By Shaun Rein
COFIDIS, 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 has 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 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 digit 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 increasing 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 going 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 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 market particularly challenging as it is a developing market with sophisticated users, yet another sign that China is very unique.
This originally appeared in the CMR Business Quarterly, www.cmrconsulting.com.cn. CMR Analyst Charlotte MacAusland helped conduct this interview.
This the first part of “China’s Credit Card Market: Interview with Pascal Nouvellon, Cofidis” next week we will publish the second part.