China's traditional lenders meet their match in internet banking
Success of the traditional players in the online battle will hinge on their ability to exploit the power of big data to understand client needs
Mainland banks are without doubt perturbed about the technology companies that have pushed into the financial sector.
News of the imminent launch of Tencent Holdings' private bank in Shenzhen has only added to the unease among medium-sized lenders, the financial institutions most affected by the rise of non-bank finance.
"When we ask what their fiercest competitor would look like … 99 per cent of the time it's a technology company with a banking licence," said James Quinnild, a partner at PwC, recounting a hypothetical question he has posed to traditional mainland banks. "Now, it's in your face and it's happening faster than anyone thought it would."
The mainland's banking regulator announced this month that it had given Tencent permission to open the Shenzhen Qianhai Weizhong Bank. It will be the first of five pilot private commercial lenders to gain official clearance to open on the mainland, as well as the country's first "internet bank", a title reflecting the online products it will host.
Its launch will also culminate more than two years of rapid growth in the non-bank finance industry, led by technology giants such as Alibaba Group Holding, Tencent and scores of peer-to-peer lending platforms that have given medium-sized banks a run for their deposits.
At the heart of the tough changes experienced by the formal banking sector is a grass-roots liberalisation of interest rates, where largely unregulated technology companies have offered market-oriented rates to depositors while also reaching under-banked small businesses with higher-interest loans.
Cushioning that is the data-crunching ability at technology firms that has helped better allocate capital and price in risk where the state-guided sector has largely failed. Here, banks have ultimately been the losers in an industry that was designed - with a low, fixed deposit rate - to let them win.
The balance of P2P lending reached 74.4 billion yuan (HK$92.8 billion) in October, a jump of about 140 per cent since January, according to Credit Suisse.
Medium-sized national lenders, on the other hand, have seen a wane in deposit growth. Growth in China Citic Bank's deposits would slow to 11 per cent next year from 13 per cent last year, Macquarie Research said. Total deposits grew just 7.7 per cent to 112 trillion yuan in the year to November, down from 11 per cent a year earlier.
That is why several banks have picked up a few tricks from the technology companies with the intention of beating them at their own game. Results had been mixed, analysts said, and fears of failing to get a foothold in online finance were more valid than ever at the banks.
Ping An Bank, for example, set up Lufax, a P2P platform that is secured by Ping An Group's own guarantee company. China Merchants Bank, the mainland's sixth-largest commercial bank and biggest joint-stock bank by assets, launched a P2P platform in April last year with the hope of recapturing business snatched by the technology companies.
These products have been well received in a wild, unregulated environment where P2P lending has gained a reputation for fraud. Mainland media have reported on numerous P2P platforms simply vanishing, leaving investors high and dry. The trust imbued in the formal banking sector has started to pay off for the few licensed lenders that have adopted non-traditional lending technology.
"More often than not, if you are a retail investor, you're still going to put your money into a P2P platform that is backed by a bank rather than something online," said Daiwa Capital Markets analyst Leon Qi. "I would say at this stage, the biggest risk with P2P isn't credit risk - yet. It's fraud."
Earlier this year, Citic Bank struck a deal with the central bank that gave it access to point-of-sale cash-flow information at small merchants. This helped the bank launch point-of-sale micro loans in which it can quickly identify small merchants that qualify.
Other banks were moving into the space as well, showing an increased interest in leveraging technology with the hopes of banking smaller, riskier companies, Qi said.
Crunching data like this will be instrumental for traditional banks in the era of an Alibaba bank.
Technology firms had driven e-commerce on the mainland, with shoppers projected to make US$540 billion or up to 10 per cent of retail transactions online next year, a KPMG report said. Alibaba's private bank is expected to use transaction data from the vast network of merchants and shoppers enmeshed in its platform and its payment service, Alipay, to better allocate loans.
In first and second-tier mainland cities, about 40 per cent of retail banking is conducted online, according to Mukul Agrawal, the Asia director of core banking and digital channels at financial software firm Misys.
Yet, as banks have pushed into the online and mobile channels, they have not yet fully harnessed the power of big data to expand their businesses and product offerings.
"Someone on the verge of retirement might get an offer for diapers," Agrawal said of banks' inability to target users with specific products online.
Failing to understand customers, whether it be pricing risk or grasping consumption patterns, would be costly for mainland banks, Quinnild said, especially as the technology players boosted their credentials with formal banking licences.
For Alibaba, getting a banking licence will mean it can hold money in its Alipay payment system as deposits. The expansion of financial remit for the company will mean a retreat for Citic Bank, which has acted as a custodian for Alipay account funds, a service only licensed banks can perform.
"The main fear at the banks is to just become a cash register or the backbone of the system," Quinnild said.
