In a country where a staggering 425 million people, or 65% of all mobile phone users use mobile phone wallets to transfer money to their friends or pay at local shops and restaurants in mere seconds, there is also a contrasting experience. Outdated state owned banks, slow to serve and cumbersome in process dominated the industry with no real competitors in sight, until now.
Practically all main functions of the traditional banks are now under attack. Consumers looking to transfer money, take a loan, store money or invest it now arguably all have better, faster and more convenient alternatives to banks right on their phones.
Money Transfers and Mobile Payments
Mobile payments market in China reached $5,5trn in 2016. Besides almost never using cash in a store anymore, I am paying for my rent, my gym, taxis and bicycles with Wechat pay, and I’m not alone. 44,5% of mobile payment users in China said they no longer take cash with them when leaving their home. The speed of Wechat pay and Alipay and zero fees when transferring money to friends or paying make traditional bank to bank money transfers obsolete. It is estimated that Chinese banks lost $22bn in transaction fees to the new incumbents and this number is expected to reach $61bn by 2020.
Both internet giants Tencent and Alibaba launched their online only banks, where users can take a loan of up to of up to RMB 200,000 at Webank and RMB5m at Alibaba’s My Bank right from their phone, without waiting and traditional credit checks. Tencent and Alibaba take the data they collect from users transactions, online and offline shopping, their location, their interests and interactions with friends and analyze it to create accurate consumers’ credit scores and offer them convenient and quick loans in a country where a lot of the population is still underbanked, and large, state owned banks rather lend to SOEs than to consumers.
There is no need for bank staff and the loan amounts are calculated using big data, while the whole process takes about three minutes. While the market share of this online only banks is still miniscule compared to the big state owned banks, they are growing fast.
Storing Money and Wealth Management
Wechat and Alipay users can keep their funds in their virtual wallets, without ever needing to withdraw them to their bank accounts. Not only that, they can invest it into money market funds such as Alibaba’s Yu’e Bao, which has more than $165bn deposits, making it the largest money market fund in the world, and WeChat’s money market fund that has RMB100bn deposits. These funds offer users higher interest rates than they could get for deposits in their banks, and because they can deposit money right through the app, they are again much more convenient. It is not hard to imagine that they can offer
These funds offer users higher interest rates than they could get for deposits in their banks, and because they can deposit money right through the app, they are again much more convenient. It is not hard to imagine that they can offer different type of funds and investment options in the future.
Can the Banks Survive?
Total headcount at China’s four largest banks fell in 2016 for the first time in six years, as more and more bank functions are moving online. Banks are investing in R&D, racing to modernize their online banking experiences and offer better mobile apps, but is it too late? Some of them, such as CITIC Bank, joined forces with the new entrants and launched online Baixin bank in cooperation with Baidu. Others are trying to build their own online products and fend off the attackers. But all of them realize that the threat is real and is already here.
I believe that state as the owner of traditional banks will have a major decision to make in the next years and decades to come. Will they allow new, private financial players to thrive and make the capital allocation in China more efficient, or will they interfere and protect the monopoly of their state owned banks once they begin to lose market share and importance? I certainly believe that without the interference of the government, slow moving traditional banks will slowly lose it importance over the next decades to innovative internet giants and other new players that can offer better and faster banking experience.
Can it be Done Overseas?
Companies like Facebook, Google and Amazon, with vast amounts of user data could potentially disrupt the banks in the West in the same way the Chinese internet giants are doing it here and offer better and more convenient products than traditional banks.
As the founder of Bitmex, one of the largest bitcoin exchanges in the world put it in the recent interview:
“They have in WeChat an app that gives them all the bank services they’ll ever need and they don’t ever have to step into a branch….China is a beacon for that, you can see how Facebook is essentially copying WeChat, and you will see the same thing happening outside of China now, where Facebook Messenger or another app will be your bank. It’ll give you credit, send money to your friends, allow you to go to the store and buy products. You’ll never set foot in a JPMorgan Chase or a Citibank.”
Or maybe the banks in the West will be able to respond faster than the banks in China and come up with their own banking experiences for the 21st century. Either way, at the end consumers, will be better off.