While you are playing with your new flashy credit cards, how long has it been since the last time you appreciate your dull, featureless, Octopus card?
The Octopus card, aging inside our wallets would soon become fossil although we must sense its existence everyday. While credit card companies try their best to please us with fancy cards in whatever variety and generously extend our credit limits, the Octopus card company does nothing. The card design looks the least possibly attractive, without the least flavor of personality or social status identity. It doesn't even have an expiry date for us to care.
Why is there a world of difference between a credit card and an Octopus card?
The answer is: we are the golden goose of credit card companies, but not that of the Octopus company. We are merely the baits for Octopus' bigger preys.
Hong Kong has 14 million Octopus cards under circulation, the issuer claims. i suspect the statistics was an overstatement as there are a lot of cards being damaged or lost without reporting. Widespread rumors that one can magically increase the credit balance of the cards by heating the cards inside microwave ovens certainly help contribute to the "death rate" of the cards, albeit to an unknown extent. Anyway, anyone must have at least one Octopus card.
The cards bring us convenience, saving time of changing coins. They are accepted in many places such as public transportation, convenience stores, vendor machines, supermarkets and parking lots. It is great to see more and more places accept the cards. Eventually, we do not need the weighty coins.
One more reason why we like Octopus so much is that it doesn't cost much. Each card requires HK$50 for an upfront deposit, for good. From then onward, we use every cent the cards have debited us. The card service is free of charge although, strictly speaking, we forego the interest income while we could otherwise save the money in our bank accounts. Suppose our average balance in Octopus is HK$100, and the total cash being locked up is HK$150 (including the deposit). Further suppose the saving interest rate is 5%. Over a year, we forego HK$7.5, a tiny fraction of the total transactions going through the card. The actual amount foregone could arguably be even small if Octopus cards reduce our cash balance in wallets only, but keep our bank balance unchanged, which could be true.
Those foregone interest incomes do go to the Octopus company, an unlisted subsidiary of MTR Crop (66). Following our assumptions, the Octopus company should be holding HK$2.1 billion in cash or liquid assets. An interest rate of the same 5% would yield an aggregate interest income of HK$105 million, which is as good as a stable source of income can be.
However, the exciting part of the Octopus business is on the corporate side, what i have meant by the bigger prey. The company said transactions processed through Octopus amount to HK$77 million a day. The shops and public transportations, which accept Octopus cards, have to pay the card company a service fee, being a percentage of Octopus transactions, in addition to an upfront installation fee and a monthly rental fee for the equipment.
The card company does not disclose the service fee percentage although it has been reported that the percentage for public transportation is 1%. The percentage varies from client to client. Suppose the Octopus company charges a flat 1% for all transactions. The company collects service fees of HK$770,000 per day and HK$280 million a year, let alone the installation fee and rental fee. Incomes from corporate clients at present have already vividly outweighed incomes from the consumer counterparts.
What is even more exciting is the potential of growth and scalability. Octopus' corporate client base is ever expanding, soon to include taxis and other shops. The service fees will increase with transaction amounts. After Octopus feels that it has expand its client base to a saturated level, which could happen a decade later, it can comfortably increase the percentage level of its service fees, the installation fees, the rental fees or all of them.
To learn to appreciate Octopus like its corporate clients do, let's switch back to the consumer side. Octopus is not interested in pleasing consumer clients because it knows that it won't succeed. So far, the company has been charging cardholders with the "opportunity cost", of $7.5 a year under our estimation. Should the company introduce an annual fee of whatever amount, many people would simply switch back to coins and banknotes. Octopus' close rival, coins and banknotes, will take charge again because the substitution is so easy.
However, from the viewpoint of corporate clients, the emergence of Octopus is of great value to their businesses.
