Banking & Finance, Section

House of cards

The explosive growth of the pre-paid card has many worried

House of cards

Can I have a pre-paid card instead?

In China, cash gifts are given in red envelopes at weddings, birthdays and during Chinese New Year. These packages, known in Mandarin as hongbao, are also a powerful symbol of corruption, as they are regularly used to convey bribes. But, as a means of distributing payoffs, the hongbao is losing ground to a high-tech competitor – the pre-paid shopping card.

Beijing Daily gives one recent example of an official in the Planning Bureau who was found to be involved in corrupt land transactions. When the police raided his home, they found almost a kilogram of pre-paid cards waiting to be spent. The newspaper also cites a high profile case of Hao Heping, a former senior official at the State Food and Drug Administration, who received a single card with over Rmb500,000 ($73,200) of credit.

These are not isolated incidents. Over the last three years, more than 60% of people that were found to have received cash bribes had also taken a pre-paid card as a backhander. The offerers of bribes prefer giving pre-paid cards because they are not registered against a name, and hence difficult to trace. And there’s a practical angle too: in a country where the biggest denomination note is Rmb100, you need to hand over brick-like stacks of cash to make a meaningful bribe. A pre-paid card is a lot more compact.

The pre-paid card industry is not yet subject to much regulation, although that it likely to change as more cases of illegal use are discovered. Research commissioned by Accor estimated at least Rmb800 billion worth of cards were in circulation in 2008. The market is growing fast, at a rate double that of GDP. Cards can be issued by retailers themselves or by a third-party partner which sells them for commission.

The vast majority are used by ordinary people as a convenient way to pay for things like internet usage, phone calls, groceries, taxi rides and other day-to-day purchases. There are also common in department stores.

Property & Credit Holdings is China’s top issuer of pre-paid cards, with two million people holding its merchandise card. Analysts estimate that the company issued Rmb4 billion worth of cards in 2008, reports Economy and Nation Weekly.

Card issuers make money through commissions or by charging administration fees from the retailers that accept the cards as payment.

Then there are the ‘breakage’ benefits – cases in which cards are lost by the customer or reach their expiration dates. But perhaps the main attraction for companies providing the cards is their pre-paid nature: the issuer holds onto the stored value in the card and only transfers it to a retailer at point-of-sale. That provides access to plenty of interest-free capital. An industry insider told the Economy and Nation Weekly that the use of these funds for investment purposes, especially in the stock market, is not uncommon. Many card issuers offer additional financial services or run investment operations. The group that owns Property & Credit Holdings owns three other subsidiaries, all of which invest in shares.

Who protects the consumer while all of this is going on? The absence of detailed regulations means that there is little to stop an issuer from taking excessive risks with the money in its possession.

Other common complaints are that shops and clubs that issue cards often shut down without notifying their clients. Companies that change owners or relocate often refuse to honour the old prepaid cards too.

One of the worst cases was in Shanghai in 2005, when the sudden bankruptcy of the Maya Group (a chain of convenience stores) left thousands of customers with cards full of worthless credit. No refunds were made available.

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