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Chinese state banks fear revealing customer data to BAT

Large state-owned banks in China feel compelled to do deals with leading internet companies such as Alibaba and Tencent.

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Large state-owned banks in China feel compelled to do deals with leading internet companies such as Alibaba and Tencent, but fear if they expose their customer data to erstwhile tech partners, they will lose whatever leverage they have.

A recent discussion between DigFin and one state-owned commercial bank’s team dedicated to fintech strategy revealed plenty of anxiety about being sidelined by the increasingly aggressive moves by BAT (Baidu, Alibaba and Tencent).

For years now, leading banks in China have signed a variety of strategic cooperation agreements with internet companies. The latest round came this spring: in March, Alibaba and its fintech arm Ant Financial signed a memorandum with China Construction Bank, promising to help CCB onboard new credit-card customers online, as well as to cooperate on electronic payments for businesses. A month later, ICBC signed a similar deal with Tencent’s WeChat Pay.

Other banks are wondering if they too should sign deals with these powerful tech players – but at what price.

Who’s eating whose lunch?
A Google search shows such agreements stretching back to at least 2005. For a while, cooperation was the name of the game, and the banks felt they had the upper hand – particularly those big state-owned institutions comfortable with lending to state-owned enterprises.

But DigFin’s discussion shows at least one major bank realized that the balance of power had swung against it in 2013.

“We weren’t thinking of internet companies as competitors,” says a manager. “But in 2013 we saw the rise of an enemy with the launch of Yu’e’bao,” referring to the money-market fund run by Alibaba’s affiliate Tianhong Asset Management.

Last year’s first stab at regulating online marketplace lenders by the People’s Bank of China provided a sense of respite, returning order to the market. Moreover, the P2P space, dominated by the likes of Lufax, didn’t trouble big banks because they know they can’t manage loans to individuals or small businesses. The first wave of internet finance met the needs of people who weren’t the customers of big banks.

But it is becoming evident to this bank’s fintech team that they are not going to ever gain traction in these new markets. Indeed, now their existing customers, such as large corporations requiring supply chain finance, are demanding banks match the kind of pricing and service that tech companies are beginning to provide, the team told DigFin.

Shifting sands
Regulation isn’t helping banks compete against the BAT in areas such as consumer lending and trade finance for companies. Nor do Chinese banks yet have a strategy for upcoming technologies including big data, blockchain, artificial intelligence and cloud computing. (To wit: the only Chinese financial institution in the R3 blockchain consortium is Ping An Insurance.)

Announcing new tie-ups between banks and internet companies hasn’t yielded much in new products. It may be a marketing exercise. Yet it could lead to more meaningful cooperation in big data, blockchain, credit scores and better service – ultimately resulting in new business models.

But how much of a ‘win-win’ will these models turn out to be for banks? DigFin’s discussion with a bank’s fintech team unveiled issues that are both pragmatic, and existential.

On the pragmatic side, banks are still skeptical about to what extent they can really benefit from new technologies. Can these lower cost or improve customer satisfaction or generate new revenue? Can they be integrated with legacy infrastructure and business models?

But perhaps more profoundly, DigFin sensed the hesitation is around whether banks are really going to win if they cooperate with the likes of Alibaba and Tencent. Banks are aware that it is the tech giants who own the customer, and the customer data.

The fintech team told DigFin that a strategic partnership with a BAT would be worth it if they can lift the veil and get a view on customer data and see their behavior. The CCB deal with Alibaba and Ant implies it might get a look at some of the merchant activity behind Alibaba’s e-commerce platform, although DigFin could not confirm this.

But some of this could be wishful thinking. “Maybe Alibaba lacks some data about retail customers that we have, and banks won’t give that away for free.”

While it is true that banks still have pools of client data that tech giants haven’t yet grasped, the trend is clear. According to Kapronasia, a Beijing-based research firm, by 2015, Chinese banks had already lost $20 billion of credit-card fees to internet companies. But more importantly than losing out on transactions, the banks are losing the data. Tech companies are not only securing this data, but they are able to transform it into new products – products that banks can’t match because their insight into customer behavior is slipping.

“We won’t give away our client data,” the team manager told DigFin, citing both regulatory and business considerations. But the problem for China’s big banks is that as more customers decamp for tech companies’ services, banks have less and less data to safeguard.

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Chinese state banks fear revealing customer data to BAT