Shifting Demands in China’s Core Banking Market

Written by Elsa Yan || November 03 2010

In recent years, China’s banking sector has gone through rapid changes, driven by deepening financial reforms, growing presence of foreign banks and quickly evolving customer demand. With intensified competition, there is a new wave of investment in core banking systems among Chinese banks, in a hope to sharpen their technology edge and stay ahead of the competition.

Customer understanding is shifting investment priorities

Legacy systems in Chinese banks were typically built on the idea of “divisional banking” which is characterized as division-driven architecture, fragmented units and scattered resources. Under this structure, the core banking system mainly served the purpose of internal management, i.e. statistical or accounting reporting, rather than playing a role in offering customer-friendly products and services.

However, this approach has seen some huge changes in a number of Chinese leading banks in their recent pursuit of establishing “Process Banking”, which is centred on customer orientation, in a bid to improve banks’ market responsiveness and service quality through business modularization, management streamlining and centralised operations. This more customer centric business approach is pushing banks to adopt more flexible architectures such as service oriented architecture (SOA) to cater to their changing needs.

The Opportunity within the Major Chinese Banks

Over the past few years, this shift has provided international players a greater opportunity to target the deep-pocketed Chinese banks primarily represented by big five. Global core banking vendors such as TCS, Temenos and Fidelity have, through setting up their own subsidiaries, joint-ventures, or in some cases the acquisition of local players, already established strong footholds in the Chinese market. Their advanced technology, experienced management, strong customer service, and locally customized products have helped them increasingly become the preferred vendors of choice for China’s major banks, which have traditionally used in-house IT to develop core systems largely because of support concerns. One of the more recent international deals was the Agricultural Bank of China (ABC), third largest assets, who selected TCS.

In addition, as China’s leading banks expand into overseas markets, global core banking vendors see new opportunities to serve their Chinese clients internationally by leveraging their worldwide experience.

S&M Banks Are Increasingly Targeted

The Chinese small and medium (S&M) banking segment, which consist of joint-stock commercial banks, city commercial banks, urban credit cooperatives and a large number of rural banking institutions, have traditionally been dominated by domestic players such as Digital China, Vanda and Global Info Tech. These local vendors had better access to S&M banks due to their deeper local market knowledge, established customer relationship and competitive product pricing.

However, local S&M banks are gradually being encouraged to operate beyond their traditional boundaries, and with more diversified and innovative product offerings and easier access to capital, they have started demanding higher-quality core banking system and international practices in a bid to rapidly enhance their competitiveness.

Unlike the larger banks whose core banking systems are largely developed and upgraded internally, domestic S&M banks are more open to engage with external vendors for the entire system revamp. This flexibility is giving global vendors more opportunities with S&M banks including Temenos and TCS who closed deals with the Bank of Shanghai and Guangdong Rural Credit Cooperative Bank respectively.

Challenges Ahead

Although global companies are seeing more opportunities than ever before, they also face many of the challenges as they enter the market, largely due to local unique banking IT needs and general business environment. In particular, many foreign core banking systems are natively incompatible with local banking practices and suppliers largely lack domestic system implementation experience. Therefore, it still remains crucial for international vendors to fully localize their products and services through entering into partnerships with experienced local players in order to achieve local success.

In November 2010, Kapronasia will publish a study of Small and Medium banks in China and in the first half of 2011 will publish their China Core Banking systems review. Both reports are available through Kapronasia’s Greater China Financial Industry Advisory Service. For more information, please contact us using the links above or send an email to This email address is being protected from spambots. You need JavaScript enabled to view it..