Who Gets the Credit? China’s Experiment in Credit

  • June 7, 2017

Although the Chinese are well-equipped with electronic gadgets, including smart phones and tablets, they buy most things with cash. They have yet to develop a credit economy. Chinese consumers’ inexperience with credit make them susceptible to fraud on a massive scale. Then again, Chinese retailers’ inexperience with credit also make them susceptible to fraud on a massive scale. You don’t have to be a late-night television psychic to predict the likelihood of a major scandal involving credit cards in China in the near future.

The Chinese are fortunate, however. If they so choose, they can learn from American and European experiences with credit cards. American consumers and retailers suffered some painful learning experiences; indeed, we still haven’t banished credit card fraud.

Credit card usage rests upon an assumption of trust. This is not the trust of bygone days, when a merchant knew her clients and extended credit for a limit period (yearly, seasonally, or monthly). My parents had a charge account at the local Montgomery Wards back in the 1960s. Mom could purchase items, and the store would record her purchases. At the end of the month, my parents sent a check and settled the account. My parents trusted the retailer to keep accurate records, and the retailer trusted my parents to pay the balance.

Credit cards extended trust to impersonal relationships. Using a fore-runner of “Big Data,” banks and credit card issuers created algorithms to identify candidates for their credit cards. Sometimes the issuers relied on such crude indicators as zip codes.

An interesting ethical issue is whether card issuers owe a duty to educate card users. One way, of course, is to clearly describe the interest rate charges and late fees. Given Americans’ rather dismal understanding of simple mathematics, just what would constitute an adequate description is difficult to ascertain.

Some fifty years ago, American bankers and consumers had a lot to learn regarding credit cards. The First National City Bank of New York introduced its Everything Card in August 1967. The card was novel in that it could be used at many vendors and not just a handful. The bank mailed a million cards without establishing accompanying security. Thieves stole credit cards from mailboxes, forcing department stores and other vendors to create lists of dubious credit cards or to phone the bank before approving a transaction. Organized rings of criminals quickly jumped into the fray and used forged drivers’ licenses and Social Security cards to get authentication of cards. Even worse, there were no established laws regarding who was liable for fraudulent purchases. Within a year, the First National City Bank admitted defeat and stopped the card.

The bank eventually joined Master Card. The credit card industry learned lessons from the debacle and pressed for legal reforms governing the use and protection of future cards. Credit cards, of course, are now ubiquitous, although many Americans experience some painful experiences in learning to use them.

China, then, appears poised to experience its own set of credit card fiascos, before the government, business, and consumers fully understand the financial tool. China’s banks may have more difficulties than their American counterparts of 1960, as its banking system is not as developed. American companies operating in China, however, may help in the process of establishing a credit card system. If predictions of a cashless economy are accurate, though, perhaps China can skip the credit card stage of consumerism and go directly to debit cards.

Will China escape the pitfalls of credit card usage, or is the country destined to repeat, in some fashion, the mistakes made by American credit card companies and consumers? Stay tuned to see how a heretofore Communist society deals with credit cards.

The views and opinions expressed are those of the author and do not imply endorsement by the University of Northern Iowa.

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China's Credit Card Experiment

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