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Smart cards: China to lead the way in smart-card usage
According to the Chinese government’s figures, China consumed 334 million chip cards in 2003. This figure is expected to frog-leap to more than 556 million in 2004, 689 million in 2006 and will soon cross the 2.5-billion mark, making China the country with the largest smart-card user base in the world.
The telecommunication and transportation sectors and the government itself are expected to drive this growth, though awareness of the smart card, its extensive use in daily life and its benefits are expected to spread adoption to other sectors as well.
The urban Chinese nationals are already familiar with the smart card as a card such as this has been in use since the government introduced the Golden Card Project in 1993.
The Chinese today use smart cards for e-payments, on the public transport system in the bigger cities, as campus cards and for communicating with each other via cell phones.
Currently, more than 60% of the smart card in China is being used in the telecommunications sector, with about 123 million cards used in mobile phones, while another 70 million find use in prepaid chip cards in pay-phones.
This composition is expected to change in favour of other uses in the coming years. According to independent consultant firm Information Management Systems (IMS) Research projects: “In 2008, more than half of the cards in China [are expected to be sold] for applications other than mobile-phone subscriber identity module (SIM)/UIM, or fixed-line pay-phone cards.”
A big boost to smart-card usage in China and its wider proliferation is also expected to come from the 2008 Olympic Games in Beijing. The Chinese are promising to make this a “digital Olympics”. What this broadly means is that services such as security, medical-care/social security, information search, employment information and consulting will be extended to contestants, visitors and nationals, using smart cards such as the Beijing Green Card, Citizen Card and Smart Transportation Card.
Understandably, the smart-card suppliers are gung ho about China. Yet, in the retail industry, the smart-card use is still at a nascent stage. Most retailers are using plastic or paper cards as their loyalty cards. And when smart cards are used, they are often stand-alone single-use card which explains why they have not gained much popularity among users and retailers.
Tony Cotterell, principal & consumer business leader in China, Deloitte Touche Tohmatsu, however, observed that mainland China companies are fast adopters of technology. Smart cards, for example, have already been adopted as e-money for transportation.
“I expect applications of smart cards by retailers will be one to two years away, either as e-money or for loyalty programmes. Besides, retailers in Hong Kong, such as 7-Eleven, Circle K, and Watson’s, are using smart cards as a form of payment. These retailers will import these technologies into their mainland operations once the infrastructure is in place.”
The benefits of smart-card usage are known. It offers greater convenience to shoppers, especially on small-ticket items, thus stimulating revenues. In Taiwan, for instance, Starbucks Coffee runs a smart-card-based stored-value-card programme called On-the-Go. A customer pays an initial deposit of NT$1,000 (US$30) for a card, which can be recharged once the sum deposited is exhausted. For every NT$1,000 deposit, the customer is awarded bonus points, which can be redeemed for a free tall latte.
Sharleen Chan, CRM project leader, President Starbucks Coffee Corporation, Taiwan, said that On-the-Go is a win-win programme. “The customer benefits from our bonus-point programme as we rotate our bonus exclusive merchandise each month, such as three points for a half-pound of whole beans, six points for an exclusive tumbler, etc. The company benefits from more frequent visits by card users and a bigger transaction size.”
Chan said that, so far, 280,000 cards have been issued, resulting in a retention rate of 35%. “It is popular with the regulars,” she maintained.
The Starbucks programme is the typical kind of stand-alone loyalty and e-purse programmes that one tends to see in Greater China. The main reasons multi-use programmes have not yet taken off lies in the Chinese preference for cash transactions as well the lack of infrastructure.
The Chinese economy, like the rest of Asia, is still largely driven by cash rather than plastic money. Those who do make credit-card payments have a high default rate. This has forced credit-card companies to demand hefty commissions from the retailers to spread their risk. The commissions currently being demanded are about 50% of the transaction size (with the exception of Wal-Mart, which has been able to drive an attractive deal at around 5% commission).
The retailers have been protesting and have, in turn, refused to accept card payments - which work against the retail sector developing a strong e-payment system.
Another important development in the government sector is also delaying wider adoption of the smart-card technology in the retailing industry. The Chinese government has widely adopted chip-based cards in its various agencies, including transport and finance.
As the chip in the smart card can store information on a variety of subjects, many retailers are awaking to the possibility of adding on their loyalty and payments services to an existing card. Such an add-on spreads the card costs on wider canvas for retailers and customers.
Said Cotterell: “To make smart card valuable to the shoppers, it must be integrated to all customer-interaction channels, including point-of-sale, kiosks, Web, and other convenient and affiliated locations. The card must be seen by the shoppers as a convenient tool to manage their spending, their personal and family life, and their relationships with a myriad of organisations.”
It is expected that conglomerates which own multi-lines of business would have the greatest potential to maximise the benefits of smart card and stimulate its adoption. “Conglomerates that own telecommunications, electricity and financial services, and different formats and brands of retails can provide the value proposition to the shoppers and the member companies,” he said.
It is in this context that an experiment by the Shanghai Transport Authority is proving to be a trend-setter in China. Called the SmartClub, the loyalty programme operates without a card of its own. Similar to Hong Kong’s Octopus and Singapore’s ez-Link cards, the card it uses is issued and operated by the Shanghai Public Transportation Card Company (SPTCC).
