New | China's privately owned banks: boom or bunk?
Forty companies want to open their own banks, but analysts say few of them have the know-how needed to shake up the sector
Chemical factories and airlines are lining up to become the next big thing in the mainland's financial sector: privately owned banks.
About 40 companies have applied to open their own banks, according to a recent statement from the country's top bank regulator. The fervour follows the high-profile launch of MYbank by Alibaba Group Holding and WeBank by Tencent Holdings, the guiding stars of the impending private bank boom.
Five banks were approved late last year and five more were in the last stages of approval in what has been called one of the biggest regulatory shifts in the mainland banking sector in decades.
The problem with the pomp surrounding the reform is, with the exception of WeBank and MYbank, few of the companies behind the banks have the business models or the know-how needed to shake up the sector.
Some of the entrants will be fish out of water in the balance-sheet business.
"Most of the applicants do not have the experience nor the plan to be successful in this business and are nowhere near Alibaba and Tencent in terms of readiness," said Mukul Agrawal, the Asia director of core banking and digital channels at financial software firm Misys.
The strengths behind the bank that Alibaba opened last month and the one Tencent launched in January lie in the businesses from which they grew, namely the largest e-commerce and social media platforms on the mainland.
The big data system that WeBank uses has access to 40 trillion records on retail customers connected to Tencent's internet or social media services, according to a report from Celent, a technology and finance industry consulting firm.
The data the company sits on ranges from records of simple online activities and payment behaviour to customers' public credit information and the content of messages sent between friends on its messaging client WeChat.
Leveraging that wide spectrum of information, the bank can access risk and make automatic lending decisions for small loans.
Alibaba's MYbank will draw on an even bigger pool of data: the one it has amassed running the country's largest e-commerce platforms.
Even before the company was approved to open the bank, its subsidiary Ant Financial Services Group had started deriving credit scores using information on cash flow and payments from online merchants and their customers. It can now offer instant consumer credit loans to users through the mobile phone.
In stark contrast, most of the other companies in the race to launch banks would be starting at an early stage on both data collection and the technology needed to operate an online bank.
"We don't know much about their customer acquisition strategies but we do know that they don't have the same access to data," said Christophe Uzureau, a vice-president of research at Gartner, a technology research and advisory firm.
Generating a high frequency of interaction with small and medium-sized businesses and consumers was essential to collecting high-quality data, Uzureau said.
That data, once processed, goes on to be a key component in credit-risk assessment and product development.
How, and from where, the lenders will tap into such rich data pools is a major question for the private banking boom.
Wenzhou Minshang Bank, which launched in March as part of the first wave of approvals, is backed by electronic equipment maker Chint Group and industrial chemical maker Huafon Group.
The bank will lend to a relatively broad range of clients including "small businesses, the self-employed, community residents, and county-level rural sector", according to Xinhua.
But Minshang has given little indication on how it will reach both farmers and self-employed entrepreneurs. Although it says it has started to lend, the bank does not appear to have an operational website, leaving open questions on how it plans to compete on the technology front.
The story is similar for other banks that have gained approval.
Shanghai Huarui Bank opened in the Shanghai free-trade zone earlier this year. JuneYao Group, the conglomerate that owns the bank as well as a small airline, says on its website it will serve small businesses within the free-trade zone while also building a "smart bank with differentiated services".
Still, there is little information on how JuneYao plans to lead this innovation, especially without a working website.
Running a balance-sheet business to serve a corporation's customer base was hardly long-term strategy, experts said.
"Since many of the applicants are corporates, they would benefit in the short term by getting captive business plus cross-sell to their customer base," Agrawal said. "However, it would be difficult to sustain this in the long term."
Agrawal likened the current effort to bring private capital into China's bank sector to one in Vietnam a decade ago, in which the Vietnamese government began promoting private capital in banking. Early this year, the government announced it would promote the takeover by larger state players of many of those banks in the hope of cleaning up an overcrowded, under-capitalised industry.
China's privately owned bank boom could eventually face the same fate, Agrawal said.
