In the past six years, the growth of Taiwan's credit card market has been astonishing. People love to buy now and pay later, but debt goes against the grain of traditional Chinese values. Are credit cards causing consumers to lose control over their spending?
The lights are just coming on in Taipei's bustling Shihlin night market when Lung Hsien-te(龍賢德) sets up shop. His "store" consists of a small desk, several stools, a small electric fan, a display rack with a variety of application forms, and a fax machine. From time to time, passers-by stop to make esoteric inquiries. "Is a graduation certificate enough?" "Do I need my driver's license?" The questions, coupled with the general appearance of Lung's stall, might lead one to think that he is some kind of high-tech fortuneteller. And fortune does enter into it, certainly, although not quite in the way you might expect--for this man peddles credit cards.
Lung works for Chinatrust Commercial Bank. He usually prefers to set up shop at one of a number of downtown locations, after office hours. His aim is simple: to attract more business than other credit card salesmen. Aggressive promotion strategies like his are a reflection of the heated competition between card issuers in Taiwan's credit market. Some inducements, such as offers of a cash bonus, no annual fee, and even free airline tickets, strike observers as downright bizarre. And one thing that Taiwan's current credit card spending spree has made abundantly clear is that card issuing banks are relaxing the background checks they run on applicants, simply to cope with the sheer pressure of market growth.
Private consumption in Taiwan is expanding rapidly, causing a corresponding reduction in savings. The national savings rate over the last five years averages out below 28 percent, the lowest among Asia's "tiger economies." This in turn has had an indirect effect on the investment rate. Spending, not saving, is the "in" thing, and more and more people are inclined to anticipate their income. Despite fresh, and sobering, memories of Japan's credit boom and bust during its so-called "bubble economy" years, among Taiwan consumers there is a growing trend to borrow in order to spend.
According to the Ministry of Finance's Bureau of Monetary Affairs, since international credit card companies were first allowed into the market in 1989, the number of cards issued has grown by an average of 50 percent annually(see table 1). Likewise, credit card spending has increased by an average of 60 percent annually. Within seven years, credit card spending as a percentage of total private consumption has rocketed from 0.6 percent to 5 percent. Cardholders charged some NT$200 billion [US$7.27 billion] in purchases last year alone, a 45 percent increase over the previous year(see table 2).
Taiwan's credit card business is booming despite the fact that last year the economy went through a period of stagnation. Since the recession began in the second half of 1995, the number of cards issued has been increasing by about 175,000 a month. At the end of August 1996, the total number of cards issued was estimated to be as high as 7.5 million [This figure represents the total number of cards ever issued; active cards number around 4.5 million]. In other words, the economic setback appears to have expedited a change in the way people buy things. People have started to use credit cards as a means of delaying payment. It is even more noteworthy that many consumers are now taking advantage of revolving credit, despite the continuing recession and rising unemployment rate.
Take the Citibank experience, for example. The bank has over one million active cards in force and, as a group, its cardholders generate the island's largest credit card spending. Among Citibank cardholders, 27 percent use revolving credit, and the amount unpaid on their accounts, plus the interest from revolving credit, constitutes 67 percent of the bank's outstanding accounts. According to estimates by many card issuers, that percentage could go as high as 90 percent, a figure comparable to those in advanced nations.
Statistics from some domestic card issuers show that cash advances taken with credit cards last year alone went as high as NT$10 billion [US$360 million]. Moreover, according to the Bureau of Monetary Affairs, the figure has soared in 1996. Advances grew to over NT$1 billion [US$36 million] in March, a staggering 33 percent increase over February, and to NT$1.5 billion [US$54.5 million] in April, a 45 percent increase over March. A number of banks have started worrying about the growing number of bad debts resulting from use of revolving credit and cash advances. Citibank's vice president, Rose Heung(香夢苹) says that her bank's debts in this regard have been increasing since September 1995.
In many developed nations, service charges and interest from cash advances account for an average of 80 percent of card issuers' revenues from their credit card business. Such income far exceeds that earned from contracted merchants and annual fees, and has become the major profit component. The result is that banks tend to encourage the use of revolving credit and cash advances, despite their fear of bad debts. For instance, Chinatrust Commercial Bank, which claims to have more cardholders than any other Taiwan bank, charges an annual interest rate on revolving credit of 19.7 percent, starting from the date of each transaction, in addition to a 3.5 percent service charge. In cases of late payment, another 10 percent of the interest from the revolving credit will be added to the bill.
