China: Battle of the Giants - China’s online banking play

China’s first foray in to the pure play digital banking space commenced in early 2015 with the launch of WeBank backed by Tencent, which runs the popular smartphone messaging app WeChat. It was positioned as the Middle Kingdom’s first internet-based lender that would operate without any physical branches and had the blessing of regulators keen to introduce private lending outfits within China’s banking ecosystem. This was quickly followed by the successful launch of e-commerce giant Alibaba’s MYbank and search engine Baidu’s Baixin Bank in 2015 with reports indicating that smartphone manufacturer Xiaomi likely follow suit with its own online banking proposition under the Sichuan XW Bank brand. 

The Chinese government fully supported these initiatives by introducing series of financial reforms prioritizing the issuance of licenses to private operators. This was done with a view to encourage competition from non-traditional lenders as well as support efforts for digitalization to enhance service delivery for private customers. Indeed, the shift towards digital is a testament to the evolution of financial services driven by access and convenience in addition to changing consumer behavior from a bank engagement perspective.

95% of internet users are on mobile, which means that for the first time, half of China’s 1.4 billion population can access the internet via mobile devices.

Fundamentally, the opportunity with such internet-only banks rests with the fact that China is home to the world’s largest number of internet users with the China Internet Network Information Center (CNNIC) estimates citing more than 731 million as of December 2016 and growing. More importantly 95% of internet users are on mobile, which means that for the first time, half of China’s 1.4 billion population can access the internet via mobile devices. To put this in further context, RFi Group’s projection of China’s adult banked population based on our proprietary Wealth Model to be 896 million, indicative that a sizable segment of banked customers are likely internet users as well.

For China’s big 4 and city commercial banks, the traditional “bricks & mortar” operation may no longer suffice as internet-only banks commence to challenge existing channel arrangements. Indeed, RFi Group research has shown that increasingly consumers are looking to use computers, smartphones and tablets to conduct their day to day banking activities with 53% of retail banking customers indicating as such in a recently completed study. Similarly, visiting the branch for application channel for products has fallen below digital touch points for the first time in China at 39%.

Baby Boomers (Age 55+) and Gen X (Age 35-54) represent the largest scope for digital uptake in China going forward given the lower levels of digital engagement.

Understandably, this is only the start as customers have increasingly demonstrated a marked appetite in using digital channels with a greater proportion having indicated an inclination to use these touchpoints in the future compared with existing access arrangements. RFi research also shows that demographics is influencing the choice of channel use with millennials/Gen Y (Age 18-34) over-indexing compared with other age groups in terms of current usage. Interestingly, Baby Boomers (Age 55+) and Gen X (Age 35-54) represent the largest scope for digital uptake in China going forward given the lower levels of digital engagement.

Given these evolving trends, the winning proposition for China’s pure-play digital banks will rest on how effective they will be in differentiating themselves from their traditional branch-led counterparts. The winning proposition for any service delivery rests on the end to end user experience of customers whose expectations of a seamless, fast and secure service remains paramount. Enabling these key drivers is essential for internet-only banks in China to act as “disruptors”. More importantly, WeBank, MYbank and Baixin Bank are each well-positioned given the sustainable competitive advantages they enjoy in terms of access to customer data that will help personalize and customize product and service offerings.

It remains to be seen how quickly they will be able to build out their brand presence but if the Yuebao online investment fund experience by Ant Financial (Alibaba’s parent group) is anything to go by the outlook for China’s digital-only players is a very positive one. Positioning the bank “for the little guys” is certainly a step in the right direction.

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