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Insight - Kapronasia

According to the latest China’s Payment Report from People’s Bank of China, up to 2012 Q1, the total number of bank card in circulation grew 5.2% quarterly to 3.1 billion, reaching about 2 bank cards per person. Among them, the total number of credit cards reached 290 million, an increase of 1.8% from end of 2011Q4.

According to Eguan, a China-based consulting company, the total transaction value of China’s 3rd Party Online Payment market reached 758.3 billion RMB in the first quarter of 2012.

The quarterly growth rate declined because of seasonal factors and the influence of the holiday - especially because online shopping and air travel which accounts for the largest part of the total online payment market; both declined rapidly in the first quarter.

It has been a few weeks since Tradetech China and it’s worth taking a look back at the event itself. Really in China, there are not too many capital markets focused events and WBResearch saw the opportunity and in 2010 setup Tradetech China.

In recent years, Chinese banking sector profits have skyrocketed to new levels, in part due to the Beijing imposed ceiling on the rates banks pay depositors, providing banks with a source of cheap funds, which banks then in turn lend out at much higher rates. Net profits for commercial banks grew 36 percent last year, reaching 1 trillion Renminbi. Chinese banks are enjoying year-on-year rises of more than 30 percent in their first-half net profits. In one example, the Industrial and Commercial Bank of China’s fees and commission income for the year 2011 was close to 100 billion RMB, compared to 72 billion in 2010 and 55 billion in 2009.

The Chinese mobile payment market is virtually doubling in size every year and is expected to be worth more than US$80 billion with 441 million active users by 2015, according to the latest report from Kapronasia. China has already overtaken the US as the largest smartphone market in the world; the number of mobile payment users will dwarf other markets worldwide.

Since the first QDII quota of US$500 million was allocated to the HuaAn fund in 2006, the quota allocated to security companies and fund companies has maintained steady growth. As of the end of February 2012, US$44.4 billion of investment quota was allocated to fund companies and security companies, compared to US$44.4 billion and US$40.6 billion for 2011 and 2010.

On March 28, 2012, Trunkbow, a provider of Mobile Payment services in China, announced that it has teamed up with CUP (China Union Pay, the only bankcard switch in China) for the development and deployment of a mobile online-to-offline payment system which will be launch in Q2 2012.

In recent years, since Chinese banks have been working on data consolidation at the national level, the establishment of disaster recovery systems has become one of the key considerations for banks. Today, banks must ensure the stability and security of their national data center in the event of a disaster to ensure uninterrupted business operation through disaster recovery systems.

According to IDC’s report “China Business Continuity and Disaster Recovery Market Forecast, 2008-2013, data disaster recovery service and business continuity in China is expected to become the fastest growing segment in the local IT service market during 2008-2013, with a CAGR of 52%.

A standard recovery

The importance of disaster recovery systems has pushed the Chinese government to formulate a series of industry standards. In June 2009, the China Banking Regulatory Commission issued a new guideline on IT Risk Management of Commercial Banks, which has set a higher standard for the information security and business continuity of the entire life cycle of banking IT.

In 2011, China’s regulators also urged local banks to speed up the implementation of disaster recovery systems during the 12th Five-Year Period, by proposing a disaster recovery model named “Two Places and Three Centers”, which specifies a main data center, a remote disaster recovery center, and an intra-city emergency disaster recovery center.

In response to the legislation, recently, more local banks have started building their own “Two Places and Three Centers”. Large domestic banks have been seen allocating more resources to develop the disaster recovery model and already built large disaster recovery centers. The Agricultural Bank of China initiated its Shanghai remote disaster recovery center in 2012; China Construction Bank will complete the establishment of its Beijing data center in 2013. Even though they are somewhat behind the larger banks, small and medium banks have identified “Two Places and Three Centers” as one of their key IT investment priorities in the future.

Looking forward

In 2012, we expect that local small and medium sized banks will lead the demand for disaster recovery systems, particularly for joint stock commercial banks and city commercial banks, as they seek national expansions in their next phase of growth. With increased operating risks, banks have begun to put more value on the benefits brought by disaster recovery systems, which will be key to ensure uninterrupted business operation and improve risk management capability. This trend is also likely to be seen in local insurance and securities sector, where more small and medium sized insurers, securities firms and fund companies will invest in disaster recovery systems.

