Moving the back office to Beijing

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A few days ago, the Beijing Municipal government (separate from the national government) issued a report promoting the capital city as a new back office operations centre for the financial sector. Using a raft of incentives such as discounts on registration payments, and subsidized housing and land, Beijing is looking to attract all types of back functions to four new specially designated zones in the capital. Apparently Goldman Sachs / Gao Hua Securities, “Swiss Bank” (?) and Deutsche Bank have been in discussions about shifting some of their back office work there; the People's Bank of China, Agricultural Bank of China and the R&D arm of China Life Insurance Company have already signed contracts to relocate to the financial zone.

The move is an interesting one and makes a lot of sense for the government. Beijing doesn’t have tremendous natural resources on its doorstep, so it’s relied heavily on government and non-industrial companies to build the city and maintain a yearly GDP growth of ~10%. It does have numerous advantages over 2nd tier cities though including one of the best transportation networks in the country and more than 150 universities including Tsinghua and Beijing University, arguably the number one and two schools in the country. As well, Beijing is the financial services hub of the country no matter what the new World Trade Centre in Shanghai would like you to believe.

The challenge that Beijing will have is of course with India. Where India has succeeded and China has struggled has been in value add. With lower labour costs, India has done providing much more than just simple A -> B services, but more complex A->B+C=D value add services. China on the other hand, has yet to master this outside of heavy industry and manufacturing. Indeed neither have some of the masters of the art who have come from India to China. Infosys CEO Mr. Gopalakrishnan commented last week during a press conference about Infosys’s business in China: “It is however, growing slower than we expected. Global customers have not taken to China as would have liked. India is still viewed as the ideal location for offshore outsourcing. We are pushing customers to look at China as an option.”

The back office centre in Beijing will inevitably be successful. Wages are rising in big Chinese cities, making it difficult to maintain profitability without special incentives from the government. If Beijing crafts these well, it could be very advantageous for banks looking to move their back-office functions. Further, Chinese banks will be loathe to move a majority of their back-office operations out of China, so areas like this in Beijing will likely continue to grow as these banks setup operations there.

The ramification for financial services tech companies is clear: get in and sell. Banks that setup a captive operation in Beijing will likely take some time re-examine their software and hardware platforms, which presents an excellent window of opportunity for the correctly positioned fintech company. Likewise, any domestic outsourcing providers that setup operations there will likely need to offer a suite of new applications to support the coming demand.

The best way to do this really would depend on the individual fintech situation: for companies with existing global contracts/relationships with one of the MNC banks (like DB or GS), it would be best to leverage those existing ties to develop the business in China. For those without, establishing a partnership with one of the large domestic SIs is likely the best way to go as they will have existing relationshis with many of the banks that would be difficult to duplicate in the short term.

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