How close is China's banking industry to becoming a utility?

Written by Zennon Kapron || April 29 2015

Accenture recently released its Accenture North America Consumer Digital Banking Survey for 2015. One of the findings was that banks run the risk of being seen as a 'utility' to their customers. Could the same thing happen in China?

Historically speaking

China's modern banking system grew up around the need to have a more efficient way of providing and distributing capital to China's massively growing economy. Shortly after China's civil war ended in 1949, the Big Four banks were the Bank of China, the Bank of Communications, the Central Bank of China and the Farmers Bank of China. Those banks were supplemented by the People's Construction Bank of China in 1954, now known as China Construction Bank and the modern day Industrial Commercial Bank of China which was founded in 1984. 

Through a number of name and structural changes, those banks became the Bank of China (BoC), the Agricultural Bank of China (ABC), China Construction Bank (CCB) and the Industrial Commerical Bank of China (ICBC), which we know today as the 'big four'. The Bank of Communications gradually grew into its role as the fifth big bank.

For the most part, those banks did what it said on the label: BoC did F/X and trade finance. ABC worked quite a bit with farmers. CCB with construction and infrastructure, etc..

In the early 2000s, all of the big four banks IPO'd and in the process gradually wrested (some) of their ownership and control away from the central government. As this process concluded, the names of the individual banks were the only things that really remained from their previous business as they rapidly moved into each others turf. ABC started making infrastructure loans, CCB started venturing into rural banking, etc.. At this point, competition increased significantly across product lines and customer segments. All of their overall businesses grew alongside the Chinese economy, but market share didn't shift much between the big five. 

How to build a utility

For the past decade, most of the retail banking product depth and breath has been remarkably similar for each bank. BoC has internet banking, ICBC has internet banking. CCB has time deposits and wealth management products that pay 3-5%, ABC has the same. The features and functionality of both channels and products is quite similar. 

The switching cost between banks is quite low as well. Most accounts have no account maintenance fee and customers frequently have multiple accounts. Some of these accounts come from lost debit cards as account numbers are typically the same as debit card numbers, but many are just for convenience. Yet, even with low switching costs, retail customer stickiness is still quite high (customers unlikely to completely switch banks). People just don't want to switch banks.

The real question is 'why switch?' If every bank is providing the same products and services and your employer doesn't require to use a particular bank, what is the point? 

I had this experience myself. I always banked at ICBC as my previous employer required it, but then decided to open up a China Merchants Bank account. Was it easy? Yes, certainly. Do I notice a difference in products or services? Not really...

Unfortunately for the banks themselves, Chinese banking products and services have become incredibly commoditised. 

Same same, but still a bit different

The west is currently going through a fintech renaissance where anything that plugs into a core-banking system (or even better, doesn't) is getting a lot of attention and funding. Wealth management and deposits are being replaced with robo-advisors and socialised savings as we move into what many describe as a golden age of fintech.

Yet despite these advances, most financial industries are still dominated by traditional banks. There are number of reasons for this, but one of the most relevant is that western banks seem to be getting much more involved in fintech in general. Perhaps realising that very few banks are capable of that level of innovation, many are acquiring the more successful startups either directly or through bank-sponsored incubators or bootcamps. This leads to financial institutions that are very traditional at their core, but have a subset of innovative products, channels or processes. 

The ability to acquire and integrate these companies will likely keep western banks from becoming utilities (or commodities) - at least for the near term. China is, unsurprisingly, different. 

Here the financial innovation is coming from outside of the financial industry and it is coming fast. On-line finance, P2P lending and 3rd party payment providers have reshaped an industry that now looks nothing like it did 5 years ago. It is not small fintechs or banks that are driving the change, but the tech behemoths of Alibaba, Tencent and Baidu. 

But it would be nearly impossible for a bank to acquire an Ant Financial or a Tencent, so they have little choice but to either partner or go it alone.

The challenge is though that they have never done it successfully on their own and with that expertise and innovative thinking increasingly moving to startups, it is not getting any easier. Now with more private banks on the horizon for 2015, traditional Chinese banks could very well be the commoditised utility of the future. 

What can banks do? 

It would be misleading to say that there was no innovation happening in Chinese banks. The mobile banking platforms in China are actually world-leading in terms of functionality and features. But the fundamental business and thinking behind them needs to change.

Today's China banking CEOs were cultivated from a generation of leaders that didn't have to worry about competition. They didn't have to worry about innovation.

They need to start taking a page from the playbook of other banks that are ahead of the change that's coming. Banks like Singapore's DBS that not only has a Chief Innovation Officer, but recently launched a fintech accelerator. It's forward thinking banks like these that will survive in the future.

As different as China is today from other economies, the challenges in the financial industry look remarkably similar. 

Update: An announcement of a tie-up between Bank of Beijing and Tencent on April 30th further reinforces the idea that banks will need to partner to succeed.