Now that they are licensed banks in China, could the likes of Tencent and Alibaba threaten banking markets and models in the West? Outside of the payments sector – where China’s online firms have already demonstrated overseas ambitions – I would say no… for now.
In part, this is because China’s online giants owe much of their success to factors that are largely unique to China. Low government-set interest rates for regulated banks, for example, provided the right environment for the largely non-regulated upstarts to successfully launch high-interest deposit accounts and products. Tight lending controls for small businesses made Alibaba’s and Tencent’s loans highly attractive and accessible. And an overall lack of traditional banking infrastructure in less developed parts of the country has made online banking a necessity for business owners.
In the West, on the other hand, investors have access to a wide range of interest rate options (depending, of course, on their risk appetite). In most Western markets, access to credit is relatively simple and small to medium businesses face fewer hurdles securing capital. And all banks today now offer a range of channels that provide any-time and any-where access to banking services. In other words, many of the value propositions that make Alibaba and Tencent so successful in China may not exist in the West.
That is not to say that China’s online giants can’t disrupt Western markets. Indeed, there are a number of areas where the upstarts could leverage their experience and approach from China to deliver an attractive proposition to Western customers, particularly small to medium enterprises.
Take, for example, their soon-to-be-launched credit ratings businesses. If the firms were to successfully develop an approach that – instead of using traditional lending and payment history – leveraged Big Data and customer insights to create a ‘forward-looking’ scoring system (a development already well underway, I understand), they could use this insight to target loan products to businesses that traditional banks may see as risky in the West but – in reality – could be highly profitable customers. This advantage may not be available for long, however. A growing number of Western banks are already starting to partner with ‘non-traditional’ ratings agencies, particularly for SME customers with less collateral.
A more immediate area of potential disruption is in the payments ecosystem. Both Tencent and Alibaba have made overseas acquisitions in the past year with the intention of both expanding their footprints into new growth markets and growing traffic to their core business of online retailing. In November 2014, Alibaba took a minority stake in V-Key, a Singapore and California-based mobile security provider. In January 2015, they announced a US$575 million investment into Paytm, India’s largest mobile wallet service.
It would not be difficult to imagine the dominant position that could be had if the company were to integrate their Chinese payment systems with those from the US, Singapore or India, particularly given the challenges Western ‘upstarts’ (such as PayPal and Apple Pay) have experienced growing market share in China. Conversely, as more and more western merchants start to use the international marketplaces provided by the likes of Alibaba and Tencent, the value proposition for entering into Western payments markets becomes more attractive.
However, building a new bank in the West is not easy. Even if China’s online giants were to discover a strong and differentiated value proposition for offering banking services in the mature markets, they will need to overcome some very significant barriers to entry and regulatory challenges.
The reality is that – currently – China’s online players face few of the regulatory burdens suffered by their Western peers and may not be prepared to manage the full span of regulations and rules that banks must follow in these markets. The complexity of getting up to speed and building the required capabilities just to manage reporting in each jurisdiction may – for now – stop most perspective new entrants in their tracks.
Alibaba and Tencent have secured banking licenses for the China market: What are the implications?