China has commanded a great deal of interest from virtually all U. S. business sectors. Foreign companies should recognize that government regulators are working on a course of regulation that is oriented toward supporting state-owned and domestic Chinese enterprises. Also, there are other local factors like thrifty culture in China where saving is encouraged and the nation is still not into consumerism as common in other strong economies. Chinese have the largest savings percentage at 40% of their income. The Chinese credit card market is particularly intriguing for Western banks.
The Chinese credit card market has been growing at exponential rates since the early 1990s and has an even more accelerated growth since 2003. Being highly policy-driven, the Chinese credit card market is largely directed by political developments, government policies and administrative intervention. Even though economic and social factors play a vital role, government regulations and policies control strongly influence the competitive landscape, the credit card ecosystem and the industry income structure.
This industry is described to be in the process of a very encouraging growth stage due to the size of the national economy and population and provide the possibility for a successful expansion through first-mover advantage. And the relative slow-down of the Chinese economy will have a limited impact on the market given the huge scale of business opportunity and the tight control of credit risks by the central bank. According to the case, 3 million credit cards had been issued by mid-2003 and the number quadrupled to 12 million two years later, with an expected 50 million in 2006.
In addition, transaction volume on the dual - currency credit cards had almost tripled. If these predictions are to be accurate, Bank of America can benefit greatly from this extreme surge in growth and size of the Chinese market by establishing a strong foothold in this yet to be mature and rapidly growing industry and exert power over its competitors. In the given case, it is stated that Bank of America decides to collaborate with China Construction Bank (CCB). Big foreign firms are attractive to middle and upper class Chinese customers whom BOA can target through high-quality and exclusive services.
In addition, younger adults are forming a new generation of consumers who are more technologically and innovation driven when it comes to choosing credit cards. At the same time, the payment processing market is going through a revolution in China with the introduction of third-party payments. In this dynamic landscape, the two parties can leverage their different strengths to collaborate and create value for themselves. While Bank of America's (BOA) has impeccable credit card expertise, CCB has market strength. CCB can merge its current card operations into a new credit card unit.
It can involve BOA in designing the business model for this unit. They can then convert this unit into an international unit through a JV with BOA, which can further launch co-branded credit cards. As part of the company's overall strategy to become a world-class retail bank, CCB's credit card business has seen a continuous increase in market share, product competitiveness, customer satisfaction and risk management. Hence, BOA is looking at a strategically long-term partnership if it decides to go ahead with this collaboration.
However, in spite of its successful credit card business in America, BAC is facing some issues with entering the Chinese credit card market. Some problems BAC is facing - the strong sense of values to cultural beliefs among the Chinese customers, some card issuers show little loyalty to their primary cards, and are unprofitable to the market. The biggest problem of all is the deeply-rooted savings culture of Chinese, which was the result of tradition, fiscal discipline and personal experience. It is expected to take time for the Chinese to become more comfortable with borrowing money.
Another challenging fact was that more than half the Chinese cardholders were unprofitable and financing themselves outside the formal financial systems which hinder the profitability of the credit card business. Other issues include falling transfer fees due to pressure from the merchants and retailers, government corruption, higher propensity to switch banks, and lack of adequate infrastructure. The Chinese market has only recently opened up and embraced the credit cards and there is huge potential for growth in future and hence a strong foundation is indispensable.
Bank of America's credit card business is at the top of its class worldwide, and can provide solid support for CCB to accomplish its strategic goal of developing its credit card business, and help enhance this core competence. Hence, even though the cultural beliefs of Chinese customers offer negative cues to the strategic partnership for BOA, we believe that the market show immense potential in future and will definitely pick up by a substantial amount in the coming future. Thus, BOA should go ahead with the JV with CCB for establishing its presence in the highly promising credit card business.