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Many commentators in China are extremely excited about the launch of WeBank, and are all-too-ready to discuss how its creation could help transform the country’s banking sector.
Getting anyone at WeBank itself to talk about its potential is a much tougher task. Tencent, the Chinese internet giant that is its most illustrious shareholder, is famously secretive, despite being listed in Hong Kong, and rarely grants interviews to either domestic or international media.
Tencent’s wiry founder-chairman Pony Ma is bespectacled and publicity-shy, expressionless and pale, in many ways the embodiment of that western idea of Chinese inscrutability.
Requests for an interview with WeBank were at first politely rebuffed by Tencent; later entreaties were simply ignored.
“Good luck getting an interview with them,” counseled a well-credentialled Hong Kong financial analyst. “If you can get your foot in the door, please let me know how.”
Never one to shirk a challenge, Euromoney ventured across the border from Hong Kong to Shenzhen, then across town to Tencent’s main headquarters on Kejizhongyi Avenue, in the city’s high-tech Nanshan District.
The analyst’s words at first appeared ominously on the money. Requests to speak with management or media staff were met with courteous but blank faces at the reception desk in Tencent’s soaring, glass-clad atrium. “Perhaps you could come back in summer, when the bank is up and running,” it was suggested, kindly but unhelpfully.
A more patient approach was adopted, one that often proves fruitful in the mainland: stress how far you’ve travelled to interview the company before retreating to a middling point in full view of the entry desk (in this case, next to a giant model of the winking, scarf-wearing penguin that acts as a rotund mascot for Tencent’s instant messaging platform QQ). Then repeat the process with excruciating politeness until it pays dividends.
In the end, it only took just over 24 hours. After fielding requests for just over a day with surprising amiability, a very nice young man bearing a name badge that included his chosen English name of ‘Zorg’ strode across the atrium. “My boss,” he said simply, handing over a cellphone.
The quiet young voice on the phone was gentle. Could the interview wait a few months, at least until May? No, not really, it was explained, equally politely – deadlines had to be met. An hour later, Zorg was back. “I will take your phone number and you will wait for us to call.” In China, this sort of promise is usually little more than a polite but solid ‘no’.
A call came in later that day. The quiet voice on the other end of the phone suggested meeting at a Starbucks on Dingjiyuan Avenue, a stone’s throw from both Tencent and the ponds and gardens of Pony Ma’s alma mater, Shenzhen University.
The owner of the quiet voice was already waiting in the coffee house at 8.30 the next morning. He was pale and fidgety, with glasses and a reedy voice, and wouldn’t give his title or his name, beyond admitting that he worked at WeBank. He didn’t look like a banker – in fact, he wasn’t one at all.
“Data,” he explained, looking at little embarrassed at his own words. “I do data.” He warmed slowly, both to his theme and to the foreign reporter sat drinking a frothy latte. “We have a lot of information about customers. All technology firms do, wherever they are. So, why not open a bank? We know our customers, we can see their financial history, what products they want.”
Asked where he banked, his face sloped into a sort of morose frown, and the name of a second-tier state lender was mentioned. “They are awful, but all Chinese banks are awful,” he said. “I hope we can do better.”
Tencent’s ascent
Banking in China just got more interesting. Over the past 12 months, Beijing has steered a U-turn on an industry dominated by large but creatively challenged state lenders.
Last year, it handed out provisional banking licences to 10 privately run corporates, ranging from industrial conglomerates to power distributors, airlines to copper miners. Beijing’s aim: to inject more dynamism into a torpid industry, and to direct more capital toward small business owners, essential to its attempts to diversify a flagging economy.
Tencent’s is the most interesting name on the list of new private banks. One of China’s largest private firms, it grew out of nothing in 1998 to become a domestic leader, first in instant messaging then in social networking. More than 470 million people use its WeChat mobile messaging service, according to company data. It sprawls internally – spanning industries old and new, from e-commerce to online gaming, wealth management to payment services – and externally. It has become one of the country’s most rapacious investors, buying up stakes in domestic music and distribution services (Huayi Brothers) and a plethora of foreign gaming firms (most recently, Switzerland’s Miniclip).
