By asset size, Industrial and Commercial Bank of China (ICBC) is the world’s largest bank. It is one of China’s “big four” state-owned lenders, with 7 million business clients, as well as a retail giant, with over 600 million individual customers.
ICBC is used to throwing its weight around and getting its way in China. But even it isn’t big enough anymore to advance on its own. All of its political ties, resources and reach aren’t getting the job done.
In December, therefore, ICBC signed a strategic partnership with Ant Financial and Ant’s parent Alibaba. It will use Ant technology and Alibaba platforms to drive its existing payments and e-commerce business. More, this deal will see ICBC work with Ant to hone its capabilities in global corporate finance, scenario-based finance, and financial innovation.
The bank spun this as an obvious evolution, noting that it has been working with Ant’s AliPay since 2005, when ICBC used the company’s technology to offer mobile payment services to the bank’s customers.
What this endnote ignores is the reality that hardly anybody in China uses ICBC’s mobile payment app: AliPay and Tencent Pay together account for 96% of mobile payments in China, with a few smaller tech players accounting for most of that other 4%.
Transformation with Chinese characteristics
To DigFin, it appears that ICBC is, finally, the last of the big banks to kowtow to China’s leading internet companies.
This does not mean, however, that this is the end of ICBC as a consumer bank. It might be the start of something new.
Being open is our aimSu Yongqian, ICBC
Indeed, it is the highest profile move in China’s banking industry which is seeing lenders big and small work furiously to remain relevant as retail and SME players. (The big state-owned lenders are assured of eternal access to state-owned corporate clients.)
“Being open is our aim,” said Su Yongqian, general manager of the financial technology department at ICBC’s Shenzhen branch, speaking at a recent banking conference organized by SZ&W Group. “The past achievements of ICBC can’t be repeated without the support of others.”
Someone ate your lunch
China’s banks are the world’s biggest losers from the rise of digital finance. The big state-owned players are captive lenders to SOEs and government projects. The plucky city banks tend to cater to China’s newly wealthy. SMEs in the private sector go ignored and individuals, although most possess a simple bank account, have experienced nothing but the shabbiest service.
Once Alibaba put payments on top of its e-commerce business, and Tencent’s WeChat began handing out money in the form of red packets to its messaging and gaming users, it was game over for China’s retail banks.
“Banks ignored the pain points of ordinary customers,” said Sun Ling, general manager at China Minsheng Bank. For example, banks only sold wealth-management products to their richest depositors. In aggregate, the low-ticket wealth customer base is in aggregate huge – and now Alibaba and Tencent own it.
Banks ignored the pain points of customersSun Ling, China Minsheng Bank
The speed of Alibaba and Tencent’s ascent surpassed anyone’s expectations, though, leaving banks reeling.
Two years ago the internet companies were still – just – off regulators’ radar screens; today, they are so big that the government has wrapped its arms around them, embedding them in the nation’s financial and social infrastructure.
In the rest of the world, financial institutions have been pressured by Silicon Valley for the past decade but retain many advantages and are only now responding with pace. In China, the consumer’s shift to internet companies and their closed-loop electronic money rails has been swift and complete.
(It must sting knowing that banks unwittingly facilitated the rise of internet competitors: to make payments on Alibaba or Tencent apps requires a bank account. Banks still record money flowing in and out of customer accounts, but all they see from these transactions are that Ali or Ten are the counterparties; the real data, and merchant identities, are hidden in the tech giants’ servers.)
Banks are therefore now undergoing digital transformations that will have to be more aggressive and full-blooded. That doesn’t make it easier. It makes it harder.
“Banks are still struggling to digitalize despite the presence of so many high-tech firms,” said Zhou Yougqun, executive deputy director of the Guangdong Association for Promotion of Cooperation among Guangdong, Hong Kong and Macau.
Open banking architecture
For ICBC, the solution is open banking. It has vast customer data but needs the technology and insights of an Ant Financial to monetize it. ICBC talks about making banking “invisible”, moving data to the cloud, and innovation labs (last year it also opened a fintech office, meant to bridge operations and I.T.). “We want to do a better job at integrating finance and technology,” Su said.
That means building a proprietary core banking system from scratch, one that will be centered on customer data instead of the usual product silos. ICBC’s existing systems are from IBM, which Su says is both expensive and outdated.
