China's Credit Card Market: Interview with Pascal Nouvellon, Cofidis

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by: Shaun Rein

This originally appeared in the CMR Business Quarterly, ww.cmrconsulting.com.cn

COFIDIS, www.cofidis.fr, is a leader in the European consumer finance industry. It was founded in France in 1982 and operates in 10 countries. COFIDIS is one of the most profitable actors in the consumer finance industry with an average Return On Equity above 20% for the past 5 years and holds a portfolio of 8 billion € in consumer loans. COFIDIS operates via a unique business model of selling and managing consumer finance products from distance. COFIDIS has a recognised expertise in consumer credit risk management.

COFIDIS has charged Pascal Nouvellon, Deputy Chief Representative for China, to lead a team that manages the strategic direction for COFIDIS, including product development and marketing programs to drive growth in China. Before joining COFIDIS, Mr. Nouvellon spent 6 years at Michelin in management and business development positions both in Europe and China.

CMR recently sat down with Mr. Nouvellon to gain insight into how he views the consumer finance sector in China, COFIDIS' plans going forward, and the specific challenges and opportunities it expects to meet along the way.

CMR: Chinese are famous for their high savings rates of around 40%. But a closer analysis shows that for urban Chinese under 30 years old – the group driving China's consumption growth today – savings rates are effectively zero. Accordingly, we have seen the number of credit cards grow from 13 million at the end of 2005 to 130 million in 2008. Do you expect similar growth going forward?

PN: 2008 saw extraordinary growth for the credit card market in China, adding over 50 million new credit cards on the back of very strong consumption. This came to a point of exuberance, and we do not think it is sustainable in 2009.

We think the market will become more rational in 2009. We predict the market to add 15 to 20 million new credit cards, putting the total market in the range of 145 – 150 million credit cards as a combination of 2 factors:

  1. usage rates are already pretty high in key cities such as Shanghai and Beijing and most customers in the 25-40 years old group already have more than one credit card
  2. the strong growth in 2008 has been marked by a big push by domestic Chinese banks like ICBC, China Construction Bank and Bank of China to regain a leading position in this credit card market. They have spent considerably in infrastructure and marketing. Many larger banks have focused on the race to get more volume, but 2008 growth has been mostly done at the expense of profitability. With more difficult financial times ahead, most players will decrease their marketing investments and focus more on growing profitable segments in the credit card sector.
That being said, 15 to 20 million new credit cards is very solid growth and a lot to work on!
CMR: What effects will the global financial crisis have on consumer finance in China?

PN: The Chinese Banking sector has been somewhat immune from the global financial crisis as it is still very China-centric. This being said, the slowing down of China's economy, resulting from both the global crisis and the impact of a tightening of China monetary policy in 2007-2008 , will eat into the profits of Chinese banks. Most analysts see profits of Chinese banks slowing down to single digit-growth in 2009, a drop from double or triple digits in 2007 and 2008.

There will likely be an overall contraction in the lending business on the consumer side. As of 2008, 70% of consumer loans were driven by real-estate mortgages and auto loans made to affluent Chinese consumers in their 30s and 40s. Those are the consumers that will likely pare back spending and increase their savings in 2009. They are the traditional Chinese consumers, born before 1980. They are much more conservative spenders than younger Chinese, and they will rather stop buying than go into debt during uncertain times.

On the other hand, we predict that credit card loans should increase dramatically in 2009, driven by younger Chinese in their 20s who are not afraid of buying.

CMR: Unlike in more developed markets in the US and Europe, you have an opportunity here to attract many first time credit card users. How do you attract their interest? Is consumer education a major initiative for you?

PN: There will be 15 to 20 million new credit cards issued in 2009 in China, among which 10 million should come from first-time users, mostly young white-collars entering the professional world. Yet, this is not a major target for most Chinese banks that prefer to target less risky consumer groups i.e. well-to-do Chinese, and equip them with Gold and Platinum cards.

This represents a great opportunity for the Sino-foreign credit card players such as GE Money (NYSE:GE) and COFIDIS, as those players benefit from great expertise from outside China markets and can manage the higher-risk inherent to that population. The winners will be those who will be able to deliver value to those young Chinese consumers and bring them what they want i.e. products that are easy to apply for and to use online.

