Taiwan Today

International credit cards made their debut in Taiwan six years ago. The market is growing, but there are cultural hurdles to clear before the island gets into the habit of charging it.

Will that be cash or charge? The question is a familiar one to many Taiwan con­sumers today. But it was seldom heard a decade ago. In the mid­-eighties, credit cards appeared mainly in foreign movies—detectives used them to break into apartments. But locally, peo­ple used cash to pay for everything from restaurant meals and airline tickets to new cars.

The situation is changing. “Not so many people carry a lot of cash these days,” says Lee Wan-ling (李宛玲), who sells imported menswear at a Taipei department store. “About half of my cus­tomers use credit cards. They’re conven­ient, perhaps too convenient. People who pay with credit cards usually buy more than those who pay cash.”

Compared to other economically de­veloped countries, Taiwan has a relatively short history of credit card use. Although Chinatrust Commercial Bank introduced Taiwan’s first credit card in 1974, it could only be used within Taiwan and it had at­tracted just fifty thou­sand cardholders and five thousand contracted merchants by 1984. It was not until 1989, when Chinatrust issued a Visa card, the island’s first foreign charge card, that buying on credit began gaining wide­spread appeal. As of October 1994, Tai­wan had 1.3 million cardholders for its United Credit Card, a national card intro­duced in 1984. The world’s five major in­ternational charge cards have also entrenched themselves in Taiwan: Visa has 1.9 million card holders, MasterCard 441,000, American Express 367,000, Japan-based JCB 341,000, and Diner’s Club has 101,000. All told, 4 million cards have been issued, although only 2.5 million cards are now in circulation. (The rest have been lost, stolen, replaced, or cancelled.) In other words, one in four Taiwan adults has an active card.

The main reason the island’s credit card market is growing rapidly is the trend toward overseas travel. Felix K.H.Ong (翁光輝), deputy president of the National Credit Card Center (NCCC), a quasi-public organization overseeing the industry, says most people apply for their first card in prepa­ration for a trip abroad. “People travel with credit cards so that they don’t have to carry a lot of travelers’ checks or cash,” Ong says. “When they come back, they can’t just throw their cards away, so they use them once in a while at home. This helps the growth of the market.” Statis­tics from the NCCC show that in 1989, only 24 percent of credit card purchases were made in Taiwan; the rest were made over­seas. By 1994, 73 percent of charged pur­chases were made on the island—close to the 80 percent rate of domestic credit card use in economically developed countries. One reason for the switch is the recent in­crease in the number of local merchants who accept charge cards.

The new interest in credit cards has attracted the attention of local financial institutions. More than thirty now issue charge cards, and the number is expected to reach forty by the end of this year. But so far, offering credit cards has not been considered a short-term moneymaker. “The credit card business itself may not be profitable for banks, but it is a way to establish connections with customers and bring in additional business,” says John C.C.Yen (賴長川), vice president of the credit card department at Chinatrust.

Still, card issuers see great potential in the industry, especially given Taiwan’s rising per capita GNP, which hit US$11,600 last year. Some have met with impressive results. Citibank, which began offering Visa and MasterCard in Taiwan in 1989, has issued 560,000 cards. Spending from these cards is now the largest among its overseas markets, with US$770 million in purchases in 1993. By compari­son, German Citibank cardholders spent US$630 million that year.

Many card is­suers are aggres­sively cultivating the market by offer­ing various benefits for consumers. Currently, more than twenty banks offer one­-year trial use with no annual fee. Some also add extra value to their cards by providing booking services for travel and accommo­dations, travel insurance, special discounts, or low interest or interest-free installment payments on certain purchases. Master­Card International is planning to sign taxi companies as contracted merchants. Mean­while, Chinatrust offers its cardholders loans of US$1,850 to US$18,500 when they apply through the telephone or mail. “The loans are based solely on a cardholder’s credit record,” John Yen says. “It’s probably the world’s most convenient loan.”

Another marketing trend is to issue joint “co-branded cards” along with a service organization such as an airline, telephone company, car manufacturer, department store, university, or profes­sional association. These cards allow us­ers special benefits with the partner company, such as accruing frequent flyer miles on an airline or bonus points toward a new car, whenever the credit card is used. “When the mar­ket has grown to a cer­tain level, there will be different specialty cards to appeal to dif­ferent groups of peo­ple,” Yen says.

Another option is an “affinity card,” which allows cardholders to support their favorite nonprofit organization. Among these cards, the most successful is the Lotus Card issued by Chinatrust. The card functions as a normal credit card except that, for every US$37 charged, Chinatrust donates about 10 U.S. cents to the Buddhist Compassion Relief Tzu-Chi Foundation, a well-known charity organization in Taiwan. Since March 1993, the bank has issued 150,000 Lotus Cards and has donated US$550,000 to the foundation’s projects. “Many people want to give to a charity but don’t know which one to support, or they simply don’t have time to go to the post office and send a money order,” John Yen says. (Few people in Taiwan use personal checks.) “The Lotus Card solves both problems.” Ac­cording to the NCCC, there are now forty­-five co-branded or affinity cards with 330,000 holders in Taiwan.

Applying for a charge card is not difficult. The basic requirements are that applicants be over twenty years old, have a steady job, and make more than US$8,900 per year. Some banks also al­low students to become cardholders. The strategy is to cultivate loyal customers at a young age. According to a survey by Chinatrust, many people form an attach­ment to their first credit card that can last for many years. “It’s like their first love,” Yen says.

The number of cards issued has grown at an annual rate of 30 to 35 percent in re­cent years. But Taiwan still lags far behind credit-based countries such as the United States in both quantity and quality. While one-fourth of local adults has a card, the average U.S. adult uses three, and the aver­age Japanese adult, two. And although local cardholders purchased US$3.8 billion on credit in the first ten months of 1994, this figure was only 3 percent of the total con­sumer spending during those months.

