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11/14/2015

An Era of Transformation

This is a new era that we all live in the digital world. Once the network is made available, information or knowledge is just a click away from us. Technology has brought all of us closer, made our lives convenient, and have also made something that used to be impossible to become possible.

With the convenience of online stores and online banking, most of the transactions can be done online nowadays. However, due to some security reason or administrative process, there are still transactions that cannot be processed online, especially when it comes to the traditional banks.

In 2015, MYBank with the registered capital of RMB 4 million and WeBank with the registered capital of RMB 3 million were launched in China. These two private online banks belong to Alibaba and Tencent respectively. They have obtained banking licenses despite a long controversial debates.

The launch of these online banks marks a transformation for the banking industry in China.  These online banks are putting enormous pressure on the traditional banks. They have transformed themselves from giant e-commerce companies into financial institutions. In addition, with the Chinese regulator's approval, this is a huge milestone for them to enjoy the market share in the banking industry and provides a new impetus to China’s economy.

It is vital for the traditional banks to review their business and operation models in order to maintain their competitive edge and at minimum sustain their market share.  What are the differences between these new generation online banks and the traditional banks?

Huge customer database

Given that these companies started as e-commerce companies rather than a bank. They have built a huge social online network with their existing customers. Therefore, over time, they have established a huge database of client information to leverage new business opportunities. In addition to their e-commerce business, they have also developed electronic payment services, they are also a shopping search engine, and provide data centric cloud computing services. With all of their services offering, their customer database has grown to billions. These banks have made it very clear that their target customers will not be the big corporates and the high net worth customers.  They focus on the small and micro enterprises by providing loans and other services at the cheaper cost, and those in rural areas who have issues accessing branches and banks in person.  With this existing customer database, this makes it easier for these banks to keep expanding their business network whilst adopting their current customer base.   

Data Analysis

Given the wide range of service they have been providing via the internet, their database contains valuable customer information, such as identity information, payment pattern, shopping pattern and preference etc. Since so many information are readily available in the database of these online banks, and they have been collecting these information electronically.  They have advantage to process big data on their customer purchasing behavior, payment pattern, their preferences as well as their credit analysis. It is also important to determine the borrowers’ creditworthiness and lending risks.  With these analysis readily available, this enables them to cross sell relevant banking products based on their customers’ preference with a higher successful rate, while protecting themselves better by analyzing the credit risk of each individual customers. At the same time, by understanding their customer preference better, they can enhance the customer experience based of this understanding, such as stop sending push notification for promotion, but customize the advertisement based on their analysis.

Data Analytics has become a key area for most of the traditional banks, as this can help them to increase their successful rate of target marketing, streamlining existing process by centralizing their customers’ information. However, most of the traditional banks still encounter lots of issues when it comes to ne u analysis due to their legacy system architecture and interface problem, this may restrict them from connecting each system together.  In addition, quite a lot of information is still not yet being handled electronically.  The banks require lots of manpower to convert hardcopy information into electronical format and this has prolonged the roadmap for them to master data analytics.  

Operating Model

While you see branches of different traditional banks all over China, online banks does not require to have a physical branch. All customers need is to go online with a smartphone. Alibaba employs 300 people with no physical branches, the new business model will save significantly on operational costs and reach more customers. They have centralized the customer services team, which helps to streamline the front end process, as well as to reduce the cost for headcount. Meanwhile, they have been maintaining to provide good quality customer services with instant reply to ensure customers still enjoy a good experience while purchasing any products at the online bank. They have developed mobile app, and makes it user friendly to facilitate the purchasing process and other banking services. Without a physical location, this also ensure information is transferred and stored electronically. 

Business Model

There were totally ten private investors that were approved by the Chinese government to launch five private banks. The ultimate goal is to offer more credit choices available for small business in China. As the government would like to reduce the overall control that state-owned banks have on its economy and open the market for fair competition. With the ultimate goal of this programme, the target customers of these banks are mainly the small to medium size enterprises.

Given that there are restrictions on these banking licenses, these online banks can only offer limited products/services, and therefore their business model is set with this limitation. As traditional banks can offer a lot more products and services to different group of customers, their business model can be a lot more complicated.

However, this does not mean that the traditional banks do not need to review their business models. The reason is because regulations may evolve through time. There are many speculations that regulator may loosen the restriction of these banking licenses from time to time when the market gets matured and developed. Therefore, in order for traditional banks to improve themselves to maintain their competitiveness, it is critical that they have to plan ahead of their business strategies and review their business model to continue to sustain at the strong market share. 

Where will this transformation take us to?

Currently, there are still many constraints of these online banks.  For instance, China Bank Regulatory Commission (CBRC) does not allow them to open new bank account with a customer online.  Without the ability to allow users to open bank accounts remotely, the bank is limited in its ability to collect deposits and conduct other banking services.  Given that regulator is still heavily monitoring the products or services that these online banks can provide, it is difficult to see that online banks can replace the traditional banks in a near future.  

Nevertheless, their establishments have definitely brought some momentum to the banking industry, where this becomes the perfect timing for traditional banks to review their target operating model, enhance their system architecture and streamline their existing process, in order to maintain their competence in the market.  In the long run, the traditional banks even need to reshape their business model to cope with an enormous challenge posed by these online banks. This is an era of transformation in the banking industry which is taking the banking industry to a brand new stage, with the never-ending evolvement of technology.  We cannot anticipate yet where exactly this transformation is taking us to. However, individual and small to medium size of corporates will definitely be benefited.

Sia Partners

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