By any measure the firm is a monster. It posted earnings of Rmb15.6 billion ($2.5 billion) in 2013, the latest full-year figures, $1 billion more than the sum generated by Facebook over the same period. As of March 16, investors valued the firm at $163 billion: less than Facebook (which boasts a market capitalization of $219 billion) and its closest domestic peer Alibaba ($202 billion); but more than Amazon ($172 billion) and eBay ($71.4 billion), making it the fourth most-valuable internet firm in the world.
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I’ve spent the last 15 years moaning about the lack of precise data available to interpret credit worthiness in China and suddenly it’s all there, on these online platforms
Ben Simpfendorfer, |
Tencent, though, has an ace up its sleeve: unlike its US peers, it is currently in the final throes of setting up its own loan-making, deposit-taking lender, Shenzhen Qianhai WeBank. This is no small deal in China. The country’s first (and so far only) privately run lender, Minsheng Bank, opened its doors in 1996. Founded by a Sichuanese pig farmer, Minsheng was heralded as a trailblazer, serving privately run small and medium-sized enterprises. Yet it was never really ‘private’ at all: it took barely two years for state-run institutions to buy a majority of Minsheng shares.
So the events of January 4 this year caused waves in China’s staid banking sector and were noted around the world. For the first time in a decade and a half, a loan was disbursed onshore to a private client by a private mainland lender. Chinese premier Li Keqiang turned up to add political heft to the occasion, pressing the button that transmitted a Rmb35,000 loan at a rate of 7.5% from WeBank to Xu Jun, a trucker from Guangdong province.
And this, the new bank was keen to underline, was just the beginning. At the soft launch, WeBank chairman Gu Min said the lender aimed to focus on retail customers and SMEs, delivering financial services to “30 million small businesses and 300 million individual consumers over the next decade”.
Around 500 people already work for the lender, which will be controlled by Tencent (which has a 30% stake) and two other local private firms (conglomerate Shenzhen Liye and investment group Shenzhen Baiyeyuan, each with a 20% share). Smaller shareholders make up the remainder.
Medieval mentality
China may be the world’s largest economy ranked by purchasing power, but its banking sector remains medieval.
State lenders have long proven inept at providing customers with anything remotely approaching service. Until recently that mattered little to Beijing, which needed a tame, pliant banking industry to push through the sort of fiscal stimulus that saved the economy from recession in 2009. Banks did what they were told and didn’t ask questions. But that mentality came to dominate the client-facing side of the business. After three decades of development, China’s state lenders know remarkably little about their customers, let alone who to target with mortgages or savings plans or wealth management products.
This is where Tencent comes in. In theory a sprawling assortment of technology patents and products, its true, overarching identity is as a vast collector, sifter and user of data relating to China’s 1.36 billion people.
Inside the company’s servers sit the details of the 829 million active QQ users – more than the populations of the United States and the European Union combined – as well as the 580 million registered members of its social networking service, Tencent Weibo. It can see what these people do in real time.
As a direct extension, in theory it already knows to whom it would want to lend: which truck-drivers, students, or small-business owners will likely pay back loans on time, and which won’t.
This helps explain why Beijing, when mulling a list of likely candidates to run the country’s first generation of true private lenders, turned to Tencent.
The company ticks a lot of boxes. It boasts scale and reach, its tentacles spreading out to touch an extraordinary cross-section of China’s demographics, from white- and blue-collar workers to cash-strapped students and high net-worth customers. WeBank will also target the sort of corporates – smaller, entrepreneurial, typically privately run – that remain underserved by the state banking sector, despite forming the bedrock of China’s economy.
But the money shot in this picture is provided by something else entirely: WeBank’s ability to form and build something that China’s leaders have long craved: a national credit-scoring system.
In May 2014, China’s powerful National Development and Reform Commission, the state’s central planning agency, announced its intention to create a nationwide system by 2017 capable of tracking every citizen’s credit history.
This otherwise bold goal looked like a classic case of placing cart before horse. Relatively few Chinese citizens own a credit card, making it hard to form a cogent picture of a single person’s credit history, let alone an entire country’s. Many mainlanders still eschew debt, preferring to save up to buy big-ticket items, all the way up to automobiles and even houses, in cash.
This lack of a comprehensive credit system stymies national efficiency and militates against asset-poor consumers and small businesses, which often resort to the shadow banking system to settle medical bills and finance capital expenditure plans.
