The internet giant Tencent (the firm behind the online messaging service WeChat) has recently launched China’s first online private bank, WeBank, in a move that many are predicting will dramatically disrupt the financial industry in China. We have already spoken about Tencent’s innovation within mobile messaging apps in an earlier post. But now Tencent and its rival Alibaba have now moved even further into the financial space, being among several investors granted permission by the China Banking Regulatory Commission to open private internet banks in a landscape dominated by China’s state-owned institutions. But will this move see long term success? In this post we highlight some of the challenges Tencent and Alibaba (and others like them) may face in the early days of online-only private banking in China.
In a country where the vast majority (prior to the pilot scheme Minsheng Bank was the only existing private bank in China) of banks are under state control, the scheme is a significant step toward expanding access to finance for small businesses and making good China’s pledge for ongoing financial reform. Despite some analysts estimating that small to medium sized companies generate almost 60 percent of China’s GDP, China’s state-owned banks have frequently come under fire for being reluctant to lend to smaller enterprises; preferring instead to lend to larger state-owned companies.
Premier Li Keqiang, speaking at the launch of WeBank appeared to acknowledge this tendency when he spoke of how the launch of WeBank must help “lower costs for and deliver practical benefits to small clients, while forcing traditional financial institutions to accelerate reforms…It’s one small step for WeBank, one giant step for financial reform”.
While the Central Bank already operates a personal credit reporting service, the system has often been criticised for being slow and utilising outdated technology. Furthermore, the system fails to cover those who have never taken out, or have been turned down for, formal loans. Tencent and Alibaba’s approach is radical in this context due to their plans to harness big data and utilise the vast amount of personal credit information they hold from millions of daily transactions taking place on their online shopping platforms and apps. Using proprietorial technology they have developed, the companies are able to conduct risk assessments of an individual’s credit risk based on their transactional history.
For some however, it is this focus on smaller loans to individuals that has led to questions around the long-term feasibility of the scheme. Jim Antos, a banking analyst from Mizuho Securities Asia expressed his concerns to CNBC:
“Those amounts are too small to be dealing with. Lending to individuals tiny amounts of money looks like a blueprint for problems. Once somebody is out the door, how can WeBank ensure that it will be collected?”
Despite this, Tencent and Alibaba have already proven that there is an appetite in China for digital innovation in the banking sphere. Both Tencent and Alibaba offer deposit–like money market funds sold online which have attracted in excess of $65billion, and users of their mobile payment apps and websites are already allowed to store funds in their accounts. The recent banking licenses offered by the government now allow Tencent and Alibaba to collect deposits – a further advancement into traditional banking territory
A report by Barclays last year expressed concern that changes in regulation (particularly around transparency and security of funds) have the potential to affect the long term success of internet banks in China. Indeed, these money-market funds have already drawn criticism from Chinese banks and regulators who claim that internet banking is not currently sufficiently regulated.
Whatever regulatory changes take place in the near future, it is highly likely that Tencent will also face increasing domestic competition from other players in the internet banking market. Alibaba, Tencent’s main rival was among several others also granted permission to operate, and the official launch of its bank is expected to take place later this year. Although some commentators believe that these new entrants are unlikely to be able to rival the vast deposit base of the ICBC in the short-term, as competition now hots up, many predict that internet banks in China will be a driving force in creating new and compelling financial products – forcing both state-owned and private banks to innovate to stay ahead of the pack.