China Banking Research

According to the figures from Chinese Academy of Social Sciences’ ‘Chinese financial industry supervision report’, the official figures show the shadow banking industry reached an AUM at the end of 2012 of about CNY14.6tn, but other research shows that the actual market is much larger, about CNY20.5tn. The number is so large that it even takes 40% of GDP according to the numbers and 2013 is expected to be even higher.

The shadow banking system in China is not sufficiently regulated and often many of the products created are carry high risks which are not explained clearly to the investors. In general, a more regulated shadow banking system should be beneficial to the banks and investors in long-run. If the current issues were not solved effectively, then the dramatic volume increase could be a financial time bomb that might severely damage the Chinese economy and financial stability.   

Year 2012

Scale of Chinese shadow banking (CNYtn)

Proportion of GDP

Proportion of total asset of banking industry

Official data

14.6

29%

11%

Actual Market

20.5

40%

16%

 

Although the Asian banking market presents a tremendous opportunity for banks, it is also increasingly competitive as smaller banks grow and innovate to compete against their large rivals. This competition, coupled with slowing growth in many countries is pushing large domestic banks to start looking abroad outside of their home countries. China’s Industrial Commercial Bank of China (ICBC), Hong Kong’s Bank of East Asia (BEA) and Singapore’s Oversea-Chinese Banking Corporation (OCBC) are great examples of domestic heavyweights who are rapidly expanding across the region.

So the reasons for expanding are fairly clear, but what about the strategies? How are banks able to justify expansion, at least in the short-term? If we look historically, many of the Japanese banks that initially expanded overseas in the 1970s and 1980s for access to deals as their customers moved abroad; we’re seeing much of the same trend today.

Although the Chinese banks started expanding for access to new f/x markets, but are increasingly following their Chinese customers as those firms also expand to ‘escape’ domestic competition and slowing demand in their home markets.

Facing almost the opposite problem, Taiwanese banks have been eager to enter the mainland China market for nearly a decade as their domestic market is relatively small and very saturated. Yet, similarly to Chinese banks, Taiwanese banks are looking to first enter the market to support their domestic customers who are represented by some of the largest manufacturers in the world like Foxcon, makers of most of the world’s iphones.

So following existing customers into new markets seems to be a good strategy to enter a new market, but what about positioning and expanding once you get there? That is actually where the challenge lies and where both supra-regional banks and global banks often struggle. How do you differentiate? How do you position your product?

Using China as an example, regulations on banking products and services for foreign banks are pretty controlled which doesn’t leave much scope to compete or innovate in terms of product scope or breadth, but where we have seen banks be more successful is looking at different underserved markets like rural banking.

BEA and HSBC in particular have been working with the government and regulators to follow the ‘go west’ policy and tap those new markets. Although the jury is still out on whether the strategy will be successful, it has helped the banks better their relationships with key stakeholders like the regulators and has positioned the two banks differently in the market.

How about you? What have you seen work in Asia? What are banks doing to successfully compete outside their home country?

This blog is part of the Oracle / Kapronasia series on Future Finance. For more information, please visit the Future Finance blog at here.

According to a user survey on mobile banking security conducted by the CFCA (Communications Fraud Control Association), users’ assessment of how safe mobile banking is has really not changed since 2010. But are the users’ security concerns valid or do they arise from a lack of understanding of how mobile banking works? Perhaps even more so than mobile payments, mobile banking seems to provoke more worries as it seems more closely attached to their banking accounts; no one wants to the risk before they understand how it works.

There is some validity to the concerns. Although mobile banking accounts and nearly all  phones have passwords, they still cannot stop professional fraudsters. According to the Internet Security Report by Symantec, attacks on mobile phones have been increasing in recent years. Mobile hackers are possibly targeting users’ financial and personal information. With increased use of mobile financial services, banks will need to devote more effort in in eliminating these threats and customer concerns.

This is even more the case in Asia where mobile phone penetration is increasing faster than anywhere else in the world and millions of individuals are becoming ‘banked’ via mobile banking services. Although the region has pockets of very sophisticated and mature user bases, there are millions of rural users who may never have had a phone before much less mobile banking products and services.

In a fraud example that we found in China, one mobile banking user in China found 40,000 RMB (~US$6,700) missing from her bank account. An investigation with the bank revealed that someone used her phone number to report a lost mobile phone. After receiving her phone number, the fraudster transferred all of her deposits out of her account by using her mobile banking service.

Unfortunately these few examples of fraud stand out much more in the press and in consumers minds more than many examples of successful transactions. We have seen financial institutions put education programs in place as well as implementing new more secure versions of their mobile banking software.

