The Future of China's Fintech is emerging as Fintech and banks start to cooperate

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We have talked about the trend before, but starting to see more and more cooperation between fintech companies and banks. China Construction Bank Wenzhou Branch is now in cooperation with Alipay for a hospital payment service channel, ICBC is supporting WeChat’s QR code payment and JD finance and Citic Bank have issued over 2 million co-branded credit cards called the ‘White Card’. We're also starting to better understand the potential business models for both sides.

By working together in cooperation with fintechs, banks are now starting to realize the importance of technology to improve the efficiency of transactions, as well as the ability to acquire new customers. According to multiple annual reports from different banks, fintech and online banking have become the major focus along with big data, followed by mobile payments, QR codes, cloud computing, biometrics, Al and blockchain. Banks all increase their investment into technology.

A few banks have decided to follow this trend by building up their own fintech subsidiaries. Cib Fintech (兴业数金)was set up in 2015 by Industrial Bank, YiZhangTong Technology(平安壹账通) by Ping’an Group during the same year. In 2016, MB Cloud was set up by China Merchant Bank and CCB Fintech was established in 2017. So far there are 6 bank-backed fintech subsidiaries in China. Beyond providing services to their parent banks, they also export their technology to other banks and start-up licensed financial institutions. According to Cib Fintech, by the end of 2017 the company had helped built up information systems for 346 commercial banks.

Smaller banks in China, as they do in many places, struggle with funding. In China’s market there are 134 city and 1,172 rural commercial banks that do not have a large enough budget to build up a technology team or compete core banking system by themselves. By the end of 2016, the average value of capital for the top 5 commercial banks was calculated to be 17.3 trillion RMB, while small and medium banks accounted for 27.6 billion RMB. Due to this lack of capital, smaller size banks often choose to outsource their technology. Increasingly, their partners for the outsourcing include bank-backed fintech companies and independent technology companies such as Ant Financial and Tongdun Technology (a provider of risk control tools).

Most of these efforts have focused on setting up more efficient operating systems, online banking services, risk control models and user data analysis. Banks are also looking to move towards the cloud define a more flexible infrastructure for future innovation. But not all the cooperation brings about what banks expected, especially in customer acquisition and new financial product design.

Before, banks would pay fintech companies millions upfront. But according to a banks’ feedback, the work was only  'satisfactory.' One commercial bank admitted that after two years of operation, the fintech platform could not bring promised retail clients. The upfront fee banks were used to paying would often create large losses for the companies, as well as a potentially faulty system that brought more problems and additional work. Today, China's banks seem to prefer sharing profit rather than paying upfront. According to a 21 Jingji Report, currently fintech companies get 4-8% of their profits from technology support for wealth management products and 1%-2% from profit of loan products they help design. Fintech companies may also apply a valuation adjustment mechanism (VAM). For example, one fintech vendor may guarantee that they can provide a consumer finance product with customer acquisition channels and risk control technology. This vendor promises to issue 1 billion in RMB loans in one year, generating 100 million RMB interest. The vendor also commits that they would compensate the bad debt loss that is over 2%. As payback, they require to share 20% of the product profit.

It is clear that the banks need to make changes to stay competitive in China as the market has changed rapidly. Partnering seems to be a potential way forward and the market opportunity in China is still huge. The initial results of these cooperations have been mixed, but tending positive. Certainly a space to watch in the future.

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