For newcomers to Taiwan, one of the strangest aspects of life is that local people often carry huge wads of cash with them in order to do a day's business. In this cash-based society, it is dangerous to leave your home without at least US$100 in your pocket. What if you need to treat an unexpected guest to lunch? Or run a few errands by taxi? You'll need cash. Here it is common for a local businessman to use a roll of fifteen NT$1,000 notes—US$600—to foot the dinner bill for a party of twelve, or for a woman shopping in one of Taipei's trendy clothing boutiques to pull US$1,000 out of her purse for an imported leather jacket. Motorcycles, CD-players, jewelry, and air fares are all paid for in cash.
The use of cash rather than credit cards or checks is especially surprising considering the formidable spending power of Taiwan consumers. The government expects the per capita GNP to reach US$10,000 this year. Meanwhile private savings account for 30 percent of the island's GNP, giving Taiwan one of the world's largest holdings of private savings.
Why haven't credit cards caught on in this increasingly wealthy society? In fact, the central government's Ministry of Finance approved the use of credit cards more than ten years ago when it created the National Credit Card Center (NCCC) to oversee the issuance of credit cards through approved local banks. But as of last June, the ministry had attracted only 1.65 million card holders, or 8 percent of the total population. This figure contrasts sharply with the popularity of charge cards in Japan and the United States, where each person possesses an average of two and three cards, respectively.
The primary reason for the stunted growth of the industry, according to analysts, has been the restrictions on credit-card companies. Up until last spring, the service could only be provided by the eighteen NCCC-approved local banks. But the age of plastic may now be on its way. Last May, the Ministry of Finance substantially liberalized the industry by ruling that any domestic banking institution may apply for permission to issue credit cards.
The move will bring a flood of consumer interest, predicts analyst Charles Lo (羅聯福), senior vice president and manager of the credit-card department for China Trust Co., Taiwan's largest card-issuing company. First, Lo expects the number of new credit-card companies to grow since any bank can now enter the market with no obligation to join the NCCC. Under the former system, the twenty-two local banking institutions that were not NCCC members could not offer credit cards. Second, Lo expects some of the banking institutions now operating under the NCCC to leave the organization and to campaign more aggressively as independents.
The top three local card issuers are China Trust (440,000 card holders as of May 1992), Citibank Taipei (140,000), and Cathay Investment & Trust Co. (110,000). "Operating independent of the NCCC can allow greater autonomy," says Lo. "You can decide your own business strategy and develop your own software to best promote your sales."
As the number of card issuers grows, Lo points out, competition will heat up for both prospective card holders and merchants willing to accept charge cards. Only if enough retail and service outlets are contracted will charging become widely accepted by consumers. But the industry faces a Catch-22 in attracting merchants. On one hand, many retailers balk at the high service fees charged by local card issuers. On the other, issuers claim they cannot reduce their fees until more retailers sign on.
Merchants now pay 3.12 percent of total billings as a fee to card issuers. This represents a drop of 2 percent from the initial cost charged when credit cards were first introduced in the early 1980s. Even so, many retail and service executives complain that local fees remain higher than those of many foreign countries. The reason, according to Felix Ong (翁光輝), executive vice president of NCCC, is that business volume is not large enough to reduce operating costs. Thus, issuers balance their costs with higher fees. "However," Ong says, "we'll continue to reduce our service charge with the increase in our card business, as we have for the past few years." He also predicts that annual fees for consumers will drop as the business expands and competition intensifies. At present, the annual fee is US$48 for foreign credit cards, and US$16 for the NCCC's National Credit Card, the only approved local charge card.
The color of money—only 8 percent of the population holds a credit card, but Taiwan is the second biggest spender in the Asia-Pacific region.
The local card accounts for just over half of those now issued in Taiwan. The first foreign-based credit-card company, VISA, was introduced in 1989 and had issued 657,000 cards as of June 1992. Others include American Express, with 150,000 card-holders; MasterCard, 61,900; and Diners' Club, 20,000. When the Japan-based JCB credit card officially enters the market this September, the world's top five credit cards will be available in Taiwan. The Japanese card, whose application has already been approved by the Ministry of Finance, projects sales of 50,000 cards in its first year.
