Xiaomi enters the banking industry

Written by Kaiyu Xu || 21 Jun 2016

Xiaomi has entered the finance industry, following in the steps of Chinese tech titans Alibaba and Tencent. On June 13th, Xiaomi, whose traditional strength is in the smartphone business, joined hands with Chinese conglomerates New Hope Group and Chengdu Hongqi Chain Co. to establish the New Hope Bank in the Western Chinese province of Sichuan.

New Hope Bank is the first private bank approved in West China and has a registered capital of 3 billion RMB ($462 million USD). Unlike the Eastern coastal cities like Shanghai, where the fintech industry is more developed and established, cities in Western China have less-developed fintech ecosystems. Thus, the latter are especially in need of innovation and new technology models. This need has became even more critical, especially after President Xi Jinping's One Belt One Road initiative to develop the region. 

Similar to earlier fintech banks, New Hope Bank plans to use internet technology and a mobile platform to serve its clients as Xiaomi is seeks to capitalise on its mature mobile platform techniques to expanding its business into banking. New private banks similar to New Hope have been heralded as disruptive and considered rivals to traditional banks. As their history is relatively short, it is unclear how they will do in the long-term. Online bank Webank, which was launched by Tencent, aims to help SMEs in south east China startups and various small firms access capital. Webank has already lent over 20 billion RMB in the past year, but we have yet to see any financial results from the bank. 

Regarded as rivals of traditional banks, these ‘fintech platforms’ also face their own problems. Of all the major digital financial management platforms in China, Yu Ebao is one of the most influential, with more than 295 million customers as of June 12, 2016. The Yu Ebao platform was launched in June 2013, with the intent of providing anyone a chance to manage his or her wealth—no matter how small. One can buy funds of one yuan from Yu Ebao. In comparison, a traditional bank, like ICBC, typically sets a minimum purchase amount of 50,000 RMB for any wealth management products. However, the average amount invested on the platform seems to be falling, which could be an indication that consumers are falling out of love with Yu Ebao. This could be because of the rate of return.

In 2014, the seven-day annual deposit interest rate of Yu Ebao yielded to 7%, but today its interest rate is typically around 2.48%. Thus, the demand and passion for Yu Ebao has decreased since customers are not as motivated to invest money because 2.5% is close to what they could get from a time deposit at the bank. Consequently, traditional banks are regaining some of their customers that had previously preferred the digital wealth management platforms.

Why are online wealth managing platforms not succeeding?

  • Social Norms: For most customers, when it comes to financial management, traditional banking is their first choice. Many customers tend to stay away from new wealth managing methods, like Yu Ebao, due to the risk of interest rates changes, as well as safety concerns. Naturally, the lack of incentive from low interest rates drags customers back to the safer and more traditional method of banking.
  • Peer to Peer Lending: The rise of p2p lending is a brand new topic for China’s financial market and it was only recently that China began to setup regulations around p2p lending. Suitable for investing larger amounts of money, p2p tends to attract customers with more assets, therefore dividing the modern money managing market.
  • Stock Market: Besides p2p lending, a more attractive way of growing wealth is through the stock market. During 2014 and 2015, China had a strong bull market. The market was so profitable that even many college students invested in the market in hopes of earning moneyIt is likely that because of an increasing number of customers investing in the stock market, the stock market naturally stole some potential customers from Yu Ebao.

Over the past year, the stock markets have cooled, without rising or falling dramatically. At this point, New Hope Bank may want to seize this opportunity to win over potential customers. In order to build confidence amongst customers, New Hope Bank still needs to prove itself by offering a steady rate or other attractive policies to compete with traditional banks.

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