State-owned banks have long dominated banking in China but China wants to do things differently now. The Chinese government wants improve its financial sector by creating more confidence and responsiveness towards private customers. China has lately seen a lot of changes in its banking system, which could see some big changes in Chinese banking sector in 2015.
INTRODUCTION OF INTERNET-ONLY BANK
In 2015, China aims to slowly reforming its financial system in a big way and it already started this by granting licenses to six such institutions in 2014, which included Alibaba and Tencent. Tencent won regulatory authorization in July, giving it a two-month head start from its competitor Alibaba. The first step towards it has been a joint venture led by Chinese gaming and social network group Tencent Holdings (30% stake) called “WeBank”. On January 4, 2015 Premier Li Keqiang inaugurated WeBank with a transaction for the country’s first 24-hour, Internet-only bank. Pressing the “confirm” button for 35,000-Yuan loan issued to a Shenzhen truck driver marked the event. WeBank launch was a ‘test run’ allowing it to open accounts for shareholders and employees, with the open official launch to public in April 2015. The future plan of this business model is still in its early stages, waiting for approvals, negotiating legal limits with central banks and regulators.
HOW ARE THESE BANKS DIFFERENT?
- Loans To Small & Medium Companies
Most of the state-run banks in China favor lending to big institutions; the reason could be little default risk. Small and medium companies struggle to get loans and since they are an important driver for overall economic growth in China, banks like WeBank is good news to them. Such banks will only increase the number of loans being granted for new and small-medium businesses. WeBank aims to lend small amounts to people who might not be eligible for bank loans to fill their special needs.
- Facial-Recognition
WeBank is China’s first bank to use facial recognition for client- identification and authorization of banking transactions. Remote account opening will rely on facial recognition – on both desktop PCs and smartphones.
“We think that the face recognition technology is relatively mature. It has low rate of error, lower than the human eye,” said Cao Tong, president of WeBank, told CCTV.
According to Caixin Media, the technology reads facial characteristics and compares them with what appears in photos on personal identification cards and in police databases.
- No- Physical Branches
The banks will not have any physical branches making all banking transactions online especially in case of granting loans. China Banking Regulatory Commission regulation requires bank employees to personally visit the loan applicant at work and witness the signing on each application, thereby avoiding inaccuracy in data. A potential customer thus has to be physically present with all the required documents at the bank’s branch. In such cases, banks like WeBank may face some surprises when bank regulators release final regulations on their functions.
The first internet-only bank will not have any branches so how money is deposited still remains an unanswered question. How tightly the mobile payments offering will be integrated with WeBank’s loans and other banking services aren’t clear.
- Paperless Loan Application
Traditional banks also use online data services for assessing a customer who applies for a loan, but they are mostly paper-based. Various online platforms, such as the 600 million-user WeChat app, will be used to gather clientele based- information like a potential client’s financial behavior and credit history. This will help loan officers in working out a credit rating system based on financial models.
- Advantage of being closely connected to Internet Companies
Tencent is connecting with its WeChat Users hoping to create a platform that will provide access to their banking needs like payments, bank statements etc. Large database already exists with Tencent and Alibaba (Alipay has 300 million users) and once the final regulations are released, getting clients should not be a difficult task for them
CRITICISMS
It does seem that Internet-only bank is good news for small- medium business and people who will not otherwise be approved for a loan by other type of banks. But clearly, the internet-only banking model seems a bit weak on the basic banking foundations. Default is of utmost importance especially when China’s banking system has a weak credit rating system. According to Xiao Bing, a vice president at the U.S. bank Wells Fargo & Co, “Banks should be responsible and understand the sources of their customers’ capital.” Privacy Protection also seems a control to many raising doubts on facial-recognition technology being used in the banking sector. Once central bank has conducted an evaluation, tested the technology and given the nod, it could mean million of client for WeBank and the other internet-only bank that follows.