A decade ago, bank salespersons were seen at almost every street corner in Taipei. Apart from credit cards, they also offered unsecured micro-loans to ordinary people. As long as you didn’t have a criminal record and could provide your basic information such as ID number, address and employment, you could get a cash card in just five minutes, even without guarantees. The card could be used for credit purchases just like a credit card,and offered a very convenient withdrawal service.The only difference between cash cards and credit cards was that the latter one didn’t accrue interest until the end of a month, while the former started collecting interest right from the day after you used it.
Maybe you will ask: you mean whoever wanted to get a cash card could have one?
Then what about the high risk?
In 1999, Cosmos Bank issued the first ”George & Mary” cash card in Taiwan,providing different levels of micro-credit loans, from NT$10,000 to NT$300,000. Between 2001 and 2003, the competition in the realm of cash cards reached its climax. In 2005, Taiwan was confronted with a cash card crisis.
Through the year of 2005, the total default volume in Taiwan amounted to over NT$30 billion.The number of over-borrowing people was about 300,000 to 400,000 (almost 1.7% of the total population, and 2% of adult population).The average loan value was more than NT$1.9 million.The outbreak of debt crisis exerted an overwhelming influence on Taiwan’s economic development and social stability.
Then why on earth did such vulnerable cash cards get launched?
Back in 2004, Taiwan’s overall economic environment was not bad. However, the banking industry had already started to make transitions to consumer finance, issuing credit cards and personal consumer loans in a large scale. According to the statistics from Taiwan’s FSC, the total value of the two banking services increased from NT$663.1 billion to NT$805.6 billion, and the value of cash cards even surged from NT$193.45 billion to NT$306.7 billion.
Then why did the banks swarm into consumer finance?
Firstly because of the demand side, there was a rising middle-class population in Taiwan with increasing and diversified consumption demands. As for the supply side, the financial system of Taiwan was suffering from excess liquidity, and the enterprises were slowly shrinking.
Secondly, after the interest rate liberalization, private banks kept growing and the traditional business of commercial banks became less profitable.The whole banking industry was eagerly searching for new opportunities.
Wait a minute…It sounds somewhat similar to the present situation of mainland China. Will the same crisis happens again?
The use of credit cards in Taiwan had already become relatively common at the beginning of the 20th century -Taiwanese citizens held 1.7 credit cards per person on average. Under such conditions, the population that cash cards aimed at was far from ”qualified”, and using cash cards in consumption became more conspicuous.
What’s more, there was a certain degree of credit risk control, banks tended to ignore risks in order to grab the market share. The risk control, of course, could not compare with the present credit system armed with big data technology.
Nonetheless, the story of cash cards may generate some relevant experience for the future development of consumer finance in mainland China
First, in the realm of consumer finance, the demand for emergency loans remains strong. In 2007, big banks such as China Commercial Trust Bank survived the cash card crisis and continued the issuance of cash cards. On the other hand, many of the small private banks with high leverage and bad debt rates closed down.
Secondly, the core problem of cash cards may not lie in credit investigation. After all, no matter how reliable the credit investigation is, high risks are not avoidable for emergency loans, which target the long tail of consumer requirements. For these consumers, apart from penalty interest of high rates, controlling the total loan amount is probably of the most importance. During the cash card crisis, about 30% of all the debtors had a debt amount of 22 to 45 times of their monthly payments, these borrowers also accounted for the majority of bad debts. Therefore, emergency loans should focus on micro-loans, with the upper limit not surpassing 22 times of monthly payments.
Last but not least, consumer finance should be prepared for the test of economic cycle. Both in Taiwan and mainland China, the transformation of consumer finance emerges during the economic downturn. Although the middle class usually expands in the period of economic ascendance, we shouldn’t neglect the vulnerability of national income and accumulation of wealth for emerging economies .Once the unemployment rate rises, many people will have to face the situation of insolvency. In a word, it is always not that easy to transform from an investment driven economy to a consumption driven one.
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