“China’s big state banks,” notes Ben Simpfendorfer, managing director of Hong Kong-based consultancy Silk Road Associates, can thus “only mine the data of their existing customers to assess credit quality,” while Tencent can tap into the psyche of corporates and retail customers. “They can see whether a business has a one- or a 10-year credit record, and assess the risk weighting [on a potential loan to that client] accordingly.
“I’ve spent the last 15 years moaning about the lack of precise data available to interpret credit worthiness in China and suddenly it’s all there, on these online platforms,” he adds. “And the ability to analyse and mine that data is stronger than ever. These are very powerful trends and they change our perception of a country with no verifiable data to a country with bucket-loads of data.”
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At a very high level in Beijing, there is a recognition External adviser to the central bank |
Nor is Tencent alone. In January, the People’s Bank of China granted licences to eight companies, including Tencent, Alibaba and insurer Ping An, allowing them to establish national credit rating agencies. In doing so, the country’s leaders are implicitly recognising the need to form a far deeper and more accurate picture of the country’s financial health. Data released by the central National Bureau of Statistics is treated as a joke; even premier Li has said he uses its numbers for “reference purposes” only.
And there’s an even loftier ambition playing out here, one with repercussions that will stretch far into the 21st Century. “At a very high level in Beijing, there is a recognition that without better data – data that people trust, not just in China but overseas as well – the country’s going to have a hell of a challenge forming a global currency, or creating a proper debt curve,” says an external adviser to the central bank. Everything, he notes, starts at the bottom. “Until you have better data at ground level, China can’t claim to be a real global power.”
And that, he believes, explains the government’s sudden “love-in with the tech sector. These firms are now deemed vital and essential to the country’s financial health.”
Opening the door
The tipping point for China’s leaders, believes Zennon Kapron, founder of Shanghai-based financial research and advisory outfit Kapronasia, came when Beijing finally realised that “genuine advances in technology just weren’t going to stem from traditional, state-run banks. The government could see that the only way to instil new ideas and innovative approaches in banking and credit reporting would be to turn to leading tech firms.”
In fairness it will be years, maybe even decades, before we get a full picture of China’s finances, from the macro to the smallest of micro levels. Tencent remains a bank in name only: the loan extended in January to China’s most famous trucker remains so far the only one disbursed by the country’s new generation of private lenders.
After the meeting with WeBank’s data guy in Shenzhen, the company cracked open the door a little more. A spokeswoman said that the new lender was “still engaged in trials, sharing information between various [internal] channels, and seeing what will and won’t work.” Despite being China’s “first internet bank, with capitalization of Rmb3 billion, targeting retail customer and [small] enterprises,” it was important not to trumpet the bank’s credentials too early, she added.
Full operating approvals were in place, having been granted on January 18 by the China Banking Regulatory Commission, the national bank regulator.
But WeBank “still needs to keep quiet until we have all the right licences in place,” the spokeswoman noted. “Our aim is to open the bank to the public in late April or early May. During this current phase, we will help our shareholders and employees to open bank accounts, reach out to select customers to experience our banking business and loan service, and strengthen cooperation with other banks in compliance with regulations.”
Nor is Tencent alone here. Its great peer and arch rival Alibaba is also preparing to open its own banking operation, MyBank, in early summer. Controlled by a raft of investors led by Alibaba subsidiary Ant Financial Services Group (which will own 30% of the new lender), Shanghai-based conglomerate Fosun International (a 25% share) and auto parts giant Wanxiang Group (18%), MyBank will be linked up to Alibaba’s online payment system Alipay, which itself boasts 300 million registered users.
The aim, a source close to Alibaba says, will be to provide customers with “a range of financial services that entails loans, access to credit cards” and investment products. Like Tencent, Alibaba is rapidly building its own credit scoring system, Sesame Credit Management, which will also be housed under its Ant subsidiary (which was precluded from the group’s blockbuster 2014 New York listing), with access to Alibaba’s network of 37 million small-business customers.
Perhaps the biggest unanswered question is what these new lenders will actively look to not do or be. MyBank, an Alibaba insider says on condition of anonymity, would not seek to be a standard, old-fashioned lender: China already has enough of those.
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I can’t see Alibaba being able to create a full-service financial division. It won’t have enough range, breadth, depth and knowhow
Fraser Howie, |
“There are no plans to become a ‘bank’ in the traditional sense of the word, with offline counters, ATMs and offices,” he says. For the first time since the dot.com boom of the late 1990s, an entire generation of online-only banks is set to open its virtual doors, this time to the Chinese public.