The reason, as card issuers know well, is the Chinese custom of paying in cash and the taboo against owing money to anyone except family. To many Chi­nese, charging a purchase means two things: the person doesn’t have enough money, and he or she will owe the bank until the bill is paid off. The Chinese concept of credit is very different from that of the West. Hwang Mei-shu (黃美序), a drama professor at Tamkang University in Taipei county, recalls being rejected when applying for a card in the United States. “I told them my credit was good because I had never owed money to the bank,” he says. “But they told me that’s why I had no credit.”

Hwang was perhaps correct from a tra­ditional Chinese point of view, but such a tradition has become a hindrance for credit card companies and banks. Because most Taiwan cardholders pay off their bills each month, banks and card companies make lit­tle money on interest from revolving credit. As a result, the annual fees for customers and contracted merchants are higher locally than elsewhere. In Taiwan, most issuing banks and international credit card compa­nies charge consumers around US$44 per year, while merchants pay 2.5 to 3 percent of the sales figure per purchase. The local annual interest rate on revolving credit, usually 17 to 20 percent, is also higher than in the West.

Another challenge for credit card issuers is that for many users, the charging habit does not seem to be sinking in. Users may pull out the card in an emergency, but they do not make it a regular choice and rarely take advantage of extra benefits such as booking services or special loans. Many in the industry believe more time should be spent educating users, rather than simply encouraging new people to tryout a card. “While everyone is busy expanding the size of the market, it’s perhaps even more important to promote the quality of the market,” says Jessica Huang (黃莉惠), public affairs and communications manager for American Express International, Taiwan. Huang explains that many people in Taiwan apply for credit cards because they are free, at least initially. But they seldom use their cards, never realize their rights and benefits, and cancel the cards as soon as the issuer asks for an annual fee.

John Yen of Chinatrust also believes many users lack knowledge of the cards’ basic functions. “Often, our cardholder’s manual goes directly into the trash can,” he says. To reach consumers more effectively, Chinatrust is planning to produce a videotaped manual. “The more card­holders know about credit cards, the more they can protect their rights and enjoy the convenience,” he adds. “And it also saves card issuers a lot of trouble.”

Misuse of cards has been another headache for issuing banks and credit card companies. Unfortunately, credit card fraud has arrived in the local market. In 1990, the second year after Visa entered Taiwan, the island ranked third among Asian countries in fraud losses for the company, with US$2.6 million. By 1993, Taiwan had improved to eighth place within Asia for Visa and MasterCard, with combined bad debts of US$14 million.

As in other countries, lost and stolen cards account for the bulk of these losses. But Taiwan also suffers from one type of credit card crime not found elsewhere­—illegal banking. People in need of a quick loan can borrow from an underground bank using their credit card. The “bank” then collects from the credit card company by recording the loan as a merchandise sale, after adding in a high interest rate. But when Visa or MasterCard tries to collect from the consumer, many of these debts go unpaid. The NCCC estimates that such charges total about US$19 million a year, and that one-third to one-half of them will become bad debts.

Attracting the right cardholders is only half the battle for credit card companies. Signing enough high-profile contracted merchants is another vital component. In the past, contracted merchants were solicited through the NCCC, while banking institutions concentrated on attracting cardholders. But the number of merchants was not keeping pace with the number of card users. In 1993, banks joined in the effort to build up merchant ranks. Since then, according to John Yen, the number has in­creased from fewer than twenty thousand to more than fifty thousand. “The increasing number of cardholders and their strong consuming capacity are the biggest attractions,” Yen says. “And from the consumer’s point of view, a good merchant should provide a convenient shop­ping environment in which they can pay as they wish—by cash or charge.”

Although the number of contracted merchants is growing rapidly, they are still a small minority. The fifty thousand such businesses on the island are only 6 percent of total registered merchants. Ac­cording to Felix Ong of the NCCC, most domestic credit card purchases take place at department stores (35 percent), fashion boutiques (14 percent), restaurants (11 percent), and entertainment businesses such as karaoke parlors (11 percent).

Other businesses, such as fast-food restaurants, convenience stores, and most supermarkets, still do not accept credit cards. These stores operate with a large volume of customers, so they don’t want to hold up operations to check a customer’s credit card record. An­other reason for the lack of interest in accepting credit cards, according to Felix Ong, is that many merchants avoid paying full taxes by simply not recording all of their sales. But this is not possible with credit card sales, since there is a record of every transaction. “There is no way merchants can get away with tax evasion,” Ong says, “as they sometimes do when customers pay cash.”

Another reason merchants have hesitated to accept credit cards, according to Jessica Huang of American Express, is that Taiwan cardholders are sometimes embarrassed to use their cards. They rarely charge small purchases and will use cash instead if the store clerk asks for it. Such attitudes help keep the number of contracted merchants low. But Huang argues that merchants have much to gain from promoting credit card use. “When half of their potential customers walk out empty-handed be­cause they aren’t carrying enough cash or can’t use their credit cards, merchants will start to calculate the difference between the business they are losing and the charge fee. Then they will begin accepting credit cards.”

Although credit card use is still relatively low in Taiwan, card issuers are optimistic about the market potential. As John Yen puts it, there are opportunities for a “win-win-win” arrangement for issuers, cardholders, and merchants. At the same time, card companies know that they face some major cultural challenges in promoting the charging habit. “In Taiwan, many credit cards are now going full steam ahead with aggressive marketing,” Jessica Huang says. “But in this market, the competition is not so much between fellow banks and credit card companies as it is between cash and credit.”