While China is regarded as a forerunner in such fintech fields such as digital payments and online consumer and SME financing, established banks in China, mostly owned and directed by the state, are not known as being particularly active or successful in this field. Though Chinese banks and other established financial institutions have also developed digital versions of their existing services, the user experience and the efficiency of operations and marketing have been dwarfed by data-driven, highly automated fintechs. But recently China’s conventional banks, driven not only by fintech trends but economic changes, has begun to embrace more radical tech trends such as open banking.
Since regulatory restrictions on the establishment of private banks were relaxed in 2014, a handful of digital-only private banks founded in the last several years have brought the tech-driven products and services, operational processes, and other innovations created by fintech developers to the banking industry. With data network trends in mind, some of them have opened their tech capabilities to conventional banking and financial institutions.
Chinese fintechs have become highly successful in digital payments, individual and small business lending, and retail investment products distribution in terms of both popularity and profitability.
Their online operations and marketing approaches, considerably data-driven, are not only highly automated and scalable but also more effective in risk pricing and monitoring, and marketing than traditional banking and other financial institutions. Though lacking credit information and other data held by the established banking industry, fintechs leverage digital footprints of consumers and businesses that are generated from online platforms, telecom operators and other digital channels, such as financial transactions and user behavior data, to power automated loan pricing and underwriting, sales of wealth management products, marketing and risk management.
The newly emerged digital-only private banks, each having a major Chinese tech company as a shareholder, have developed, apart from the aforementioned data-driven fintech products and services, innovative banking services and marketing strategies incumbent banks were previously unable or unwilling to implement with their branch-centric operating and marketing models.
MyBank, the digital-only private bank affiliated to e-commerce giant Alibaba, makes use of a wide range of data sets generated from Alibaba's e-commerce platforms and Ant Financial, Alibaba's fintech arm, to provide loans and other financial services to merchants of Alibaba's e-commerce ecosystem. MyBank touts that it only takes three minutes for loan application and approval, and there’s zero human intervention. In June 2018, MyBank announced to open up its tech capabilities to conventional banking and financial institutions. Its lending system had been adopted by some 50 financial institutions as of June 2019.
WeBank, with internet conglomerate Tencent as the largest shareholder, is also digital-only and is so far focused on consumer credit. Its online instant lending business leverages its exclusive access to WeChat and QQ, the ubiquitous messaging and mobile services platforms owned by Tencent, and the data generated from them. WeBank announced in July this year to open-source all of their tech tools, including a set for big data analysis and management.
XWBank, the digital-only bank with consumer electronics giant Xiaomi as a minor shareholder, has released a wide range of APIs and has reached partnership with hundreds of local financial institutions.
These digital-only banks also apply big data technologies in remote bank account opening, identity verification and other risk management tasks, etc.
MyBank has amassed more than 17 million business borrowers and WeBank has more than 100 million individual customers. Both have reported extraordinary business results and significant operating cost reduction. Fintech platforms are also highly scalable and can easily and cost-effectively add new products and expand into new markets. Big tech companies behind those digital banks also provide them with efficient, resilient and reliable tech infrastructures like cloud computing offerings. Also, they have significantly fewer employees and lower operating costs.
Apart from pressures from fintechs, Chinese conventional banks are also facing challenges in the midst of economic and regulatory changes, especially in risk management and new business expansion. China's banking system has been directed by the state to help implement economic development plans that had previously mainly serviced the state-owned or big private corporations, and had long neglected retail banking and small business lending before the recent changes. As China's economic growth has been declining in recent years, China's banking industry is facing challenges such as record-high corporate default rates and liquidity difficulties confronting some smaller commercial banks. It is also facing new policy and regulatory requirements aiming to boost economic growth or rein in risks in the current system, such as increases of bank loans to private businesses, which has been regarded as a new potential economic growth driver to the state but with more risky customers to the established banks, and the spinning off of their wealth management businesses, which has long been scrutinized as highly-risky shadow banking entities. All of these changes mean increased requirements in risk management and operating efficiency.
Major banks have initiated multi-year plans to update their technology and operating models. More recently, they have begun to develop tech capabilities around the idea of open banking, which is implemented by China’s banking industry through the use of APIs to allow for access to both their data and functionality.
Since 2018 more than half a dozen major banks, including Industrial and Commercial Bank of China and China Construction Bank, the world's largest and second-largest by total assets, respectively, have launched open APIs and related offerings. Smaller banks tend to partner with fintechs to share data and services.
The open banking trend is expected to bridge the data gap between conventional banks and digital tech companies. While China's tech industry has long been pushing for data mining and sharing, records of the financial activities and positions of businesses or individuals held by traditional financial institutions are not accessible to most of the newly emerged financial services providers, let alone other data like interactions with customers.
Incumbent banks have also begun to use alternative data and data analytics services from digital financial services providers or digital data vendors in the hopes of improving their online marketing and risk management capabilities.
While China hasn't yet issued any regulations or guidelines on it, open banking has been regarded as a major approach for incumbents to keep up with the latest technology and business trends. Though data-sharing between established banks and fintechs are still at an early stage, it is hoped that the open banking movement will eventually bring the two sides onto a network of shared data and services.