When China’s first online bank made its first loan in 2015, Premier Li Keqiang said: “This is one small step for WeBank, but one giant leap for financial reform.”
But the leap has been less than giant — online banks are just a tiny part of the banking system, big state lenders continue to favour big state firms, and small private companies in China continue to struggle for credit.
More than four years after their launch, the likes of Tencent-backed WeBank and MYBank, its Alibaba-backed rival, have assets equal to just over 1 per cent of those of Industrial and Commercial Bank of China (ICBC), the world’s biggest lender, according to research firm Kapronasia.
The SME Finance Forum, a global small business organisation managed by the International Finance Corporation, the World Bank’s private-sector funding arm, estimates that 43 per cent of the credit demanded by 74m micro, small and medium-sized enterprises (MSMEs) in China goes unmet, equal to nearly 40 per cent of the global $4.8tn of unmet demand for such credit.
Despite the lofty expectations that accompanied their launch, online lenders remain constrained by their limited ability to attract deposits. They have no branch networks and deposits and transfers in individual accounts are capped by regulators at Rmb200,000 ($29,500) a year, leaving them reliant on costlier funding sources such as the interbank market. Analysts do not see this changing in the near term.
“The development of internet banking has to be under one condition — that risk can be managed,” said Felix Yang, an analyst at Kapronasia.
Traditional lenders, which enjoy powerful support within the bureaucracy, have not welcomed the competition from fintech. With the industry’s encouragement, the People’s Bank of China has clipped the wings of the technology giants as they move into financial services.
Nonetheless, the importance of online lenders is expected to keep growing as they leapfrog the outdated lending infrastructure of traditional, state-dominated banks, making use of their technology to deliver credit more efficiently and more effectively to credit-starved parts of the economy.
MYBank president Jin Xiaolong plays down the idea of competing directly with state lenders, arguing that his bank works closely with them. In southern Guangxi, for example, the Bank of Guilin has lent Rmb350m to more than 20,000 farmers over the past two years, using MYBank technology to gauge risk.
MYBank, which is a unit of Ant Financial, Alibaba’s fintech arm, dispatched artificial intelligence analysts to the city to study industries such as fishery and poultry and build a risk assessment algorithm allowing Bank of Guilin to begin serving a new client base.
“We are filling a gap in the national economy and the financial sector,” Mr Jin said.
Although MYBank would not disclose the terms of the deal with Bank of Guilin, S&P Global has highlighted arrangements in which an online bank would take a distribution fee equivalent to 30 per cent of the interest charged, while the traditional lender underwrites up to 90 per cent of the loan.
MYBank says it has also directly lent more than Rmb2tn so far, while Ant says the bank’s non-performing loan ratio stands at just 1.5 per cent, lower than the 1.8 per cent ratio for all commercial banks (although such ratios are heavily caveated by the “extend and pretend” culture that still pervades China’s financial system).
MYBank uses data garnered from the 1bn users of Alipay, China’s leading payments platform, to extend loans directly. The company has extended uncollateralised loans to 16m small and medium-sized enterprises and mom-and-pop shops, though the average loan size is just Rmb7,615. MYbank plans to serve 30m SMEs, working with 400 traditional financial institutions, by 2021.
Provided customers are willing to let MYBank use their Alipay data for verification, Mr Jin claims applying for a loan with his bank takes three minutes, that the loan transfer takes a second and that there is zero human interaction. The wait for a loan from a traditional bank can last up to a month.
The technology is evolving quickly. WeBank, which is embedded in WeChat, China’s leading social networking app, has used blockchain to create a shared ledger allowing for book-keeping, clearing and settlement between banks. It also uses its technology to analyse promotional campaigns, user transactions and cyber security threats in real time to control lending risk.
If online banks have fallen short of their promise at launch — MYBank reported profits of just Rmb670m last year against ICBC’s Rmb298bn — analysts believe they are bringing a much-needed technological jolt to China’s staid banking system. Traditional lenders have become slow-moving under state protection, meaning their systems are largely outdated and uncompetitive.
A joint PwC-China Banking Association survey last year found 38 per cent of bankers saying their current IT systems at most barely met their current business needs, up from 34 per cent in 2017 and 30 per cent in 2016.
“The traditional players have to have an answer to the digital world,” said Joe Ngai, managing partner of McKinsey China.
The future for online banks also depends on their regulatory treatment, and specifically whether they will continue to rely on more expensive capital sources or whether regulatory constraints will be loosened. MYBank’s Mr Jin said making a small business loan can cost his bank as little as Rmb2.3, compared with the Rmb2,000 that it costs traditional lenders, once human resources costs are factored in. However, the advantage of such low operational costs is reduced by the higher cost of capital.
The land-grab by big tech firms in card payments shows how vulnerable China’s traditional lenders would be to true competition. Kapronasia estimates that online payment platforms such as Alipay will take more than 40 per cent of total payment fees by next year, up from just 28 per cent four years ago.
Martin Chorzempa, an analyst at the Peterson Institute for International Economics, said the authorities may eventually loosen rules on deposit-taking in order to help China’s small firms, if the alternative is once again encouraging risky shadow financing. Regulators want more information about how online banks operate and, in particular, where their risks lie, before letting them off the leash, he said.
However, there is strong inherent support for them because their mission overlaps nicely with the government’s policy focus on nurturing domestic innovation and giving smaller firms a hand. Besides, with most of the Chinese consumer economy already tied into WeChat and Alipay’s systems, there is strong, inbuilt demand for online banking services.
“Consumers have shown their preference for the tech giants,” Mr Chorzempa said.
— Jose Qian
scoutAsia is a corporate data and news service from Nikkei and the FT, providing in-depth information about more than 660,000 companies across more than 20 countries in East Asia, South Asia and Asean. This exclusive scoutAsia Research content has been produced by FT Confidential Research