Chinese banks must tap growing online market
Andrew Sheng says e-banking can be a competitive tool, provided regulatory issues are addressed
The rise of the internet suggests that electronic commerce will develop rapidly globally, but especially in China. One British research estimate is that business-to-consumer e-commerce transactions worldwide will exceed US$1.25 trillion by 2013, even as the total number of internet users equals nearly half the world's population.
Currently, the world's largest e-commerce market is the US, followed by Britain and Japan, with growth rates of roughly 10 to 15 per cent a year. However, with China's e-commerce sales more than doubling in 2011, the Chinese electronic consumer sales market is about to catch up with the global leaders.
According to Forrester Research, e-commerce sales in China will grow roughly 20per cent annually to more than US$350billion by 2016, compared with an estimated US$160billion today. Currently only 40per cent of Chinese internet users shop on the web, compared with 69per cent in Japan and 58per cent in Australia.
Buying and selling over the internet has become much more prevalent since the arrival of smartphones and tablets. This year, global sales of personal computers is expected grow by only 0.9per cent to 367million units, but tablet sales are forecast to rise by 54per cent to 107million and smartphones by 39per cent to 686million pieces.
Hand-held phones and tablets fulfil the functions of PCs and therefore are becoming the consumer's preferred platform for electronic banking and e-commerce. It is estimated that there are 5.6billion mobile phones in use globally.
If this is the trend, the biggest competitors to Chinese banks for consumer service are the mobile phone companies. China Mobile alone has 683million subscribers, while the total number of mobile subscribers in China is 1.046billion. The number of places where subscribers can pay their mobile phone charges is larger than even the Postal Savings Bank of China's network, which is the widest in the country with more than 40,000 branches.
Until recently, the biggest obstacle to consumer purchase and payment online has been internet security. But five basic technology trends are going to change the game for electronic banking and buying online.
The first is eye-scanning technology that recognises the user. The iPad2 has already incorporated that technology. The second is cloud computing, which means that much of the software and data need not be stored inside the computer. Third, the analytical power of smartphones has increased, and apps downloads make them more user-friendly. Fourth, the arrival of 4G broadband will widen the spectrum for different consumer uses. Finally, social media has become extremely popular and retailers will begin to exploit this to reach out to customers.
Electronic banking involves a range of functions, including payment, checking account balances and investments.
Competition in e-banking will come from different sources. In Kenya, rural residents use mobile phones to transfer small amounts of money instead of using cash. In China, Taobao is wildly popular: it accounted for 79per cent of total Chinese online transactions in 2010, compared with Rakuten's 30per cent share in the Japanese market, and Amazon's 17per cent share in the American market.
As we see more middle-class Chinese consumers and investors, who are educated and empowered by technology, they will demand higher-quality services, involving both bricks (physical branches) and clicks (through the web).
The transition from branch banking to phone banking and now web banking has not been easy for many banks, as the skills required are very different: e-banking is not just about buying bigger computers, but changing the whole marketing, back-office and risk management systems and processes. As competition within Chinese banks intensifies, having a strong strategy on moving innovatively and creatively to e-banking will be a major competitive step.
The key problem is still regulatory; e-banking services cut across different regulatory regimes. The most obvious is between mobile operators, electronic service providers and the banking industry. Will credit facilities provided through mobile operators and specialist platforms constitute banking business? If so, what are the regulatory considerations involved?
There is no doubt that the Alibaba and eBay model of bid-and-buy provides excellent "flow" information to monitor the creditworthiness of customers. Transactions-based credit is in one sense superior to collateral-based credit, since you know in real time whether the customer/borrower is having sales and/or liquidity problems. Because traditional banking relies on collateral to protect the bank against credit losses, monitoring is not in "real time" and by the time the bank wakes up to the exposure, the loan may already have gone bad.
The time has come for Chinese banks to examine their scope for going into e-banking as a strategic competitive tool. The larger banks will be able to do this on their own. Some smaller banks may wish to pool resources and adopt common platforms so they can compete against larger players.
This review at the policy and strategic level will mean revolutionary changes in Chinese financial services. Whether the Chinese financial sector can serve the real sector through better quality of services will be vital for China's long-term global competitiveness.
Andrew Sheng is president of the Fung Global Institute