China’s Lunar New Year is due next month. It’s usually a boom time for the issuance of pre-paid cards – a settlement method that we first raised concerns about as far back as 2010 (see WiC47).
According to Shanghai Securities News, China’s pre-paid card market had grown to Rmb1.4 trillion by 2013 (second in size only to the US). The cards store monetary value and can be used in supermarkets and even department stores. They’re particularly popular around Chinese New Year, when companies like to give them as lai see gifts to clients and high-performing staff). Their attraction owes much to the awkward practicalities of giving monetary gifts. The Rmb100 note is the largest in circulation, so if you want to give someone a lai see of Rmb10,000, that’s a wad of 100 notes. Much easier to hand over a credit card sized pre-paid card, with that amount purchased and pre-loaded.
However, as CBN reports the industry got a shock late last month when the cards of Shanghai-based Chang-go stopped working. Merchants stopped accepting them and users flocked to its headquarters for refunds. According to the newspaper, Chang-go’s owner is currently “unaccounted for” and the central bank has had to step in to figure out what happened.
Chang-go issues pre-paid cards but also settles transactions involving its card base. What seems to have happened is that it began operating in the shadow lending market, lending its float of unspent credit to high-risk borrowers at high rates. When some reneged on their debts, liquidity at Chang-go collapsed and it could no longer settle its obligations to cardholders and merchants when its cards were swiped.
CBN reckons it could be the first third-party payment company to collapse.
The question then becomes: how many more of China’s 160 pre-paid card providers could have been up to similar tricks?
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