And they really will be different. Both new online lenders are trialling new technology services and gadgets, including video banking and using online face recognition to confirm the identities of loan applicants. WeBank chairman Gu believes that being based purely online will allow the lender to slash operating costs by up to 90%, passing on savings to customers.
Whether customers take to these new lenders remains to be seen. For younger, tech-savvy customers born in the internet era, the idea of banking with a WeBank or a MyBank might well appeal. To many, notably those embedded in social networks and already using online payment systems such as Alipay or Tencent’s Tenpay to buy movie tickets or settle utility bills, banking with a known-and-trusted internet brand is likely to be a logical and simple next step.
These new private lenders boast another comparative advantage over their offline peers: the ability to tap customers strewn across China’s 31 provinces and municipalities at the click of a button.
“There’s nothing to stop these new lenders gathering market share across the country, snapping up customers in Xinjiang or Hangzhou,” notes Kapronasia’s Kapron. Thus, the new institutions will be the first batch of freshly minted, nationally focused mainland lenders since the formation of Tianjin-based Bohai Bank in 2005.
In time, both internet firms could even extend their operations outside the mainland. Both are respected brands abroad, while Alibaba’s $25 billion September 2014 New York listing, the largest in history, transformed the firm into probably China’s best-known corporate brand. “There is no stigma associated to either names, anywhere,” Kapron notes. “They could use that fact to their advantage.”
Others go further. Silk Road’s Simpfendorfer believes banking could come to constitute the “biggest part” of both Tencent’s and Alibaba’s operations within a few years.
A Shanghai-based private equity investor in his early 40s, and who uses his Alipay account to buy plane tickets and settle cab fares, says he “almost never goes to a physical bank branch. I do my banking online, as do many people who don’t want to wait in queues for hours. These internet firms have gained the trust of a large proportion of Chinese consumers, and they should find it easy to convert paying customers into deposit-making customers. This is very threatening to state banks, most of whom aren’t very good at interacting with customers, asking them what they want, or understanding them.”
To see how poorly the big state lenders understand the internet, customers only have to visit their home pages, burdened as they are by clunky graphics and a muddle of clashing fonts.
Tech titans
China’s banking system isn’t going to be turned on its head overnight. Despite the furious vibrancy of Asia’s largest economy, change happens slowly in key sectors such as financial services. Beijing still needs its lenders to act with unhesitating loyalty, whether that means directing capital to favoured state-owned enterprises, or opening the funding taps during times of crisis. Control, in this sense, is everything: foreign lenders have failed to make much of a dent in the vast market in large part because Beijing can’t afford for them to snaffle market share from domestic rivals.
Others doubt if these tech titans have what it takes to build anything approaching scale in the banking sector.
“It’s far from clear that any of these new banks will become successful,” says Fraser Howie, co-author of ‘Red capitalism: The fragile financial foundation of China’s extraordinary rise’. “They will be far too small and will take far too long to gain any significant scale or position in the market.”
Howie points to concerns about transparency, corporate governance and intellectual property theft that undermine some Chinese internet groups. “These problems are just as bad in the private sector as they are in the state sector, if not worse,” he adds. “I can’t see Alibaba being able to create a full-service financial division. It won’t have enough range, breadth, depth and knowhow.”
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Further reading |
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Other questions yet to be answered include how the new entities will be regulated by the CBRC, and how the regulator will integrate them into the broader banking system. And what of their ability to manage risk?
“The parameters that surround the process of making a loan haven’t changed for a couple of centuries,” notes one veteran China financial-watcher. “And the idea that these entities will reinvent lending in some way, just because they have a bigger store of data to mine, is hard to envision. Opening a bank doesn’t make you a bank, and none of these institutions has the DNA of a bank.”
For all of these rightful concerns, Chinese consumers should be offered something absolutely new in their lives in the months ahead: a genuinely pleasant banking experience offered by trusted internet brands who know their customers inside and out, and who will mine their vast databases to determine who is worthy of a loan and who should be avoided.
There may well be rollout glitches, and both Tencent and Alibaba run the risk of alienating long-standing customers, at least in the early years, by rebuffing their requests for capital. Either way, it’s hard to avoid the sense that for the first time in the country’s history, banking in China just got interesting.