Compared to self-built disaster recovery centers, outsourcing services on disaster recovery will be much more popular among these companies, as the latter can provide lower investments, shorter construction period and higher service standards; the local market for disaster recovery system is still dominated by global players represented by IBM, HP, Symantec and EMC.

What is QDII

The QDII (Qualified Domestic Institutional Investor) program was first launched in 2004 initially for insurance companies to invest their foreign exchange funds in the Chinese companies traded in overseas markets, with PingAn insurance company being the first institutional investor to receive a QDII quota of US$8.89 billion. Since then, the program has expanded and now allows institutional investors, including commercial banks, security companies, fund companies, insurance companies and trust funds to raise funds in mainland China and invest in offshore capital markets under the control of China’s foreign exchange regulator.

As China’s financial institutions continue to invest more money in information technology innovation to help them maintain strong growth and a competitive edge, foreign vendors expect enormous opportunities and are scrambling to enter this dynamic market.

However, when a foreign vendor and its local partner want to implement a new solution, both of them may face a dilemma or, specifically speaking, a real problem, in that China’s financial standardization lags behind the relatively rapid development of the financial industry globally and has yet to meet the demands of technology innovation and business expansion. This can slow the pace of technology advancement as competing standards add layers of complexity and make it more difficult to come up with straightforward technology solutions to clients’ problems. The PBOC has realized that financial standardization does and will continue to play a pivotal role in financial informationization and regards standardization work as an important strategic measure to promote China’s financial industry.

The China Finance Standardization Technical Committee (CFSTC), established by the PBOC and other financial institutions, shoulders the responsibility to draft and revise financial standards relating to banking, insurance, security and printing, and it also promotes the adoption of new standards in China. As of the end of 2011, CFSTC had issued 151 financial standards covering fundamental data elements, code, interface standards, terminology, messages, data, financial instrument designs, and parameters in printing technology. These standards have been successfully implemented in various financial areas such as bankcard, Internet Banking, accounting, treasury, information security and financial IC card.

Take for example the ISO 20022 standard, a universal financial industry message format. Since China has become a member of WTO, the scope of China’s financial institutions’ business has become much more international than before. However, incompatible financial message formats increase the cost of international transactions and impede efficient global bank connectivity, so the PBOC has already urged China’s local banks to adopt the ISO 20022 financial message standard and, at the end of 2011, CFSTC also issued the ISO 20022 standards which will be officially implemented in May, 2012.

We can expect that local banks will obtain numerous benefits from the implementation of ISO 20022 in China including the reduction of transaction costs and improvement of risk control. Vendors, of course, will be happy to help banks upgrade their cash management, treasury and payment systems.

Although progress has been made, China’s financial standardardization still faces many problems and challenges:

  • Compared with the large number of services offered by China’s financial institutions including banks, security companies, and insurance companies, the number of standards is not enough and the variety of standards is limited. For example, even though electronic payment business, such as online banking and mobile payment is increasingly popular in China, China still lacks sound and comprehensive electronic payment standards which will standardize the end-to-end process of electronic payment and control payment risk.
  • 70-80% of total standards refer to information technology, and CFSTC needs to draft more standards related to business and management, such as operation, transaction and risk management standards
  • Experts with relevant industry experience and knowledge are scarce, hindering the draft of standards
  • Currently, China only follows international standards, instead of participating the drafting of international standards 

As China becomes further integrated into global financial markets and reformation of domestic financial markets continues during the 12th Five-Year Plan Period, the authorities realize that they should continue pushing financial standardization and, more importantly, participating more actively in the drafting of international standards. By submitting its own proposals for international financial standards, China wants to strengthen its competitive edge in global financial markets.

Although it seems difficult for China to exert influence on international financial standards over the relatively short period of time that China’s markets have been developing, CFSTC will keep tracking and learning international standards first and promote indigenous innovation at the same time. In the future, we will likely see some of China’s own financial standards become international standards.

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