Fintech boosts banks’ performance in China

Written by Felix Yang || September 10 2018

Financial results from China's banks are improving recently as tight regulation is limiting the expansion of 3rd party competition, while overall bank profitability is increasing.

According to Chinese banks’ half year financial statements, in the first half of 2018, commercial banks’ total net profit reached RMB 1.03 trillion, a 6% increase from last year.
In general, the good news came from two areas: growth in retail banking and cost control. The leader in China retail banking is China Merchants Bank. 57% of its net profit came from their retail business in the first half of 2018. Ping’an Bank is also focusing on the retail business growth with 51% of Ping’an’s total revenue originating from their retail business since the start of 2018. On the cost control side, banks’ efficiency ratio decreased when Chinese banks emphasized the importance of cost control. However, in technology focused areas, banks have invested more and occurred higher expenses. This is due to the pressure from clients’ requirements of more advanced banking products. As more and more banks started cooperating with outside technology providers, such as Ant Financial and Experian, the general banking services have improved in China.

Investment in technology has brought changes in banks’ digital structure. For instance, banks are leveraging their resources with big data and machine learning. The ideal plan is to manage customer analysis, risk control, and transaction process automatically at the back office with little human interference. With more accurate analysis, banks have improved the sales of banking products, reduced labor cost, and new opportunities in more business areas such as wealth management and internet loans.

With the development of mobile apps, banks reduced the waiting time at branches. Customers are more satisfied with their services today in China. Also, the new functions designed on banking apps can help banks attract more customers by allowing upgrading Type 2 accounts to Type 1. Banks also cooperate with big online platforms to increase their customer base. Some leading banks also provide services to other banks. For example, Ping’an has developed its cloud service platform, which provides solutions of digital transformation for smaller banks.

Those changes are positive developments for banks in China. However, it is just a start. There are areas where banking services can be improved further. For example, the consumer finance service is still limited to a small group of individuals in China. Due to high risks of fraud in the online borrowing market, the Chinese banks cannot open their lending business to a broader range of consumers. Most banks only accept applications from its credit card customers or certain type of high-income individuals. It can be interpreted as a result of inefficient credit scoring system. Although technologies such as big data and machine learning have been adopted, the outcome is not satisfying.

Most of banks in China are followers with regards to technology adoption. The recent development is encouraging, while more work needs to be done. Banks need to combine new technology available in the market with their traditional systems. It is not an easy task but necessary. When other banks keep investing in this area and creating more value in the market, banks with little improvement will face tough competition.