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Killing Cash? The Development of the Payment Ecosystem in China

David S. Evans and Wai-Shun Lo
Founder and Principal, Market Platform Dynamics

November 17, 2006

China has a young, vibrant, and dynamic payment card industry. Today, few consumers use cards instead of cash to pay at retail stores. Only a small percent of retail stores accept cards for payment but both consumer use and acceptance are increasing rapidly. Between 2001 and 2006, the amount of transactions on cards increased by 460 percent (from 8.4 trillion to 47 trillion yuan) and the number of merchants that accept cards increased by 160 percent (from 150,000 to 390,000).

At the same time, the players in the payment card industry have been moving rapidly to spur card use in one of the world’s fastest growing economies. Recognizing this potential, numerous innovative new ventures have started to develop payment card methods using the mobile phones and the Internet. Other new businesses are entering this industry to provide everything from payment terminals to loyalty card programs.

There is little doubt that payment cards will compete with cash as the leading form of retail payments over the next 20 years. But many details of this evolution remain uncertain and the contours of the payment card industry will become clear only over time. Will Chinese consumers take to credit cards and borrow with them, as have Americans, or mainly use debit cards as do most Europeans? How quickly, if at all, will the Chinese card industry move away from the 30-year old magnetic stripe plastic card technology—popular in Europe and the United States—to devices that consumers can just wave at a reader, like those used in the Beijing and Hong Kong subway systems, or mobile phones like those used in Japan and South Korea? When will China UnionPay (CUP) face competition from foreign systems such as MasterCard and Visa or from another domestic system?