CURRENT CHALLENGESPROBLEMS

CURRENT CHALLENGES/PROBLEMS

Information Technology Support

A comprehensive and integrated information technology support system is of critical importance for a flexible, convenient, secure and fast online payment system. For the past ten years, China's telecommunications sector has been growing at annual rates of 30% to 50%. However, China is a country with a massive geographical landscape, and comprehensive wire-based telecommunications coverage will involve a considerable amount of time and cost, especially in the inner and relatively underdeveloped regions. Although there are alternatives for the banking industry in overcoming telecommunications infrastructure inadequacy, these have limitations. For example, a cellular and wireless communications infrastructure may serve as an ideal alternative, but it is only a temporary solution to the telecommunications bottleneck, as it has limitations in flexibility. Similarly, smart cards have been considered as an alternative to overcome the vulnerable features inherent in the magnetic-strip card and the inadequate telecommunications infrastructure in the country, through its ability to store value and information and to permit offline^[5] transactions. However, the magnetic-strip bankcard constitutes at least 75% of all the bankcards issued in China. Smart card technology is relatively new to the world and is being adopted by a few banks in developed areas such as Tianjin, Shenzhen, Shanghai and Hainan.^[6] To replace the magnetic-strip card with the smart card requires careful analysis in terms of the cost-benefit equation. The sponsorship for the banking service technologies to the customers largely comes from the banks. Each smart card costs 30 yuan (locally made) to 70 yuan (imported), which, on average, is 19 times more expensive than the magnetic card (Jinrongshibao, 19/8/1997). In addition, a terminal that reads smart cards costs four to five times more than one that reads magnetic-strip cards. Smart cards could be a means to avoid the cost of modernising the country's telecommunications system. However, the replacement of 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.

The Local Banks

The use of technology by the banks for new service delivery to customers has been plagued by resource constraints. The banks' technological capability and resources have been strained in supporting the adoption of technologies for external service support to customers. A clear sign of this problem is the high rate of ATM and POS outage—the result of delay in repair and maintenance due to resource constraints (Liu, 2001). In addition, the lack of hybrid talents—individuals equipped with the knowledge and capability in the technical applications of technology as well as the business operation aspect—has hampered the development of efficient verification and processing of bankcard transactions. The need to educate inexperienced cardholders in the different functions of their cards or the use of payment technologies will exact a further toll on the banks.

Although the number of bankcards on issue has consistently exceeded the predetermined targets of the different phases, the electronic bankcard payment system was unable to efficiently support trading within the economy because of the lack of connection between the networks established by the different banks. On an overall basis, the electronic bankcard payment system still contains islands of networks or networks that are noninteroperable. The local banks have adopted different standards in transferring and reading information in their ATM and POS systems. As mentioned earlier, this was the result of a low level of interaction and cooperation among the local banks in the development of their networks. Exacerbating the noninteroperability of the electronic networks is the reluctance of those major local banks, which have poured significant investment into establishing their networks, to admit or allow smaller local banks to utilize their electronic infrastructure. It was perceived that admitting the smaller players into their heavily invested networks would be giving leverage to the latter's competitive position. The smaller players, for their part, realized that even if they were allowed to use the networks, the cost of entry would be exorbitant and unaffordable. The noninteroperability of the existing networks has attracted concerns from government authorities, as it constitutes a dead weight in the effort to achieve efficiency in the payment system. In early 2000, the Chief of the Central Bank announced that the electronic bankcard payment system would achieve interoperability and standard uniformity in large and mediumsized cities nationally in three years time. Although the government and the Central Bank have been directing the local banks to consolidate and integrate the existing islands of networks since the mid-1990s, only 27% of the ATMs and 35% of the POS systems achieved interoperability across 16 major cities and provinces^[7] in 2000. It is hoped that the dream to "travel the whole of China with just one bankcard in hand" will materialise three years from the Chief's announcement.