As to the sophistication of the Chinese consumers when it comes to financial products, we have been very surprised: most Chinese consumers are knowledgeable about finance. Even the younger age groups are much more sophisticated in comparison to other developing markets we are operating in. There is not much to educate on and this makes China's market particularly challenging as it is a developing market with sophisticated users, yet another sign that China is very unique.

CMR: Who do you consider your main target customers, and why?

PN: There are very clear behavioral difference between Chinese born before and after 1980. Urban Chinese below 30 have a propensity to spend that is not to be seen in any other market, making the statement that Chinese are a saving people partly untrue. Our target market is clearly the Chinese consumers 22 to 28 years old.

Thanks to research conducted with CMR's Shaun Rein, http://www.cmrconsulting.com.cn/about/shaun_rein.html, we have identified 2 sub-groups in the 22-28 year old segment that present very high propensity to go revolving. Those young Chinese willing to go revolving are our main target, and we are working hard to fine-tune our offer and make it attractive to those 2 consumer groups. Today those customers are mostly to be found in the large Chinese cities like Shanghai and that is where we will put our focus in 2009.

CMR: What are your target consumers' product and service needs? What sort of marketing communications strategies are you using to reach this group?

PN: Young Chinese consumers have a need to feel empowered. When they want something they want it now and do not want to wait. And if it means accruing debts, most are ready to do it. We are working together with our Chinese banking partner to get new products with specific features to enable our customers to realize their dreams and feel part of today's winners in China.

We also put a strong focus on convenience - convenience to apply for our products and simplicity to use them and to repay. Chinese customers want innovative products, but operational efficiency is also very important to attract and retain Chinese customers.

In terms of communications strategy, we are focusing mainly at building our brand among the young Chinese community. To do this, we utilize the web and other forms of digital marketing to engage customers with our brand. Much of our marketing strategy is online because that is where our core target group spend their time and where we have found our most effective marketing campaigns.

CMR: How well-developed are national credit bureaus to help consumer finance companies determine credit ratings? How do you determine the credit worthiness of applicants?

PN: China has been building a national positive credit database, and it contains most of the current loans consumers may have. This national database is completed by a network of local credit bureaus such as the CIS in Shanghai which delivers very comprehensive credit and bill-payment records.

The challenge comes less from the inexistence of the raw data than from how to adapt your scoring and your risk procedures to the local China market, which is very unique. This is an area where I think Sino-foreign ventures like COFIDIS have an advantage as they have an opportunity to combine well-rounded international expertise with strong local market knowledge. This is a pragmatic approach where the understanding and trust between Chinese and foreign partners is needed.

CMR: What are the main opportunities for consumer credit companies in China right now?

PN: There are 2 categories of international players doing consumer finance in China: banks and non-banking consumer finance companies. These 2 categories will have different strategies.

For banks, such as Citibank (NYSE:C), HSBC (HBC), Standard Chartered to name a few, their strategy will be to leverage their newly acquired retail RMB license to propose more consumer finance products. Some banks have been very present in the past months launching new consumer finance products such as unsecured cash-loans that have been very popular among Chinese consumers. Standard Chartered's "Xian Dai Pai" cash-loan product has been very successful, and I see other international players follow course.

For non-banking financial institution, such as GE Money or COFIDIS, their strategy will be to reinforce and develop their ties with their Chinese partner to increase their competitive edge in the credit card business.

Given uncertainties on real-estate mortgage and auto-loans as Chinese consumers stop buying big ticket items, 2009 growth opportunity for both foreign banks and sino-foreign ventures will be to catch the high demand in the credit card loans and unsecured cash loans.

CMR: What major challenges do you expect to face going forward?

PN: The major uncertainty for 2009 will be the capacity for Chinese government to sustain consumption. The 4 trillion RMB stimulus package has been so far targeting at investments, and we await strong measures to encourage consumption to develop further should consumption drop sharply. The main risk would be that consumers anticipate a hard-landing of the China economy and start saving in preparation for hard-times. This could have a major impact, but we do not see clear evidence this will occur in 2009. We are still very optimistic about 2009 prospects.
CMR Analyst Charlotte MacAusland helped conduct this interview.