We talk about the rush-hour problems in the previous article. Hong Kong is no Wisconsin where people buy all goods they need once a week. Hong Kong people grasp what they want along the way. Therefore, during rush hours, there are inevitably booms of consumers to visit convenience stores, fast food shops, etc. For those shops, that's an all-you-can-win situation in fixed, yet short, periods of time. The question is how quick you can grasp the prizes. The quicker you close each deal, the shorter queues you have, the more revenue you earn.
Octopus systems that save a few seconds for each transaction become essential in such an environment. And there is not any other electronic payment system around for substitution. From this point of view, Octopus is a monopoly, given its mighty army of cardholders, its baits.
Consumers play an important role in Octopus' pursue of its own business because there must be a pool of cardholders large enough to justify the installation and rental fees paid by the shops and transportations.
There is no platinum Octopus card. They do have plastic watches that work just like an Octopus. If you are interested, those watches should last as long.
Copyright Quam
2006/12/12
2006/12/11
Please stand back from the door
Recently, i bought an interesting tourist guide titled <<台北吃喝玩樂捷運遊>> (English translation: The Metro Ride for Food, Drinks and Entertainment in Taipei), which recommends places to go along the metro route in the capital city of Taiwan. The book is full of informative description and illustrative pictures about tourist attractions and exciting restaurants, but what most distinguishing this book from a dozen similar books in the shelves of bookstore is its theme, which is playing around along the metro line. What a great idea for touring.
The metro, put it in Hong Kong's prospective, the MTR (Mass Transit Railway), has integrated into everyone's daily life so naturally that a day without MTR has become unthinkable. It has become the center of our "universe" where we eat, shop, meet and sleep.
How does MTR benefit us apart from saving us from the frustration of traffic congestion and spare us half an hour in the bed on the working days? What does MTR actually bring us? To answer this question, different people would have different answers.
Fellow columnist Henry Chan, with his eagle eye for investment opportunities, would say the investment return of the MTR share (66), now trading historical highs of around $20. Shih Wing Ching, chairman of real estate agency Centaline who used to contribute to a Quam column, would say the appreciation of the value of residential properties.
Mr. Shih's second answer would probably be that MTR gave the birth of free newspapers, as he owns one of them. The MTR trains happen to be a perfect place to force people to read when they, once getting aboard, are not allow to eat or drink, not able to talk with one another as most being strangers, not able to listen to radio, having nothing to see outside the windows and, worst, not getting comfortable enough to take a nap. See my earlier entries in this column.
My answer is: Admiralty and Octopus.
Admiralty was born from the opening of an MTR station. i myself haven't known of the name of the district between Central and Wan Chai until the opening of an MTR. To myself, Admiralty means nothing but merely the shopping district built around the Admiralty station. i think i am not the only one who has such an illusion.
In fact, Admiralty was where British Navy anchored in the 19th Century. That's how the district got its name. However, Admiralty has become the busy district, with up-market shopping malls, five-star hotels and premiere movie theaters, it is today, only after the opening of the MTR in 1980. Before that, there weren't any economic activities going on there.
i am not talking about Tseung Kwan O and Tseung Wan, the satellite residential areas. These areas already existed with many estates and residents before MTR reached them. MTR brought transport service to these areas, but it did not cause the birth of these areas, unlike what MTR did to Admiralty.
Admiralty is like a miracle that only MTR made possible. If Central belongs to tie-and-suit bankers, Admiralty would belong to elegantly dressed shoppers. Walking a mile further east to Wan Chai and you can easily spot the difference made by the power of MTR and the absence of it.
Wan Chai was developed after the World War II, and it had not enjoyed an MTR access until 1985. Wan Chai is also a prosperous district with shopping malls, movie theaters and hotels, but these operations are all in a much smaller scale. To be more accurate, there are no shopping malls, but shopping arcades. There used to be many cinemas, but most of them cease to exist lacking the economies of scale. Stripping out the more recently developed north Wan Chai, where the Hong Kong Convention and Exhibition Centre is located, there is no world-class hotel.