SmartClub has a 12-year exclusive deal to operate a loyalty-points programme using the SPTCC card. As each card carries a unique number engraved on one side, consumers simply register this number, together with their basic personal information, with SmartClub.
The moment he registers, the cardholder earns one SmartPoint for each trip. This effectively turns the entire Shanghai public transportation system into SmartClub’s “partner retailer” with over 60,000 points-of-sale. In addition, SmartClub members can use their SPTCC card to earn SmartPoints at various retail merchants, especially those with lower-average transaction amounts and faster transaction-speed requirements.
One such retailer is McDonald’s, which began a four-store trial of SmartClub in June 2003. SmartClub members earn SmartPoints for every purchase at McDonald’s. “Initial results showed that SmartClub members are generally the more-frequent visitors in our customer base,” said Shantel Wong, chief marketing officer, McDonald’s, Shanghai. She added that the majority of members are white-collared workers aged 20-30 years, with an even split between men and women.
By end-2003, the fast-food giant signed a five-year deal to roll out the programme to all McDonald’s outlets in Shanghai — 66 at that time; now expected to be 100 by end-2005.
“There’s no question that being ‘approved’ by McDonald’s helped SmartClub recruit new partners,” said Henry Winter, CEO, Smart Consulting (Shanghai) Co Ltd. “The latest companies to join are Linktone (China’s largest mobile services company, recently listed on NASDAQ), and Quest Sports (China’s largest chain sports store).”
This year, SmartClub is extending its programme to include bank cards. Members would be able to register their debit and credit cards from any bank with SmartClub. When they use these cards at any SmartClub partner retailer, they will automatically earn SmartPoints. This again allows SmartClub to use an existing card base and existing card reader base to run its loyalty programme.
“SmartClub has successfully raised usage of the SPTCC card by 25% in three months,” said Winter. “Simply by offering one SmartPoint for each use of the card (as compared to 10 SmartPoints for eating at McDonald’s), SmartClub has successfully ‘incentivised’ its members to change their behaviour [of paying in cash].”
The SmartClub initiative shows that this type of loyalty programme offers three major benefits to retailers: Points outsourcing; enhanced customer understanding through data mining and market research; and direct marketing.
What is points outsourcing? According to Winter, as SmartClub is a coalition loyalty-points programme, it enables each retailer to achieve much more than it could with its own stand-alone points programme, while creating a competitive distinction that is almost impossible to copy.
This is because of the manner in which this programme works. When a consumer earns “100 points” (from any company) that can be redeemed for a prize, that means the company has taken out a certain percentage of that consumer’s spending, and set it aside to pay for the prize. Most companies can afford only 1%-10% of the purchase amount as point value. However, when this amount is multiplied by the average consumer’s frequency at a given retailer, the result is usually very small.
“That’s why most points programmes take many years to redeem any prize as the retailer just can’t afford to give more,” said Winter.
With SmartClub, each partner still gives the same low (affordable) percentage of sales. But the consumers can combine their points across a wide range of partners, adding up to a prize in weeks, even if the points accumulated are small. From the retailer’s point of view, this means each partner now has a much more attractive points proposition to the consumer - with no increase in budget.
However, there are more to points outsourcing, said Winter. What happens when consumers have enough points to redeem a prize? How exactly do they get it? Where do the prizes come from? How do members check whether they have enough points to redeem? Does the member pick up their prize at the store, or a central location, or is it delivered? Handling these logistics is a nightmare, he said.
However, when companies use SmartPoints, they benefit by not only giving consumers something much more attractive for the same cost, but also eliminating the problems when those points are being redeemed.
SmartClub has a fully automatic platform of prizes - from small things that can be redeemed in a few days to laptop computers that might take two years to accumulate the points.
“So when SmartClub’s partners give out SmartPoints, they know that it is money well spent - not only will these customers be back to get more points, but every one of them can also be profiled and studied using SmartClub’s world-class proprietary data-mining tools,” said Winter.
He added that most SmartClub clients find the savings from the traditional market research can easily pay for all SmartClub fees.
Finally, SmartClub’s direct marketing system allows partners to instantly send e-mails or SMS (short message service) texts to a precisely-profiled target group, for example, “men, aged 25-30, who have purchased at my store in the past six months but not in the past 30 days”.
Every SmartClub e-mail offers members a chance to earn more SmartPoints. SmartClub’s system then tracks to see how many members actually respond to the e-mail by physically going to the store, making a purchase, and earning their SmartPoints. This allows precise measurement of advertising return on investment.
Although the SmartClub programme is not strictly a smart-card programme, as the retailer’s information is not stored on the chip in the card but in SmartClub’s central database, it is as effective in tracking customer transactions, Winter maintained.
For instance, the company is currently working with McDonald’s to fully integrate into the latter’s cash-register system. This means it would be possible to track individual items purchased. So, by year-end, McDonald’s would be able to know, for example, the kind of person who buys large fries and the favourite menu items of women aged 18-23, with college education.
This would be a revolution in retail marketing as it would allow McDonald’s to work closely with its primary supplier, Coca-Cola. Coke would be able to offer extra SmartPoints to McDonald’s customers who order the fizzy drink, and then use the SmartClub’s data-mining tools to see who these people are.
“Can you imagine that? A large-scale, automated (not consumers self-reporting purchase) loyalty programme for an FMCG like Coca-Cola?” asked Winter.