Alibaba and Tencent have secured banking licenses for the China market: What are the implications?
While reports and rumors are flying about Facebook’s mooted interest in securing an e-money license in Ireland1, China’s online leaders – Alibaba and Tencent – have successfully secured their own banking licenses for the China market2 . But as a report released last year by KPMG in China suggests3, China’s online giants are likely benefiting from a combination of unique benefits and market attributes that may not be found outside of the China market. In this report, we look at whether these ‘new entrants’ could use their experience and innovative approaches to disrupt the banking markets not only in China, but also in the West.
That China-based online retailer Tencent or auction site Alibaba have secured one of China’s coveted private banking licenses will come as no surprise to their millions of users4. Both have been offering a range of financial services for years and already have a fairly good grasp of the markets in which they operate.
Up until they received their banking licenses, both companies were particularly active in the payments sector. Tencent owns TenPay, a successful online payment system which also offers wealth management investment services and credit cards. Alibaba’s payment system, Alipay, is reported to have handled more than 900 billion Yuan (USD144 billion) in mobile payments in 2013, from more than 100 million users.
Also not surprisingly, Tencent and Alibaba have taken different approaches to their entry into financial services. As an auction site, Alibaba’s interest is mainly on providing the right infrastructure and financial products to enable small to medium enterprises to conduct sales on its site. As a result, Alibaba has primarily focused on offering payments services, loans (underwritten, it must be noted, by their considerable corporate treasury) and some wealth management services.
Tencent, on the other hand, is offering financial products as a way to make their site more convenient and their customers more ‘sticky’. Their strategy, up to this point, has been to focus more on the retail side of banking by offering white-label products (originated by China’s more traditional banks) and then using their wealth of data to vastly improve targeting.
Now, Tencent and Alibaba are about to make more formal inroads into banking. In August 2013, China’s cabinet announced that five new private banking licenses would be granted, in part to improve competition and market efficiency, but also to bring new capital and players into the market. By September, both internet companies had submitted an application (each as part of a larger conglomerate) and a year later – in September 2014 – both had received approval to operate banks in China.
In a somewhat separate development, both Alibaba and Tencent have also been asked by the People’s Bank of China (PBOC) to start offering personal credit reporting services – a remit previously provided by the government through the PBOC. The expectation is that they – and the other six companies facing a similar request – will use the data from their eCommerce platform to improve the credit rating system in China and, in doing so, improve access to capital for those currently outside of the banking system.
If they are able to focus on what they do best – which is manage and analyze customer data – there is a good chance that these new competitors may start to chip away at the profits of China’s bigger banks. Their ability to target product offers and deliver them conveniently to customers will almost certainly provide them with a huge advantage from the perspective of both margins and customer loyalty. Their existing brand recognition and national reach will bring them right into the hands of billions of under-banked consumers looking for access to financial products.
Both organizations also have deep experience and insight into the small to medium enterprise market in China – largely gleaned from their eCommerce data and existing relationships – which should help them to quickly capture a massive segment that has historically been underserved by China’s big banks. Adding the rights to provide credit scores provides both organizations with even deeper data sets with which to make lending decisions in the future.
For the most part, China’s banks seem to be working both for, and against, the start-ups. Some have recognized the value of the data that these organizations hold on their customers and have been starting to work with them to create a win:win situation where the banks get a new and already popular ‘channel’ and the start-ups get access to more sophisticated products and reduce their risk. At the same time, however, the banks seem to have successfully lobbied the government to reduce the payment limits allowed over the internet, which will have a direct impact on customers’ ability to transfer money into new online accounts.
While China’s government will likely want to improve regulatory oversight of these new players, we firmly believe that China will lead the world in pioneering new financial services models and approaches. What remains to be seen, however, is how their success will influence the future shape of China’s banking market and improve the financial education of the population.