Generally speaking, the businesses in Wan Chai, to a great extent, serve the local residential community only. The absence of a mass transit system during its development warrants a lack of power to draw demand from outside the district. In contrast, there wasn't, and isn't, a residential community in Admiralty which the businesses in Admiralty can rely on. Fortunately, MTR brings in shoppers, moviegoers and travelers.
MTR is like a campaign runner, inducing people to act together and hence achieving something otherwise impossible. Apart from building Admiralty, it created a new currency in Hong Kong, the Octopus.
Octopus has become so popular in the city nowadays as if a second currency after the Hong Kong dollar. The debit card was used to pay MTR and bus fares only when it was launched in the 1990's. Today, it is acceptable in vendor machines, fast food shops, convenience stores and supermarkets, and will soon be acceptable in taxis. The payment system is ever expanding.
Hong Kong people like Octopus so much that each of them carries, on average, more than one card. The outstanding Octopus in circulation amounts to 12.4 million, outnumbering Hong Kong Identity Cards. i don't know why a person has to carry more than one Octopus, anyway.
Octopus is so great because it saves people time for exchanging coins. In Hong Kong, it seems anything that saves time is great. A survey said China and Hong Kong combined has become the biggest instant noodle consumer in the world, leaving Japan, the product origin, in the dust.
Should there be no MTR, there would not be such a successful debit card system like Octopus. Think about credit card. The adaptation and popularization of credit cards took several decades, if not almost a century.
The initial promotion of a payment system, whether it is for credit card or debit card, runs into the "chicken or egg" dilemma. No consumer cares to use it unless there are enough shops accepting it. In reverse, no shop dares to accept it unless there are enough consumers using it. In the end, neither the consumers nor the shops take the first step to adopt it. That largely explains the slow adaptation of credit cards.
In the case of Octopus, MTR broke this "chicken or egg" dilemma.
MTR was able to do so because it, being a prominent means of transport, captured a vast number of people. It took the first important step to adopt Octopus. People started to use it, without much hesitation, because they knew Octopus was accepted at the gates of any MTR stations, wherever they go.
Having broken the dilemma, Octopus is quickly adopted in other places outside MTR stations because the likes of McDonald's, 7-Eleven, Park'N Shop knew there are enough Octopus users in the street.
"Please stand back from the door", every time i hear this message, i know the train is about to bring me to the next station. Every time i hear "dud" at cashier, i know i can go without the hassle of exchanging coins. MTR reaches far beyond its stations.
Disclosure of interest: i am not holding any MTR shares. But i am looking forward to the initial public offering of Octopus shares.
Sep 6, 2006
Copyright Quamnet
The metro, put it in Hong Kong's prospective, the MTR (Mass Transit Railway), has integrated into everyone's daily life so naturally that a day without MTR has become unthinkable. It has become the center of our "universe" where we eat, shop, meet and sleep.
How does MTR benefit us apart from saving us from the frustration of traffic congestion and spare us half an hour in the bed on the working days? What does MTR actually bring us? To answer this question, different people would have different answers.
Fellow columnist Henry Chan, with his eagle eye for investment opportunities, would say the investment return of the MTR share (66), now trading historical highs of around $20. Shih Wing Ching, chairman of real estate agency Centaline who used to contribute to a Quam column, would say the appreciation of the value of residential properties.
Mr. Shih's second answer would probably be that MTR gave the birth of free newspapers, as he owns one of them. The MTR trains happen to be a perfect place to force people to read when they, once getting aboard, are not allow to eat or drink, not able to talk with one another as most being strangers, not able to listen to radio, having nothing to see outside the windows and, worst, not getting comfortable enough to take a nap. See my earlier entries in this column.
My answer is: Admiralty and Octopus.
Admiralty was born from the opening of an MTR station. i myself haven't known of the name of the district between Central and Wan Chai until the opening of an MTR. To myself, Admiralty means nothing but merely the shopping district built around the Admiralty station. i think i am not the only one who has such an illusion.
