cards via newsstands, convenience and mom-and-pop stores, and retail stores run by the wireless operators.

As for gas cards, Xie called their utilization in China unique. Credit and debit cards are not widely accepted at gas stations in the nation because self-service gas pumps are not in great supply, he said. So China's two main gas station operators issue private-label gas cards for fuel and gas station convenience store purchases.

Innovative business models

Xie said open-loop cards are virtually nonexistent in China, which has given rise to semi-open card networks operated by private, third-party prepaid card issuers. These businesses issue their own cards, acquire their own merchants and charge them discount fees – anywhere from 0.4 percent of a transaction for shopping mall stores or supermarkets to 10 percent or higher for businesses like restaurants and golf courses.

Some issuers have created new business models. One example is an issuer that may strike a deal with a health club, Xie said. The issuer markets discounted prepaid gym usage cards to consumers to bring in new customers to the club. When cards are swiped at the club's POS, the issuer gets the transaction fee of perhaps $15. Then the issuer pays the health club $10, keeping $5 in profit per visit for itself, Xie said.

These issuers are often limited by government regulations to operating in single cities, he added. They are required by law to have at least 30 million yuan in registered capital to operate in one city or market and 100 million yuan (roughly $20 million) to operate in more than one city. Thus, entry by startups into China's prepaid card market is "difficult or nearly impossible," Xie said. end of article

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