In China's burgeoning retail-banking industry, the credit card market represents one of the most enticing opportunities for foreign banks. Credit cards are already the fastest-growing consumer credit product in China, and all signs point to explosive growth in card usage and profitability over the next decade.

Despite the market's attractiveness, however, it poses significant challenges for foreign credit card issuers. A recent McKinsey survey of Chinese cardholders shows that certain dynamics in China's market tend to favor large domestic banks, with their extensive branch networks and ready-made customer relationships. Foreign providers also face some problems arising from economic factors, such as the high percentage of unprofitable customers and a downward trend in interchange fees.

By 2013, China's consumer credit market—encompassing credit cards, mortgages, and other personal loans—will account for 14 percent of profits in the banking sector, up from just 4 percent today. Credit cards, today barely a break-even business in China, will be second only to mortgages as the most important consumer credit product, representing 22 percent of consumer credit profits, or about $1.6 billion.

By mid-2003, 3 million credit cards had been issued to Chinese consumers; that number quadrupled to 12 million two years later. Ninety percent of...