FI­NANCE CINDY CHUNG, BEN CHOW Chal­lenge to mo­nop­o­lies in bank­ing

China Daily (Canada) - - BUSINESS -

Ama­jor de­vel­op­ment this year in the Chi­nese bank­ing sec­tor is the mush­room­ing of di­rect banks. By the end of Novem­ber, 13 such banks were es­tab­lished, mostly as sub­sidiaries of tra­di­tional banks.

Di­rect banks are not new. As a bank op­er­at­ing with­out any phys­i­cal branch net­work, they be­came popular in the United States and Europe in the late 1980s.

A di­rect bank of­fers its ser­vices re­motely via on­line bank­ing and tele­phone bank­ing and may also pro­vide ac­cess via au­to­mated teller ma­chines, mail and mo­bile phones, though on­line bank­ing is the dom­i­nant ser­vice model. By elim­i­nat­ing costs as­so­ci­ated with bank branches, di­rect banks can make sig­nif­i­cant sav­ings that they may pass on to clients via higher in­ter­est rates or lower ser­vice charges.

A di­rect bank is more than just on­line bank­ing. The dif­fer­ence is that a bank’s on­line bank­ing ser­vice only caters to clients who have opened ac­counts or cards at that bank, but di­rect bank­ing al­lows op­er­a­tors to reach out to any client even if the client doesn’t have that bank’s ac­count.

The business model al­lows small banks to by­pass their dis­ad­van­tage of hav­ing a small branch net­work and helps them reach out to more clients. In ad­di­tion, clients from di­rect banks are mostly young peo­ple, such as univer­sity stu­dents, who are In­ter­net- and tech-savvy. Although they are not fi­nan­cially strong, th­ese young peo­ple are fu­ture big clients.

Di­rect banks there­fore are com­peti­tors to na­tional play­ers and help re­move ge­o­graphic re­stric­tions for small banks.

China is a late­comer to the sec­tor, but the emer­gence of di­rect banks marks a leap for­ward in cre­at­ing a com­pet­i­tive bank­ing mar­ket with the help of the In­ter­net. This com­pe­ti­tion is good for the over­all de­vel­op­ment of China’s long-mo­nop­o­lized bank­ing in­dus­try and is ex­pected to in­ten­sify by the end of the year or early next year as more pri­vate banks are es­tab­lished.

To un­der­stand why di­rect banks in­ject com­pe­ti­tion into the mar­ket, one must see who is es­tab­lish­ing th­ese di­rect banks.

In Septem­ber of last year, the Bank of Beijing opened the first di­rect bank in China. That was fol­lowed by more than 10 other lenders from In­dus­trial Bank, Jiangsu Bank, Chongqing Bank and China Re­sources Bank of Zhuhai. All are com­mer­cial banks at the city or provin­cial level.

Th­ese di­rect banks of­fer an ar­ray of ser­vices such as credit lend­ing, money trans­fers, de­posits and wealth man­age­ment for mostly in­di­vid­u­als and small busi­nesses.

In con­trast, none of the Big Four na­tional banks — In­dus­trial and Com­mer­cial Bank of China, China Con­struc­tion Bank, Bank of China and Agri­cul­tural Bank of China — have set up a di­rect bank.

For years, small banks were ea­ger to in­crease their cap­i­tal and client pools to break up the long-time mo­nop­oly of big play­ers. When liq­uid­ity be­comes tight in the cap­i­tal mar­ket, small banks of­ten have to rely on in­ter­bank bor­row­ings from larger coun­ter­parts to stay afloat. To at­tract cap­i­tal, small banks are al­ways will­ing to raise their de­posit rates to the up­per end of the gov­ern­ment-set band to at­tract cap­i­tal, while big play­ers usu­ally keep their rates at a dis­count of 10 per­cent. But with a much smaller branch net­work, small banks are still min­nows that can do lit­tle to change the in­dus­trial land­scape un­til they find di­rect banks to be a pos­si­ble game changer.

Last year, In­ter­net com­pa­nies, such as Alibaba, Baidu and Ten­cent, launched In­ter­net fi­nan­cial projects. Among them, the most fa­mous one is Yu’er­bao, de­signed jointly by Alibaba and a fund company. The money-mar­ket fund prod­uct gained in pop­u­lar­ity quickly by tak­ing ad­van­tage of Alibaba’s large on­line user base.

On­line fi­nan­cial prod­ucts of­fered by In­ter­net com­pa­nies prompted a cap­i­tal mi­gra­tion, which saw de­pos­i­tors mov­ing their money from banks to In­ter­net fi­nan­cial prod­ucts. Tra­di­tional banks felt the pinch. Small banks were par­tic­u­larly hit hard as those prod­ucts took a share from their al­ready small money pool.

Com­pe­ti­tion breeds changes. That is why small banks acted swiftly this year to launch di­rect bank­ing units, a form that of­fers an ar­ray of ser­vices that in­clude on­line fi­nance and tra­di­tional bank­ing. In this sense, di­rect banks are a prod­uct of in­creased com­pe­ti­tion in the Chi­nese bank­ing sec­tor.

Large banks will have to change ac­cord­ingly to cater to the mar­ket. If they stick to the old mode, their ad­van­tages may be grad­u­ally weak­ened by In­ter­net com­pa­nies, small banks and pri­vate banks. The au­thors are an­a­lysts at Shang­haibased Univer­sal Con­sul­tancy. The views do not nec­es­sar­ily re­flect those of China Daily.

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