Saturday September 15, 2012
Prospects of eBanking in China
By ANDREW SHENG
My last article surveyed the fast development of the Internet which suggested that electronic commerce would develop very rapidly globally, especially in China. One United Kingdom research estimate is that business-to-consumer e-commerce transactions world-wide will exceed US$1.25 trillion by 2013, even as the total number of Internet users reach one-third of the world's population.
Currently, the world's largest e-commerce market is the United States, followed by the UK and Japan, with growth rates of roughly 10% to 15% a year. However, with China's e-commerce sales more than doubling in 2011, the Chinese electronic consumer purchase and payment market is about to catch up with the global leaders.
According to Forrester Research, e-commerce sales in China will grow roughly 20% annually to reach over US$350bil by 2016, compared with an estimated US$160bil in 2012.
Currently only 40% of online Chinese consumers shop on the web, compared with 69% in Japan and 58% in Australia. India's online purchases will exceed US$1bil in 2012 and reach US$8.8bil by 2016.
Buying and selling over the Internet has become much more prevalent since the arrival of smarter mobile phones, PCs and tablets. In 2012, global sales of PCs will grow only by 0.9% to 367 million units, but tablet (iPad equivalent) will rise 54% to 107 million and smartphones will increase 39% to 686 million pieces.
Modern smartphones already have processing capacity larger than the IBM super computers of the 1980s and with the arrival of 3G, they are able to process information and transfer data faster and more convenient for their users.
In other words, hand-held phones and tablets can already fulfil the functions of PC terminals and can therefore become the consumer's preferred platform for electronic banking and eCommerce. It is estimated that there are 5.6 billion mobile phones in use globally, with an average phone/population ratio of 80%.
If this is the trend, the biggest competitors to the banking community in China for consumer service are the mobile phone companies. The reason is that China Mobile alone has 655 million subscribers. The total mobile subscribers in China is 1.046 billion with 152 million 3G subscribers.
Since there are mobile phone users in even the remote places in China, the network of places where subscribers can pay their mobile phone charges is larger than even the Post Office Saving Bank of China, which has the widest banking network in China with more than 40,000 branches.
Until recently, the biggest obstacle to consumer purchase and payment online has been Internet security. I personally try to avoid buying online because I simply don't trust that my credit card information cannot be stolen through the Internet. However, it is increasingly more and more convenient to buy goods and services over the Internet, such as the purchase of books.
But five basic technology trends are going to change the game for buying online and doing electronic banking using smartphones. The first is eye (iris) scanning technology, which gives unique security to recognise the user. iPad 2 has already incorporated that technology. The second is cloud computing, which means that much of the software and data need not be stored inside the computer, giving the smartphone access to powerful cloud computing power and storage.
Thirdly, the analytical power of smartphones has increased, and apps downloads make such phones more user friendly. Fourth, the arrival of 4G broadband will widen the spectrum for different consumer use. Fifth, social media has become extremely popular and will be one channel where retailers will begin to exploit to reach out to customers.
Electronic banking fall into several categories payment, checking account balances, investments, credit facilities and the purchase of other services, such as insurance, travel etc.
Competition in eBanking will come from different sources. In Kenya, rural people are using mobile phones for transfers of small amounts of money, without using cash. Taobao has become even more popular in China than even the Japanese Rakuten (30%) or Amazon.com (17%). It accounted for 79% of total Chinese online transactions.
As the Chinese consumer and investor becomes more middle-class, educated and technology empowered, they will demand higher quality services, involving both bricks (physical branches) or clicks (through the Web). The transition from branch banking to phone banking and now Web banking has not been easy for many banks, as the skills required are very different. Having e-Banking is not just buying bigger computers, but changing the whole marketing and back-office and risk management systems and processes.
As competition within Chinese banks intensify, having a strong strategic view on moving innovatively and creatively to e-Banking will be a major competitive step.
The key problem is still regulatory, as the services that e-Banking can offer will definitely cut across different regulatory regimes. The most obvious one is between mobile phone operators, electronic service providers and the banking industry. Will credit facilities provided through mobile phone operators and specialist platforms constitute banking business? If so, what the regulatory and monetary stability considerations involved?
There is no doubt that the Alibaba and eBay models of bidding and transaction provides these platforms an excellent “flow” information to monitor the credit worthiness of customers. Transactions-based credit is in one sense superior to the collateral-based credit, since you know in real time whether the customer/borrower is having sales and/or liquidity problems.
Because traditional banking rely on collateral to protect the bank against credit losses, monitoring is not “real time” and by the time the bank wakes up to the exposure, the loan may already have gone bad.
What this means is that the time has come for Chinese banks to completely examine their scope for going into e-Banking as a strategic competitive tool.
The larger banks will be able to afford going into this on their own. Some of the smaller banks may wish to pool together computer resources and adopt common platforms that could enable them to compete against the larger players.
This review at the policy and strategic level will mean revolutionary changes in product, process and institutional innovation in Chinese financial services.
Whether the Chinese financial sector can serve the real sector through better quality of services will be vital for China's long term competitiveness at the global level.
Andrew Sheng is President of the Fung Global Institute.