Why does this business continue to expand, despite the high cost to the cardholder? "It makes shopping straightforward," explains one young working woman who pays for nearly everything with credit cards and is a long-time user of revolving credit. "You buy things you can't afford and don't even have to think about it." With four credit cards issued by three banks, she pays a monthly revolving credit bill of more than NT$4,000 [US$145]. She spends her entire annual bonus on paying off credit card purchases.
"Mr. Wang," is in the fashion business and is another "hopeless cardholder," as his friends call him. His last credit card was canceled because of his delinquent payment record, and no issuer will approve his application for a new one. But he's still crazy about buying expensive designer clothing, so he asked a friend to apply for a card on his behalf. When the first bill arrived, Wang's friend was astonished to see that the charges nearly equaled the card's total credit limit. The position of the government's Consumer Protection Commission on such matters is that cardholders must bear the responsibility for controlling their use of credit. But aggressive promotion campaigns by some banks encourage credit card consumption and cash advances, and exacerbate the problem.
One particularly controversial advertisement was run by Standard Chartered Bank. The basic message was that the more one spends, the more bonus points one earns. Mrs. Liu, the wife of a Taipei trading company executive, took the ad literally. She got a card and used it so much that her husband jokingly threatened to set up an association of credit card victims and play the leading role in its TV ads.
A recent campaign by Chinatrust, which focuses on the convenience of cash advances, has also provoked much discussion. "Cash advances are intended for emergencies, and are not encouraged in mature economies," says a manager at another bank. But an official at the Bureau of Monetary Affairs points out that there is nothing wrong with the banks running promotional advertisements, as long as they maintain sound controls.
A bigail Lee(李佳鴻), manager of Hongkong Bank's Credit Card Center, says that issuers should assume responsibility for each and every stage of the process, from making proper credit inquiries before issuing a card, to regularly monitoring unusual spending patterns and borrowing by customers. Hongkong Bank, according to Lee, is conservative in its outlook, and would prefer to spend more on a complete credit history check of each applicant than to dilute the integrity of such inquiries as a means of touting more cards.
Not every card issuer takes the same view. One American bank has just made an aggressive debut in the Taiwan market. Its policy is that if an applicant already owns a credit card issued by another bank, he or she will automatically be granted a card on production of an ROC identity card and copies of [paid] card invoices for the past two months--and that's it. To attract even more customers, the same bank also waives pre-set spending limits for preferred cardholders.
Merchants, too, have done their part in adding to the problems with credit cards. Many who have contracted to accept cards do not cooperate adequately with banks to control unauthorized card use. Some are not even connected to the issuer's computerized database network, and are thus unable to check credit limits with the issuer. Others do not play by the unwritten but implicit rules of card usage. In order to boost sales, they are prepared to split up the payment on a particular transaction into installments, thus bypassing the customer's credit limit on a single purchase. In one such case, a young student spent hundreds of US dollars, several times his credit limit, in a karaoke parlor with a few classmates. His inability to pay resulted in the cancellation of his card, and the loss of any prospect of getting credit ever again.
Many issuers contend that it is not their responsibility alone to prevent cardholders from burying themselves in debt, or even going bankrupt, as the result of card misuse. They maintain that it is equally important for families and society to instill responsible attitudes toward credit into the younger generation. "Some young people think that owing fifty [US] bucks is no big deal, since there are others out there who owe millions," says Willie Fung(馮煒權), general manager of MasterCard International, Taiwan. "It's not the size of the debt, but the credit history that really matters."
With this in mind, MasterCard runs advertisements specifically aimed at young cardholders, which in effect say, "Be your own master from the day you get your first credit card." [The ads play on the Chinese word for "master," which carries connotations of a self- disciplined person.] The underlying message? Maintaining a good credit history is as important as maintaining a good personal reputation. "A great many cardholders fail to realize that their credit history is a lifelong thing," says Andy Chang(張先謨), a senior vice chairman at Hongkong Bank. "Once your name is on a blacklist, it will be more than just 'difficult' for you to get any kind of loan or credit from a bank in the future."
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Translated with permission from Common Wealth, August 1996, pp.172-175.