In addition to opening the charge-card industry to local banking institutions, the regulations also allow foreign card issuers to operate under the same conditions as their local counterparts. For example, foreign companies will no longer have to issue their cards through the NCCC. They can sell them through their own channels or through joint ventures with any local organization.
While these relaxed rules will provide a new incentive for credit-card companies, the biggest draw is the growing disposable income of local consumers. In a study released earlier this year, China Trust found that Taiwan card users spend an average of US$120 per sales slip, while American users average US$10 per sale. Meanwhile, San Francisco-based VISA International Association found that, within the Asia-Pacific region, Taiwan ranked second only to Japan in the amount of money spent on credit purchases in 1991. This figure is especially impressive considering that Taiwan's card-holder population is smaller than that of Japan, Australia, South Korea, and Hong Kong.
To compete for a share of the lucrative local market, the international card-issuing companies, including the latecomer JCB, have launched ambitious, and expensive, promotional campaigns. For example, VISA International allocated US$1 million last April for its 1992 promotions in Taiwan.
Heavy campaigning by the giant foreign issuers has raised concern that the future of the island's own fledgling card business could be threatened. But not everyone shares this gloomy view. Felix Ong of the NCCC, for example, believes that the local credit-card market is large enough for everyone, noting the small size of the current card-holding population. Jack Cheng (鄭泰克), vice president of China Trust's credit-card department, agrees. He is optimistic that the NCCC card will compete with foreign counterparts. For one thing, he points out that the annual fee for the local card is one-third that of international cards.
Cheng acknowledges that foreign credit cards do have one major competitive advantage over the local card: they have contracted merchants around the globe, enabling holders to make credit purchases while traveling abroad. "But local citizens going overseas usually take traveler's checks and U.S. dollars," he says. "Besides, while more and more local people are going abroad, the vast majority of them still spend most of their time at home. For these people, a credit card that can be used locally is just as good."
Until May, American Express and Diner's Club were the only cards that allowed users to do more than buy goods and services. As debit cards, these two were given special permission from the Ministry of Finance to entitle holders to additional functions such as borrowing cash or credit in designated amounts. But with the liberalization of the credit-card industry, the ministry is planning to open these services to all card-issuing companies. Once these regulations are set, all local and foreign cards will offer more or less the same services.
Taking charge cards a step further in convenience, this October the Ministry of Finance plans to introduce a "smart card" developed by its Financial Information System Center. The card allows users to withdraw funds, make deposits, and transfer money, as well as buy goods and services on credit. Silvia Lee (李先峰), executive vice president of the center, says the cards can be used as both credit cards and advanced automatic teller machine cards. More than thirty local banking institutions have expressed interest in promoting the new card.
The removal of government restrictions and the creation of new charge-card services is bound to bring an increase in card users. But Chang Hsiu-lien (張秀蓮), deputy director of the monetary affairs bureau, Ministry of Finance, cautions that Taiwan will not change from a cash- to a credit-based society overnight. As she explained in an article in the Chinese-language Economic Daily News last June, several steps need to be taken. First, a reliable credit organization must be established to provide credit information on customers for banks and retailers. In addition, banks and contracted retail outlets must be installed with on-line computer systems to ensure prompt credit checks and money transfers or payments. Many local banks and stores do not yet have such equipment. Finally, the long-standing custom of paying by cash will not fade easily. "It will take time for local customers to break with this tradition," said Chang.
But the Ministry of Finance is already taking steps to establish credit-check computer programs to facilitate the use of charge cards. Meanwhile, those people who have already sampled the convenience of credit cards are using them with abandon. Charge-card spending in the first six months of 1992 reached US$880 million, or US$530 per person—numbers that are equal to the amount spent during the entire year of 1991. Ultimately, it seems that the pay-by-cash custom is one tradition that will not last forever.—Osman Tseng (曾慶祥) is a senior journalist based in Taipei.