But what have you seen? What ways have you seen Asian banks mitigate risk and security concerns and still drive consumer adoption?

This blog is part of the Oracle / Kapronasia series on Future Finance. For more information, please visit the Future Finance blog at here.

Many countries in Asia have been traditionally cash and brick focused: customers have been used to holding and using physical cash and visiting the brick and mortar branches. That’s changing rapidly as competitive pressures and demands from an increasingly sophisticated customer base are driving banks to create a new normal in both business model and customer interaction. A key part of that transformation will come from self-service innovation, yet self-service means different things in different countries.

In Japan, regular bank ATMs actually have limited hours of service both during the week and on the weekends. Historically this has been down to increased costs in terms of security / safety of both the machines and people and less demand from customers outside of normal business hours, especially in rural areas.

A certain subset of Japanese customers however, have, over the years, increasingly looked for “Anytime, anywhere” banking services. In early 2007, Japanese Seven bank brought ATMs into Japanese 7-Eleven convenience stores; the integration was made easier by the fact that 7-Eleven stores and Seven Bank itself are both owned by Ito Yokado. Japan actually has the largest absolute number of 7-Eleven stores in the world so now customers can withdraw money any time of day or night with their debit and credit card in more than 18,000 ATMs installed in 7-Eleven stores in Japan.

These ATMs also process remittances from Japan to other countries allowing Seven bank’s customers to send money nearly anywhere in the world, at any time of the day. It provides a convenient cash service for their customers and also satisfies their remittance needs, which means a more satisfied customer and bank.

ATMs in China have never had challenges of hours as most of them, unless they run out of cash, run 24/7 in nearly all locations. What has changed is the functionality. 10 years ago if you wanted to transfer money from one person to another, you faced a potentially hour plus wait at your local bank branch and many times had to transact in cash unless you wanted to go through the paper work.

Today you can use a Chinese ATM to directly pay anyone who has an account with that bank. Further, even if you don’t know their account number, you can even input their mobile phone number if it is associated with the account.

Although many of the changes in self-service aren’t major, they are tailored to the local customers and what might be an issue in one geography might not be in another. They can also result in increased revenue, such as the surcharge on out of hours transactions at the 7-Elevens in Japan, and decreased costs, such as fewer branch visits in China’s case, but they aren’t one size fits all.

Many financial institutions have come to Asia with this ‘one size fits all’ mentality and really struggled to gain market share and drive business. Not having the right mix can result in decreased revenue and incredible costs from poor strategies, but can also alienate customers which gives the bank a different problem: not how to move customers to self-service, but even how to have customers in the first place.

This blog is part of the Oracle / Kapronasia series on Future Finance. For more information, please visit the Future Finance blog at here.

The growth of the property and housing market is a key part of Chinese economic growth, but at the same time, there is increasing worries of a major bubble.

In another of what is appearing to be a series of missteps for the HK bank in mainland China, the organisation has further alienated a key segment of their Chinese customer base by tripling basic account fees for mainland China SMEs. This comes on the heels of moving away from individual account managers and shifting any customer service for SMEs to automated help lines in 2011.

As China moves along its path of financial reform, starting with the interest rate reform and the Free Trade Zone (FTZ) in Shanghai, it is not hard to see equity investors moving towards Shanghai-based firms and FTZ-related firms.

Over the last few decades, the Chinese Central Bank has accumulated massive foreign exchange reserves making it the world’s largest holder at $3.44 trillion. Furthermore the expansion of these reserves, which has accelerated dramatically since 2000, has shown no signs of slowing. Figure one shows foreign reserve levels in China compared with Japan, the world’s second largest holder, along with the United States. Figure two shows the trajectory of China’s foreign reserve levels over the last three decades, which is now over 300 times larger than in 1980.

China’s Central Bank has been rapidly shifting towards full interest rate liberalization. On July 20th, 2013, The People’s Bank of China (PBOC) announced liberalizing the loan interest rate. With this announcement, the deposit interest rate ceiling is the last variable waiting to be liberalized in China.

With interest rates liberalization now on the horizon, competition in deposit interest rates is heating up. Many joint-stock banks have recently increased their long term deposit interest rates about 10%. Everbright Bank increased its 2-year term deposit interest rate from 3.75% to 4.125%, 3-year term deposit interest rate from 4.25% to 4.675%, and 5-year term deposit interest rate from 4.75% to 5.125%. It will be effective until the end of 2013. Since 2012, many city commercial banks have increased their deposit interest rate. We can see the interest rate liberalization trend, and it is currently affecting China’s banking sector from local banks to joint-stock banks, and maybe state-owned banks in the near future.

Increased Bank Deposit Rates in China 

 

 

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