Research Overview
- Credit cards dominate the retail payment landscape in Hong Kong, accounting for 51% of total retail GMV. They also generate a significant portion of revenue for local banks while delivering numerous ancillary benefits to retail banking franchises, including daily customer engagement. However, Hong Kong’s credit card industry is currently facing three overriding structural challenges: (1) oversaturation; (2) underutilisation; and (3) high churn.
Summary of Key Challenges
- Oversaturation: between 2008-23, the total number of credit cards in circulation in Hong Kong increased by 39% to 19.5 million, a growth rate that surpassed all other developed APAC markets. Hong Kong also leads the region in terms of credit card penetration per capita, with an average of 3.1 credit cards per adult. In short, the market is inundated with credit cards.
- Underutilisation: although local credit card spending has increased over the past years, the annualised growth rate in local spending per card (i.e. 2.2%) has barely exceeded Hong Kong’s inflation rate (i.e. 1.9%) over the same period. Overall spending per credit card also lags all other developed APAC markets, with the exception South Korea, indicating that credit cards are being underutilised.
- High Churn: Between 2019-23, approximately 900,000 credit cards were issued annually in Hong Kong. However, over the same period, an average of around 770,000 cards were terminated each year. This exceptionally high churn rate of approximately 85% is leading to considerable wastage in the local credit card industry.
- The above challenges have a notable impact on issuer returns. For banks, direct expense ratios (fee and commission income only) for their credit card businesses range between ~40-70%, 6-7x higher than their other business units, with acquisition costs ranging from HKD 700-2,100.
Solving for Activation
- From a strategic perspective, most local issuers place considerable emphasis on acquiring new credit card users, utilising a mix of cashbacks & rebates, rewards, and benefits & privileges to attract new customers. However, credit card deals are overlooked for acquisition-related promotions, despite their outsized impact on spending behaviour. The fact is that the number of credit cards that issuers offer (i.e. their focus on acquisition) has little-to-no correlation with customer spending (i.e. the outcome of activation). The same correlation for deals, however, remains high. This points to the fact that card activation, not new card acquisition, is key to driving customer spending (and hence issuers’ credit card revenues).
- We believe many local issuers are not taking full advantage of merchant deals to boost card spending, a function of various hurdles across the spending funnel, including low deal awareness, a lack of proximity of deals to the POS, and a range of usage frictions. To this end, we see ample opportunity for local issuers to tailor their credit card strategies to drive customer spending and, in turn, their own credit card revenues. This will necessitate a rethink of issuers’ existing approaches to merchant deals, including improving customer awareness, leveraging targeted partnerships, and enhancing the overall customer experience of using deals.
