Just three years ago, virtual banks looked to be little more than inconsequential hype. But the internet is disrupting and reshaping China’s financial sector, and terms such as ‘online finance’ and ‘digital banking’ are rapidly becoming mainstream.
Chinese internet giants have secured approvals from authorities to set up privately-owned banks, ushering a new era in the traditionally tightly regulated banking sector.
Tencent and its partners Baiyeyuan Investment and Liye Group have already launched the country’s first online-only bank, called WeBank. Following suit, Alibaba and its affiliate Fosun International are due to introduce the Ant Bank this year.
A key milestone was crossed in early January, when WeBank issued its first loan: the modest sum of RMB35,000 (US$5,600), made to a Shenzhen truck driver at a relatively high interest rate of 7.5 per cent.
That marks a stark contrast to the longstanding policies of China’s state-owned banks, which prefer lending to larger state-owned peers and tend not to favour SMEs. Traditional banks are currently “very reactive” in their product offerings, says Zennon Kapron, founder and managing director of China-based financial consulting firm Kapronasia.
These internet companies already offer electronic-payment and investment fund services — such as Alipay, Tenpay, Licaitong, Yu’e Bao — but branching out to basic banking services shunts them several rungs higher up China’s financial supply chain.
The virtual presence of online-only banks measured by the huge user bases of their parent companies is, in many ways, larger than the physical footprint of traditional banks — a solid lure for deposits, says Leo Chu, regional head of digital at Wieden+Kennedy.
The crucial advantage these cyber heavyweights have is their ability to exploit Big Data to evaluate the credit risks of small-scale borrowers through billions of transactions from the electronic payment and fund investment services they already offer. Alibaba and Tencent can identify their customers, understand what they are looking for and offer them the best products to fit their needs.
It’s still early days, so advertising push has been fairly limited, but Kapron expects to see a significant amount of analytics-driven and cross-channel marketing. Alibaba and Tencent’s ecommerce and social networking platforms are in many ways viewed as their owned media, an added advantage in future.
The challenge, according to Oni Zhang, planning manager at Grey China, is in using existing resources to convert current users into bankers. Since banking is such a high-involvement category, functional benefits are likely to be key. “If users are already binding their bank accounts to WeChat it is not hard to get them to transfer cash to virtual banks,” he says.
Critics predict WeBank will struggle to attract deposits due its of lack physical branches. However, Alibaba and Tencent already proved this theory wrong with the overwhelming response to their money-market funds. Regulators are currently piloting remote account-opening through video, adding another favourable development to the branch-less model.
The shift to virtual banking should not be that much of a stretch, W+K’s Chu says. “From an overarching perspective, these companies spent years conditioning consumers to get used to making transactions online. Linking financial services to their products is the Holy Grail.”
Chu adds that internet banks could really boost creativity in the staid banking category. “It feels much younger, social, on-the-go and more relevant to today’s lifestyle.”
EXPERT OPINION Innovative online banks prepare to give financial old guard a run for its money
Sonia Barquin and Vinayak HV, analysts at McKinsey & Co
The rise of digital banking in China has been anticipated for a number of years, but several factors have combined recently to accelerate this trend.
Key among those changes is the emergence of a much stronger ecosystem, which includes the rapid increase in internet penetration, smartphone adoption and growth in ecommerce. This has resulted in demand for digital banking moving from early adopters to a broad range of customers.
This situation is also allowing companies outside the financial sector to offer payments and other services that have traditionally been the province of banks. These firms are often more innovative than incumbent financial institutions and are not held back by legacy issues and entrenched corporate attitudes. Their most difficult challenges are overcoming regulatory barriers and gaining customer trust.
For traditional banks, the stakes are particularly high.
Among the consumers we surveyed in emerging Asia, more than 50 per cent indicated willingness to shift some of their holdings to a bank which offered a compelling digital proposition. Survey respondents said they were open to using a purely-online bank with no physical branch system.
Despite the allure of digital offers, our survey also shows that physical branches and ATMs will continue to play a major role in banking.
Incumbents and new entrants will have to balance the needs of consumers and regulators for a physical presence against the cost and reach advantages of digital services.