Alternative Solutions and Recommendations

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A comprehensive and integrated information technology support system is of critical importance for a flexible, convenient, secure and fast online payment system. Although there are several alternatives for overcoming network infrastructure inadequacy, they all have limitations. For example, the mobile phone network is an emerging technology that has the potential to deliver payment convenience, allowing banking access anywhere and anytime. Although mobile banking services are being offered by most of the major local banks, they are still in their early stages of development. In addition, security issues remain a major concern. A promising new technology is the smart card technology, which offers advantages over magnetic strip card technology, especially in terms of its increased security and wider application potential. However, the magnetic-strip bankcard constitutes at least 75% of all the bankcards issued in China. To replace the magnetic-strip card with the smart card requires careful analysis in terms of the cost-benefit equation. The replacement of the relatively cheaper magnetic-strip technology with smart card technology means more capital investment, with an uncertain or prolonged payment period for the banks. Although the smart card is increasingly being introduced in greater numbers and more cities, its operating framework is not as established as the magnetic-strip card. Unless there are means of financing a rapid transition to the smart card, it is expected that the magnetic-strip bankcard will remain the dominant card for some time.

A strong and effective coordinating force is needed to consolidate and connect the disparate networks. In March 2002, the government affirmed its desire to achieve a national and universal electronic payment system by 2005 through the establishing of China UnionPay Company Limited. This company was formed through shareholding stakes from the four major local state-owned commercial banks, 10 shareholding banks, 45 city commercial banks and 12 rural credit unions; and the structure was envisaged to provide a good platform for fostering cooperation in network consolidation and interconnection. The network integration effort took a further step in June 2002 when this Chinese entity became a member of Visa International and Mastercard International. This allows local members of the China UnionPay Company Limited to access and utilise the global bankcard processing networks of the two experienced international card issuers, for payment settlement and processing of international bankcards. It also provides an opportunity for the local members to leverage on this exposure to improve their domestic bankcard payment systems for e-commerce development.

Credit reporting agencies and bureaus play an important role in gathering information for the local banks to make accurate and timely credit decisions. The existence of such entities would help alleviate the resource constraints faced by the banks in investigating the credit standing and authenticity of the information lodged by bankcard applicants. In addition, these agencies can help to eliminate duplication of the resources expended by each bank on the same applicant. However, such entities are new to the emerging market economy and may require the participation of established and experienced foreign companies. The injection of foreign expertise may help the bankcard industry to adopt a consistent framework for assessing the credit standing and risk of the applicants, which is presently highly inconsistent among the local banks and below the standard of international players.

The Chinese government should continue to play an active role in creating legal and institutional frameworks that will respond promptly and appropriately to the changes brought about by development in technology and e-commerce. In particular, there is an urgent need for frameworks that address the duties and rights of the participants, and the verification and certification of electronic signatures for online contracts, in order to cultivate widespread acceptance of online payment and trading.

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