renzhi

The charge card industry in China is worth hundreds of billions of RMB a year, operating on the margin of the jurisdiction of the People’s Bank of China (PBOC). The card issuing companies are not registered as financial institutions, therefore, are not subject to the same regulations as financial institutions.

The cards come in different formats, as IC card, magnetic card, scratch card with a simple pass code, or just a virtual account with a password and no physical card at all. The charge card is just a concept, and does not necessarily have anything to do with a physical card.

The way it works is very simple. You transfer some amount of money into the charge card account, and you can use it to pay off at any brick and mortar or online store that accepts it. However, there are a lot of anonymous pre-charge cards. Anyone can buy pre-charge cards for any amount, usually in multiples of 100 RMB.

There are cards for pre-charging mobile phone accounts, cards for pre-charging public transit cards, cards for hair dresser shops, cards for spa shops, cards for online stores, cards for gifts, cards for dining, cards for general consumption, etc, etc. As the card issuing companies are usually quite small, the scope of usage is usually limited to regional areas only. Currently, there is still no charge card that is accepted nationwide, except cards from Carrefour, or Walmart, or some such multi-nationals. But then, the cards are only accepted at their own respective stores.

There are literally thousands of card issuing companies, some very small, tiny. Cases have been reported, every year, that some card issuing companies have disappeared under the radar, with lots of monies in their users’ account. They just evaporated. When this happens, the reaction from the police is just shrug, tough luck. You, as a consumer, decided to put your money in the hand of some fly-by-night operations, therefore, you deserve what happened. We could look at it when we have time, but do not have too high an expectation.

The major problem lies with the pre-charge card. It is anonymous, untraceable. It has become what is commonly known as corruption card, or decadence card. The main purpose is not really for payment transaction anymore, but it is used as a tool for money laundering, cash kick back, or bribery gifts.

Let’s say your enterprise needs a favor from government official. It would be too easy to trace if you wire money to his bank account, even if the said account is offshore. And then, if it is an offshore account,  it would be hard to spend the money in China without leaving a trace. Therefore, you just buy a pre-charge card for the amount you need (any amount is accepted), and just slip the card into the government official’s pocket. The receiver can do whatever he wants with the money, and your company even benefits from tax deduction by counting the gifts as business expenses.

Sure, you can just give him a pile of red backs in a vanilla envelope too. But then, it won’t be tax deductible, and it’s not the in thing to do either.

However, charge cards are not accepted in all places, as the point-of-sale (POS) systems must be integrated with the system from the card issuing companies. Believe it or not, a lot of these companies barely have IT systems. And if you are the receiver of such a card, it is impossible to cash back. You have to spend the whole amount, and only at the places where it is accepted as payment medium.

You don’t expect the corrupted official to spend tens or hundreds of thousands on clothes, luxury goods, and go to have nail cleaning every day, do you? Well, he obviously could, but then, given his official income, it would be like hoping that no one sees it  while flashing a high-power beacon in the dark.

Well, don’t worry for them, as there is a whole servicing industry which would be happy to resolve the problems of demand and supply. If you have received a pre-charge card and don’t want to spend it, people in the servicing industry will help you to cash back, for small fee, you understand. The cut is normally a percentage of the amount in the card, usually running between 5% and 10%. If the card was received as gift, who really cares about the 5% or 10%? It is simply shrugged off.

Who would want to “recycle” the charge cards by providing cash back? It’s not hard to know, it’s basically the same people who sold it to you, the consumer, in the first place. They sold you full amount for a plastic card or just a piece of paper, then take a cut for cash back. A 5% to 10% of profit margin, for doing basically nothing, that’s a pretty good business model. That’s even better than when consumers spend it at some store to purchase real things, as in this case, the card issuing company would have to share the profit with the merchants. It is no wonder that everyone is jumping on the bandwagon of the charge card business.

Taking 5% to 10% profit while providing no service is nothing compared to the money deposition in their account. Some larger card issuing companies have hundreds of millions, even billions, in their account, because the consumers put their money there, for no interest. This is why everyone is jumping on the bandwagon. From a regulation point of view though, since these companies are not financial institutions, money deposition is illegal. Why has the government done nothing so far to curb it? The issue is more complicated than a post like this could describe. I’ll probably come back later.

In the last two years, people got creative too. Businesses have also started to use charge card to avoid taxes, some portions of employee salary are paid in pre-charge cards. The companies can then deduct it as business expenses, while saving a good deal on taxes at the same time. How to spend the amount in the card is up to the employees, or they should just cough up the 5% to 10% cash back rate and take the cash.

But why would an employee accept this? If the final total amount he receives this way, is more than the amount he would have received by paying regular income tax, then why would he argue? Is this in the long term interest of the employee? Well, you have to do the research for yourself.

Is this legal, you ask? Please consult your attorney. But this is what’s happening, now.

The government is keeping a keen eye on the situation. On June 14th, the governor of the PBOC has issued a new decree for regulating the non-financial institutions which perform financial transactions. It looks like an industry shuffle is imminent now.