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Redesigning the Banking Experience for the Renminbi

Louise Schenk

Experience Consultant, EPAM Hong Kong
  • Financial Services

Where poverty once prevailed, there is now huge potential for innovation in financial services

Sixty years ago, when American kids sat down for dinner, they couldn’t leave a pea on their plate without hearing about the starving kids in China. And with good reason: Famine took the lives of 15 to 30 million Chinese people.

Today’s China is unrecognizable by comparison. People who grew up on a steady diet of cabbage now occupy spacious high-end flats in modern neighborhoods. Young urbanites, whose grandparents aimed merely for a bicycle, a wristwatch and a manual sewing machine, aspire to own luxury cars and investment properties.

In 1981, 88% of China’s population was in poverty. 17% in 2010. 3% in 2017. Next year, according to President Xi Jinping, nobody will be. For China, this dash out of poverty has created the conditions for innovation in the financial sector.

China has the conditions where financial services innovation can thrive

China’s immense wealth presents an opportunity for financial services companies. Each new yuan needs to be transacted, saved, invested. The fact that China’s GDP was 59.7 billion in 1960, was 1 trillion USD in 1999, and is now 12.2 trillion (as of 2017) should have bankers excited.

Since late 2018, “momentum [has been] slowing across the board from real estate to the consumer and tech sectors,” in China, according to Reuters. It may not be as sensational as it’s portrayed, though, since China’s current growth levels are indeed slowing down, but still in positive territory at around 6.2%.

China’s financial system is still immature, malleable and open to innovation. Rapid growth in wealth demanded that the system be rapidly built as well. And, as is typical of things that are created quickly, the system is fit-to-purpose, but has gaps and inefficiencies. Where Europe and America’s well-polished financial structures make change difficult, China’s is still evolving.

Even lacking a legacy infrastructure has been an advantage for China. Western banks battle technological and organizational debt to create change. Innovating there always includes dismantling and rebuilding (technologies, teams, mindsets). Great ideas are blocked or mutilated beyond recognition in service of technological compatibility and business-as-usual. Fintech innovations in China often don’t have to deal with these roadblocks.

What China lacks in infrastructure it makes up for with speed and talent. China’s workforce is quick to learn. Quick to build. Quick to iterate and adapt.

China’s open-minded consumers provide a rich environment for new products and services to take root. Historically underbanked, China’s people don’t have fixed conceptions around how banks should behave, or how money should be managed. Still, they are richer than ever before, actively seeking out new offerings that are well-suited to their needs.

The biggest successes in financial services have taken advantage of China’s unique environment

China has been producing numerous fintech innovations that take advantage of this fertile environment. Trailblazers in payments, investments and borrowing have all taken advantage of China’s readiness for innovation.

While the rest of the world has striven to make mobile payments work, China has quickly pulled ahead as the leader for a few simple reasons. Smartphone saturation is high, in terms of both ownership and their pervasive roles in everyday lives here. Credit card saturation is low, both among buyers and merchants. Both sides were used to transacting ­in cash and were excited to switch to a less cumbersome medium. So instigating behavioral change was simple.

Europeans who reach for their phone at the register are still rare specimens. Cashiers who refuse to accept cash or cards, however, have assumed dominance in Chinese shopping centers and eateries.

Money market fund Yu’e Bao is another example. Alibaba blended a simple investment vehicle with their mass-market channels to create the biggest such fund in the world. It germinated outside the confines of a bank, and now manages $267.9 billion in funds. Without organizational and technical debt to contend with, Ali conceived this radically new offering. Similarly, because Chinese people lacked any prejudices about the nature of banks, they were receptive to the informal, digital-first approach.

Tencent’s WeBank focuses on patching gaps in the Chinese financial system by targeting underbanked audiences. It already boasts over 100 million users, only four years into their journey. Initially, WeBank loaned small amounts to small- and medium-sized enterprises. It quickly expanded to target underserved segments of the population with personal wealth management and financing products.

Without pre-existing infrastructure to rely on and a limited supply of engineers familiar with core banking technology, WeBank had to build its own. China lacks a reliable credit rating system, so WeBank uses WeChat’s data as an ersatz. Lacking infrastructure has made the bank agile and independent.

WeBank is designed around the challenge of turning a profit from unprofitable audiences, independent from a typical banking infrastructure. This informs everything from the structure of its technology to the way WeBank interacts with regulators. Incumbent banks the world over would find it difficult to so thoroughly focus their operations around a customer need the way WeBank has.

Take advantage. But learn and experiment before implementing

Looking at these opportunities and first movers in China, it’s tempting to jump in and get your offering to market as quickly as possible.

Both local and international banks often assume they can simply replicate foreign financial products for the Chinese customer. Their first moves are to work out licensing and compliance, then start building the technological infrastructure.

A lot of companies pull together the stakeholders’ buy-in and budget to build big new offerings before understanding how customers will derive value from what they’re creating.

Every successful product or service lives within an ecosystem of needs, capabilities and constraints. Before digging too deeply into implementation, financial institutions should validate whether users truly need their product or service, and whether the business model will work in China.

Look for opportunity in system gaps and underserved groups

Search out gaps in the system. "China’s innovation is mainly business model innovation trying to solve the underdeveloped and/or inefficient part of the Chinese economy,” Vincent Chan, Head of China Equity Strategy Research, at Credit Suisse emphasizes. Don’t just look at what products you can throw into the mix. Instead, consider people’s specific needs. Ask questions like:

  • What do people use money for?
  • Which of those uses are difficult or cumbersome right now in China?
  • How do people manage and control their money?
  • What needs do financial services typically fulfill?
  • Which of those needs aren’t being fulfilled in China?

Consider where the new wealth really is. Many financial institutions get excited about the new millionaires in China. But its middle class is immense, as both their ranks and collective wealth continue to explode. Who is handling and holding this middle-class wealth? How is wealth moving through the economy? Do all the players have access to the services they need?

Foreign banks must be careful not to overlook the nuance of China’s financial system. Although it’s deceptively similar to the West, it was built from Chinese materials in a Chinese context and is entirely unique. Each part has been adapted, sometimes in minute ways, to local mindsets, behaviors and prevailing politics.

For local and foreign banks alike, it’s important to remember not to take the system for granted. It is malleable. Be flexible enough to look past your own preconceived notions about how products, institutions and the whole system should be. In a thriving, fluid place like China, everything is up for redesign.

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