The new architecture being rolled out is built for digital services and is already showing promise, such as very strong online customer acquisition for credit cards. The bank is also now working on blockchain infrastructure for next-generation products. (Although everyone in China is working on blockchain, following President Xi Jinping’s endorsement of the technology last year.)
Because of ICBC’s size and position, other banks may consider it a bellwether. But it might just be a big bureaucratic exercise: ICBC is not the industry leader when it comes to digitalization. Urban banks such as Shanghai Pudong Development Bank have embraced open banking for several years, while China Merchants Bank has pioneered moves such as using blockchain for Guangdong-Hong Kong cross-border payments.
Innovating means cutting deals
Among the big-four state banks, China Construction Bank is regarded as the most aggressive when it comes to digital transformation. It was the first to set up a fintech department (supported by Tencent), and has pioneered a real-estate marketplace app to let customers rent or buy apartments – the sort of platformy-type of consumer app that other banks are just now experimenting with, such as HSBC with its Serai gambit. CCB even opened an all-robot branch in Shanghai back in 2018.
Meanwhile ICBC’s deal with Ant may be sweeping, but that does not make it special. Ant has about 200 bank partners in China, some of which look extensive, such as a deal with China Everbright to sell it Alibaba know-how in artificial intelligence and facial recognition.
Mid-sized banks are also going digital as fast as possible. “Banks were slow to adapt fintech because it’s hard to deploy at scale, but artificial intelligence now makes this possible,” says Sun at China Minsheng.
We took real risksChen Xuming, China CITIC Bank
But banks have a long way to go before they can compete with the new crop of digital banks, such as WeBank, which is partly owned by Tencent. Sun says traditional banks spend over Rmb100 to maintain a deposit account. But WeBank spends only Rmb3.6 per account, an amount that is trending toward a mere Rmb1 as more services move to the cloud.
This is why banks are falling over themselves to do deals with the likes of Alibaba and Tencent, as well as other leading Chinese technology companies like Huawei. They simply can’t compete unless they completely redo their tech stack.
Signs of success
Big banks can’t do this wholesale, but they are finding success in those areas where they are able to reform. China Minsheng, for example, is enjoying fast-paced increases in remote, online account openings.
Another area where banks are reawakening their competitive mojo is credit cards. China CITIC Bank, for example, has put its cards business on a new, proprietary tech stack based on containerization (open-sourced microservices operating in the cloud). It worked with vendor GoldenDB to build the system.
This is unusual for banks, which tend to migrate gradually among systems. But CITIC tore up its legacy framework and built something entirely new, says Chen Xuming, assistant to the general manager of the I.T. department at CITIC’s credit card center. “We took real risks with this,” he said.
In less than a year after launch, the bank has seen its card issuance rise to 98 million, and its systems were able to handle the November 11 Singles Day online shopping extravaganza.
For many banks, transacting seamlessly on this shopping holiday sponsored by Alibaba is a test of mettle; Alibaba registered Rmb268 billion, or nearly $39 billion, of transactions in 24 hours during the latest one. CITIC was so pleased with its performance that it is now trying to sell its core systems to other banks.
The real winners
The outlook for smaller banks is tough. Kan Jianguo, technical director of the fintech department at Bank of Guangzhou, says digital transformation is even harder for mid-sized banks that lack the resources of an ICBC or CCB.
But from the sounds of it, even Bank of Guangzhou is rolling out digital solutions at a faster pace than most global players: much of its architecture is moving to blockchain, it is using artificial intelligence in how its credit-card app interacts with users, and has deployed biometrics to authenticate new customers. Today, 80% of the bank’s new card issuance and customer onboarding is online.
Add it up and China’s banks may be among the world’s fastest innovators in financial services. They know the pain of having internet companies eat their lunch.
A lot of what they’re doing sounds like the kind of mistakes that Western banks have already moved on from (there’s an awful lot of faith in their innovation labs). And for the biggest banks, innovation will never be that pressing, for the simple reason that there’s no entrepreneurial skin in the game: they will always be backed by the government.
Yet it seems likely that their urgent need to transform in the face of Alibaba and Tencent will create a new generation of financial institutions that, at some point, will be able to compete internationally on the back of superior tech stacks, advanced A.I., blockchain, cloud – the works.
Although if one thing is certain, it’s that the biggest winner is isn’t any bank. ICBC’s latest signing ceremony with Ant is part of an ongoing bargain: tech in exchange for data. For the internet giants, selling their capabilities to get access to the remaining consumer information held by banks seems like a no-brainer.