Electronic Commerce

The Chinese government supports the development of electronic commerce as a source of economic growth (Cartledge & Lovelock, 1999). Unfortunately, the undeveloped electronic payment system has hindered the progress of electronic commerce in China (Clark, 2000; Einhorn et al., 2000; Hansen, 2000; Burns & Taylor, 2000). It seems that the unpleasant experience with the ATM and POS systems has affected the use of online payment through the Internet. In the absence of integrated nationwide telecommunications networks or an efficient electronic payment system, consumers are cautious in purchasing items through the Internet using debit cards. The total value of online electronic business transaction is still small, despite the increasing number of Internet users and business-to-consumer (B2C) or business-to-business (B2B) sites being established in China (Business Asia, 2000). For example, it was found that 41% of Chinese Internet users held at least one bankcard in their possession in the year 1999 (Business China, 1999), but only 8% ever purchased a commodity or service over the Internet and 2% had made online payment for their purchases in the same year (CNNIC, 2000). This low level of Internet purchase patronage has forced the closure of an electronic business website developed and operated by a popular Chinese bookstore, because its customers felt that it was more convenient and secure to purchase books at the physical location of the bookstore. Despite the small number of actual transactions conducted over the Internet, it is interesting to note that there is a higher level of willingness on the part of Internet users to make Internet purchases. A survey conducted in 1998 revealed that 87% of Internet users would purchase goods and services through the Internet if the online payment and Internet systems were secure and reliable. However, this percentage fell to 59% in 2001 and was attributed to the erosion of users' confidence in the poorly developed electronic payment and Internet environment. Insufficient regulation and poor customer protection in the Internet environment means that consumers who make online payments take all the risk, and this has stifled the development of electronic commerce in the country (Schwankert, 2001; Nelson & Leigh, 2001). In addition, the restricted geographical application of the bankcards also restricted the scope of electronic business. A bankcard issued in Shenzhen is unlikely to be accepted for payment to a company based in Beijing. Innovative solutions (such as using cash-on-delivery system, wire transfer payment prior to delivery and opening of accounts with the seller's bank) undertaken by some businesses to overcome online payment concerns were found to have inflated cost and risk. More attention and resources have to be devoted to ensuring that each purchase is genuine, especially in cases where payment arises at the time of delivery (in the case of cash-on-delivery) instead of before delivery (in the case of online payment). In cases where payment has to be made prior to delivery, customers found it inconvenient to wait for a week before the paid items are delivered.

The Chinese payment system is not developed enough to support online payment. The low level of consumer confidence in the electronic payment system and an undeveloped telecommunications infrastructure have contributed to the slow and limited development of electronic commerce in China. The need for a reliable infrastructure to protect the integrity of payment instructions in an electronic commerce environment would place significant burdens on the government. The government would need to become a significant sponsor of information technology applications and an active player in the telecommunications and information technology sectors.

World Trade Organization

China became a formal member of the World Trade Organization (WTO) on November 10, 2001, after 15 years of negotiations. As a member, China is obligated to gradually open its sectors (telecommunication, finance, insurance, commerce, transport, construction, tourism and intermediate services) to overseas investors and implement market-based mechanisms for free and fair competition in its economy. Opening of markets for foreign participation entails the need to create stability and predictability in the operating environment so that investors can plan their activity in the Chinese market with greater certainty. Moreover, foreign investment and competition will eventually drive radical changes to China's systems, forcing minimum operating standards of efficiency. New laws, regulations and rules need to be drafted, and some decrees need to be amended, while obsolete laws need to be abolished. Since admission into the WTO, the Chinese government has appointed several taskforces to review its legislation for consistency and relevancy in the WTO environment.

While the economic opportunities arising from China's accession into the WTO will be profound, it will be no easy task, particularly when it has been given only three to five years to implement changes across a wide spectrum of sectors in the economy. The electronic payment system will be placed under pressure to cope with the rising market activities due to the new market structure and business practices influenced by the growing presence of foreign companies. The status of electronic payment will also affect China's ability to integrate into the global trading systems, which are increasingly supported by information technology. New forms of payment are expected to emerge in the WTO scene, particularly the credit card service and the Internet online payment system, given China's vast population (frequently viewed as huge market potential by foreign companies) and the increase in the entry of foreign companies with wide experience in sophisticated transaction systems. It is hoped that foreign participation, particularly in the financial, telecommunication and distribution sectors will strengthen and ensure efficiency in the electronic payment system.

^[5]Transactions recorded by the agent or merchant and processed in a batch at the end of the day; no call is made with each card payment transaction.

^[6]The number of smart cards issued in the late-1990s was about 3% of the total bankcards issued by the banks in China (Liu, 1999). The adoption of smart card is comparatively more pervasive in the Chinese telecommunications and transportation industries than in the banking industry. The ratio of smart cards in circulation in the banking industry, the telecommunication industry and the transportation industry is 10:40:50 (Dan, 1999).

^[7]Beijing, Shanghai, Tianjin, Guangdong province, Shandong province, Jiangsu province, Shenzhen Special Economic Zone, Fuzhou, Hangzhou, Shenyang, Wuhan, Kunming, Dalian, Xiamen, Qingdao and Haikou.