One of the most persistent myths about the slow growth of electronic retail in China has been that the scarcity of credit cards have held the business back. There are still less than 70 million credit cards in circulation, one for every 20 or so adults in the country, and, more to the point, one credit card for every 3.5 internet users.
No credit card, goes the thinking, no electronic retail. The ubiquitous Shaun Rein, CEO of Shanghai-based China Market Research Group, echoes this sentiment in an otherwise excellent editorial in Forbes magazine:
Our findings suggest it is a lack of credit cards and other payment options, rather than a cultural aversion to buying online, that has curtailed the growth of e-commerce in China.
About half-right, I would say. The cultural aversion issue is a canard, and we will take that up in another post.
Yet elsewhere in his article, Shaun notes that 70% of the 500 18-to-32 year-olds he had interviewed had already purchased online, but "would use a credit card for purchases if they had one." In other words, all of these folks were already buying online without credit cards.
I don't mean to pick on either Shaun or CMR, but the implicit truth coming from their research supports a somewhat different conclusion. Coming from a research organization of bright and talented people, this illustrates a larger point: despite what very intelligent analysts are telling the world, electronic retail is growing in China in spite of the low numbers of credit cards in circulation, and it will continue to do so whether there are credit cards in China or not.
Money, like love, finds a way
Electronic commerce has grown in China over the past ten years because companies and consumers have found other ways to complete transactions that don't require a numbered sheet of plastic.
A number of methods have been used over time. Postal money orders, prepays, local counter pickup, and company credit have all been tried. Most have been discarded because they required the consumer to physically go someplace to place an order.
To date, the most successful has been that old reliable method, cash on delivery, or COD.
COD is superb because it allows the company to ship a product from their warehouse, via either express mail service [EMS] or regular post, to almost any city in China. Back when I developed this system for electronic retailers with the China Post's EMS division in 1996, they originally promised to deliver any package to 100 cities within 72 hours. The number of cities grew to 500 within 18 months, and the delivery times - while 72 hours was always the promise - dropped near to 24 hours.
Consumers love COD in China because it allows them the assurance of actually seeing a product before they pay for it. That's not such a big deal when you are selling small things or your company is well known. But if you are a new company, or you are selling RMB 10,000 digital camcorders, COD offers everyone one more level of assurance.
Is it a pain to have to be somewhere to wait for something? It can be. But that can be an issue no matter how you are paying - delivery services are rightfully reluctant to leave packages unattended on door stoops.
COD is extremely popular among electronic retailers in China, but frankly few do much to promote it. The biggest culprits in this regard are the EMS and postal services, both of whom should be heavily promoting COD to consumers. They aren't, and in the face of the widespread myth about "no credit cards," a perfectly workable solution has to spread by word-of-mouth.
Why do I need that funny little plastic thing?
But COD is by no means alone. Online payment systems are growing with incredible speed in China. Take Alibaba's Alipay system for example. As of March of this year, there are more registered Alipay members in China - 80 million - than there are credit card holders, and the number continues to grow. Annualized transaction volumes are in the tens of billions of US dollars per year.
And there are other means of payment on the way. We haven't even entered the discussion of the mobile phone as a payment device yet, but that is a business that China's carriers are studying with special interest. The cool thing about using mobile phones for payment is that apart from paying via your phone bill or a prepaid card, the phone becomes a credit card with a direct internet connection. No need to type anything in. Just push the button.
Porter Erisman at Alibaba suggested to me that payment systems in China are evolving beyond credit cards. I'm not any more ready to consign credit cards to the dustbin of China's development than I am COD.
Alipay and COD alone, however, underscore that regardless of how the credit card industry evolves in China, electronic retailing will boom. To what I am sure is the chagrin of both analysts and credit-card companies, the electronic commerce industry is not waiting for the day when your average Chinese has a credit card or three in his or her wallet.
And a good thing, too.
Serving the customer - and the merchant
There are actually problems using credit cards in China for electronic payments. First, many banks, fearing fraud, remain hesitant to allow purchases using their credit cards or debit cards unless the cardholder is present and signs a receipt. While this is improving, it is still a challenge.
Second, and perhaps most important, is that credit card companies are hard on merchants in China. Apart from having to bear onerous transaction fees, electronic retailers can often wait for weeks or even months to get payment, and disputes are almost uniformly settled on behalf of the consumer.
COD isn't perfect. All of my experience with COD using the EMS service was superb - we were paid within a few days, a week or two at most. Unfortunately, I'm starting to hear that some payments are dragged out for as long as six months. That's not acceptable, and the postal folks need to get their collective stuff together or they are going to lose the opportunity.
Services like Alipay need to become more ubiquitous and flexible over the long term. Dominating payments on your own site is fine, but the real promise is being able to take payments from as wide a range of services and sites as possible.
When organizations dominate a niche, they tend to get exploitative. China is no different. The good news about payments for both merchants and consumers is that there is competition among the different methods. The wise e-tailer would do well to enlist as many as possible.
Welcome to Planet Plastic
Among the many things Shaun and I agree on - and I'll be coming back to his article in future posts - is that the business of consumer credit in China is going to continue to grow, and that banks will find ways to put more plastic into wallets in the same way they have popularized home and auto loans.
What will be different in China, however, is that even when credit cards manage to reach a sizable portion of China's population, they will face competition from a far wider range of payment options than they do elsewhere.
In the meantime, electronic retailing is on a roll.