In fact, Admiralty was where British Navy anchored in the 19th Century. That's how the district got its name. However, Admiralty has become the busy district, with up-market shopping malls, five-star hotels and premiere movie theaters, it is today, only after the opening of the MTR in 1980. Before that, there weren't any economic activities going on there.
i am not talking about Tseung Kwan O and Tseung Wan, the satellite residential areas. These areas already existed with many estates and residents before MTR reached them. MTR brought transport service to these areas, but it did not cause the birth of these areas, unlike what MTR did to Admiralty.
Admiralty is like a miracle that only MTR made possible. If Central belongs to tie-and-suit bankers, Admiralty would belong to elegantly dressed shoppers. Walking a mile further east to Wan Chai and you can easily spot the difference made by the power of MTR and the absence of it.
Wan Chai was developed after the World War II, and it had not enjoyed an MTR access until 1985. Wan Chai is also a prosperous district with shopping malls, movie theaters and hotels, but these operations are all in a much smaller scale. To be more accurate, there are no shopping malls, but shopping arcades. There used to be many cinemas, but most of them cease to exist lacking the economies of scale. Stripping out the more recently developed north Wan Chai, where the Hong Kong Convention and Exhibition Centre is located, there is no world-class hotel.
Generally speaking, the businesses in Wan Chai, to a great extent, serve the local residential community only. The absence of a mass transit system during its development warrants a lack of power to draw demand from outside the district. In contrast, there wasn't, and isn't, a residential community in Admiralty which the businesses in Admiralty can rely on. Fortunately, MTR brings in shoppers, moviegoers and travelers.
MTR is like a campaign runner, inducing people to act together and hence achieving something otherwise impossible. Apart from building Admiralty, it created a new currency in Hong Kong, the Octopus.
Octopus has become so popular in the city nowadays as if a second currency after the Hong Kong dollar. The debit card was used to pay MTR and bus fares only when it was launched in the 1990's. Today, it is acceptable in vendor machines, fast food shops, convenience stores and supermarkets, and will soon be acceptable in taxis. The payment system is ever expanding.
Hong Kong people like Octopus so much that each of them carries, on average, more than one card. The outstanding Octopus in circulation amounts to 12.4 million, outnumbering Hong Kong Identity Cards. i don't know why a person has to carry more than one Octopus, anyway.
Octopus is so great because it saves people time for exchanging coins. In Hong Kong, it seems anything that saves time is great. A survey said China and Hong Kong combined has become the biggest instant noodle consumer in the world, leaving Japan, the product origin, in the dust.
Should there be no MTR, there would not be such a successful debit card system like Octopus. Think about credit card. The adaptation and popularization of credit cards took several decades, if not almost a century.
The initial promotion of a payment system, whether it is for credit card or debit card, runs into the "chicken or egg" dilemma. No consumer cares to use it unless there are enough shops accepting it. In reverse, no shop dares to accept it unless there are enough consumers using it. In the end, neither the consumers nor the shops take the first step to adopt it. That largely explains the slow adaptation of credit cards.
In the case of Octopus, MTR broke this "chicken or egg" dilemma.
MTR was able to do so because it, being a prominent means of transport, captured a vast number of people. It took the first important step to adopt Octopus. People started to use it, without much hesitation, because they knew Octopus was accepted at the gates of any MTR stations, wherever they go.
Having broken the dilemma, Octopus is quickly adopted in other places outside MTR stations because the likes of McDonald's, 7-Eleven, Park'N Shop knew there are enough Octopus users in the street.
"Please stand back from the door", every time i hear this message, i know the train is about to bring me to the next station. Every time i hear "dud" at cashier, i know i can go without the hassle of exchanging coins. MTR reaches far beyond its stations.
Disclosure of interest: i am not holding any MTR shares. But i am looking forward to the initial public offering of Octopus shares.
Sep 6, 2006
Copyright Quamnet
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