Writer: Lu Xiaoming
Capital, traffic and risk management are the three keywords of the financial sector.
In the age of fintech 1.0, internet firms, with large amounts of user traffic in hand, served to connect financial institutions with users and products with services, helping financial institutions acquire customers and boost sales. Nowadays, however, with their enterprise services, internet companies are penetrating the entire value chain and expanding their operations to include the design, production, sales and after-sales services of financial products.
The age of fintech 2.0 has arrived.
Riding the waves of this new era, BATJ (Baidu, Alibaba, Tencent and JD Group) are increasingly becoming the enablers of financial institutions with their fintech services.
Last year already saw BAT launch their respective financial clouds for financial institutions. This year, the companies are unveiling their more systematic “industry solutions” in a bid to build themselves into technological enablers of financial institutions.
Internet giants empowering financial institutions
Ever since it positioned itself as a fintech firm, Ant Financial, an affiliate of Alibaba, has launched a slew of financial services targeting businesses this year such as Chexian Fen (literally auto insurance score), Dingsun Bao (an auto loss adjuster), Caifu Hao (an app that connects financial institutions’ products with potential customers) and an AI-powered customer service. At this year’s Alibaba’s Computing Conference, for the first time, Cheng Li, the CTO of Ant Financial, systematically explained to the public the fintech firm’s business plan, known as the “BASIC” strategy. The director of the company’s financial cloud business also ran the audience through the infrastructure underlying Ant Financial Cloud from the application layer to the bottom layer.
Tencent, which has always been a follower, also rolled out its own financial cloud service last year and has recently integrated the individual products into “industry solutions.” Tencent Global Partner Conference (TGPC) was held in Chengdu last week. At the sub-forum focusing on the financial sector, Zhu Liqiang, who oversees Tencent’s financial cloud operations, systematically introduced the company’s fintech solutions for banks, insurance companies and investment funds, after he talked about the capabilities Tencent Financial Cloud provides in areas like big data, intelligent recognition and intelligent customer services. The focus was on a single product at the Fuzhou conference last year, said Zhu. This was the first time he talked about Tencent Financial Cloud in such a systematic way.
Also last week, at its JDDiscovery conference, JD Finance launched JD Financial Cloud, a corporate service platform providing Fintech as a Service (FaaS). All functions of the platform are said to have been taken directly from JD Finance’s existing businesses, such as intelligent marketing, intelligent risk management, intelligent customer services, robo-advisers and securitization. The platform offers its key fintech capabilities as separate or embedded modules and assists financial institutions in aspects like customer acquisition, business operation, fraud prevention and pricing. Put simply, it’s a PaaS for the financial sector.
“Reducing the cost of financial services” and “improving efficiency”
In the evolution from fintech 1.0 to fintech 2.0, what remains unchanged are the core tasks of “reducing the cost of financial services” and “improving efficiency”.
Customer acquisition has never cost much for tech giants boasting strong traffic magnets. By generating credit scores for users based on behavioral data, internet companies can extend credit online without having to meet with the clients in person. This can not only reduce the cost of credit extension, but also expand the reach of the services and keep non-performing loan ratios at low levels.
While traditional financial institutions must deal with the regular churn of sales people, advisors and customer service staff and take time to train new people, internet firms can save the cost with technologies like targeted recommendation and intelligent customer services.
Challenges tech firms pose to financial institutions
Banks are bearing the brunt.
As per a report by KPMG, by 2030, services originally provided by the retail banking sector will likely be offered mostly by tech firms. Banks may become unknown to children in the future and may be reduced to just places where money is kept, with no direct contact with customers.
The profit margin of China’s banking sector has seen continuous fall, from 20.4% at its highest in 2011 to 14.48% as of June 2017, according to Zhang Qu, the former deputy governor of Industrial and Commercial Bank of China.
Retail banks are the most affected. Although banks are still behind the now ubiquitous cashless transactions enabled by WeChat Pay and Alipay, for users, they have become almost invisible. In the meantime, internet firms are eating into banks’ deposit business with their own, say, money market funds. As of the end of the second quarter, China’s largest money-market fund Yu’eBaos assets had shot up to 1.43 trillion yuan, topping the personal deposits of Industrial Bank and China CITIC Bank as well as the combined personal demand and term deposits of the share-owned China Merchants Bank (CMB), which has been known for its strong ability to draw deposits.
The availability of such powerful platforms as Tencent and Alipay is indeed a boon for financial service providers. Tianhong Asset Management was only a small-scale fund management company before Yu’eBao. But now it’s one of the top monetary fund management companies across the globe. Undoubtedly, it wouldn’t have grown so fast if it weren’t for Yu’eBao.
Previously, internet firms dealt with solely traffic. But, the picture has changed. The internet firms are now branching out into financial product design, risk management and more by offering enterprise services. On top of that, they also rolled out FinCloud services to provide banks with a full suite of IT, big data and risk management solutions. It seems that the financial institutions, which hold risk management and pricing as their core businesses, will have to rethink about their future as fintech companies eat into their market.
Zhu Min, former VP of IMF (International Monetary Fund), pointed out that fintech has evolved to a stage when all the off-balance sheet businesses and some on-balance sheet businesses including lending, account management, depositing, investment, transaction processing and asset management of banks can be handled perfectly well by fintech companies.
Coexistence of fintech companies and financial institutions
The fintech companies’ entry into financial industry may have, to some extent, hurt traditional financial institutions. But this is often outweighed by the benefits the fintech companies bring to the financial sector. They can facilitate the transformation of financial industry rather than merely intensify competition. Financial industry won’t see much change if the internet giants are bent solely on selling traffic.
Firstly, the internet firms are like disruptive force which can bring into the financial circuit more vitality.
CMB was once crowned the king in retail banking. But since internet firms’ foray into financial sector, its retail banking business has suffered some serious blows. Even so, Jiang Chaoyang, General Manager of the Online Retail Banking Branch of CMB, still believes that the joining of internet firms does more good than harm to the industry as a whole and to customers. They force traditional financial institutions to reflect on themselves and improve their customer services.
Secondly, financial sector is too extensive for fintech companies to digest alone. The operation of fintech companies is still dependent on financial institutions.
Financial market is an enormous territory with countless niches. There is no way that the market can be dominated by only one company. Many companies stand a chance to thrive under its dome. Furthermore, what the financial institutions and fintech companies should really center on is tapping into their respective edges. Fintech companies’ advantages lie in application scenario and technology, while traditional financial institutions are officially endorsed organizations by the Chinese government. In addition, traditional financial institutions also have a leg up on fintech companies in terms of capital cost, financial product design, investment and risk management. Currently, customers still find financial institutions more trustworthy when it comes to money management.
Many senior executives in financial institutions and fintech companies also admitted openly that fintech companies and financial institutions complement each other instead of battling against each other. Liu Jianjun, VP of CMB, once suggested that Tencent has garnered much data in user behavior, account security and mobile payment through its social platform, while financial institutions are in possession of a large pool of transaction data. Therefore, the two sides have more reasons to cooperate than compete.
As the fintech companies march towards financial circuit, the banks too are revolutionizing themselves with technology. Banks including CMB and Ping An Bank have all expressed their intention of transforming into fintech-backed banks.
Obviously, this is a game that can’t win by one side alone. As it was explained by Ma Xiaodong, VP of Tencent in charge of payment platform and financial services, at Tencent Global Partner Conference (TGPC), finance and technology will eventually be fused together through gradual infiltration. In the future, they will coexist harmoniously under a new ecosystem by offering their respective expertise.
Written by Lu Xiaoming