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Shadow-banking crackdown opens doors to robos

Founders of digital-wealth B2Bs in China see new regulations as a vast opportunity.



Robo-advisory companies in China have been gifted a new business opportunity in the wake of regulatory changes to remove risks from the country’s banking sector.

The China Banking and Insurance Regulatory Commission in July published draft rules for wealth-management businesses. Meant to clamp down on investment products used as off-balance sheet sources of revenues by banks, the CBIRC has set conditions that will boost business for robo advisors, according to executives.

Zheng Yudong, CEO of the wealth-management business PINTEC, a Beijing-based fintech solutions provider, says the new regulations show the regulator is focused on promoting “true principles” of wealth management, in which investors bear market risks in return for being recommended suitable products.

“In the next two or three years, the entire wealth-management industry will adopt international standards,” Zheng told DigFin. (PINTEC has filed for a listing on Nasdaq.)

Gregory Van den Bergh, CEO of Bankorus, a private wealth-management platform provider in Beijing, said since the rules were published last month, “Many of our clients are enhancing their technology budget and asking how our system can help them.”

Out of the shadows
Wealth products have played a key role in the development of China’s non-bank lending market, a.k.a. shadow banking.

For years, banks have offered asset-management products that promised fixed rates of return or minimum returns – but without backing these up with deposits or other sources of capital. Instead these products were often stuffed with real estate or longer-term bonds and loans, creating duration mismatches.

Consumers have long assumed banks, backstopped by the government, would make up any losses. And in China, the concept of fiduciary responsibility has not been practiced and is often absent from law.

The government has been steadily taking measures to remove systemic risks from shadow banking, but initial measures focused on issuers and capital markets.

The new CBIRC rules represent the first clear, specific attempt to shift risk to investors while making banks take responsibility for product design, suitability and advice. Funding of products must be marked to market. Banks now face limits on how much client money can be allocated to a single product.

Unready banks
Banks, however, are not prepared to assume such tasks. Few have bothered to invest in technology platforms to manage risks, segment customers or provide advice. Few have experience in evaluating third-party investment products; the usual method is to simply sell products from tied asset managers. Moreover, it would take a long time for them to find and train enough frontline staff to provide proper advice.

Therefore banks are suddenly scrounging for tech solutions that allow them to remain in the distribution game, which means finding “best of breed” products and building out online distribution capabilities—and in a way that rapidly grows revenues to replace income lost from shadow-banking practices. These products will now be on banks’ balance sheets, in line with international principles such as Basel 3 rules on capital provisioning. And with interest rates on the rise in China, there’s even greater pressure on meeting guaranteed commitments.

So the entire wealth-management business is going to be more expensive.

But banks also have opportunities. Beyond the big national banks, there are hundreds of city, provincial and rural banks, all of which need solutions. And some of these are huge: PINTEC is in talks with a provincial bank with 30 million customers, many of whom have never invested in a fund before.

There are thousands of financial advisor corporations and securities companies as well, many of which have big client lists. These banks may not be sophisticated but they often have good relationships with their local customers, so if they can get a tech solution in place, they have a big selling opportunity.

Big internet companies like Ant Financial and are also providing wealth-management solutions, but small fintechs say they can compete because they aren’t linked to a consumer business. The Ants and JDs may dominate the B2C space, but banks will be wary of handing over customer data to these e-commerce giants – opening a door to B2B specialists.

It’s not all smooth sailing for robos, however. Many banks still view tech as a cost, rather than as a chance to create new revenues. And the CIBRC’s new rules give banks a three-year grace period – which could be extended if banks complain or if the economy experiences a lot of turbulence, which it could in the face of a trade war with the U.S. and other headwinds.

“We need the regulations to remain consistent,” Van den Bergh said.

But robo execs are optimistic. “Regulators created this opportunity,” Zheng said. “There could be delays, but the direction is now clear.”

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