Devott Perspectives: “Internet +” Compels Financial Reform - The Six Main Strategies of Transformation for Banking
Source: Chnsourcing.com View: 284 Date: 2015-09-14

The word of “Internet Finance” has appeared twice in government official reports that being described as “a new force suddenly rises”. It acts as a catfish that stirs financial market with vested interests and rapidly promotes the step of financial reform. The government official report in 2015 also indicated “internet +” that provides a new thinking for financial reform. Grasping new round of information technological reform which based on internet, new emerge technologies including internet/mobile internet, cloud computing, big data, internet of things and human intelligence promote full informatization, digitalization, intelligence of financial industry; promote improvement of financial products and services; promote revolution of financial operation concept and business models; and rapidly promote marketization of financial industry.

                                           -- Lv Chunrui, the Senior Advisor of Devott

At the beginning of rising of internet finance, banks have also still not seen it as a competitor. Therefore, when people indicated the word of “subversion”, the giants of banking also were beneath their notices even saw internet finance as “dog” that promoted rising of interest rate from banks then finally would be locked after using. However, only for a year, all of banks begin to transform to be internet, to greatly change their facades, to innovate wealth management products; none of them can ignore the power of internet finance. Even the salesmen of wealth management products in the hall of banks will hopelessly say “they are compelled by Ma Yun”, when customers complain about their wealth management products without innovation.

Crowd-funding, P2P, the third party payment, online wealth management, digital currency and other internet financial forms are constantly updating; nearly all of giants of internet including Alibaba, JD, Tecent, and Baidu are entering into financial market; and then Suning and Wanda also are looking forward internet finance. From barbarian growth two years ago to succeed of Yu’ebao, internet finance has formally entered into the national and people’s eyesight. “Internet Finance” has appeared twice in governmental working reports and been written as “another force suddenly appears”. The governmental working report in 2015 also indicated to implement “internet + operation” planning to promote health development of internet finance in China. Now, people not say “internet finance” as “dog” but “catfish” that is stirring the financial market with vested interests and promoting financial institutions those used to be stable to have to face competition and self-reform with more innovative and active attitudes.

The Core Transformations of Financial Reform

Financial reform is an important tool for economic transformation in China. After the 18th National Congress of the Communist Party of China, the path of financial reform in China has gradually been clear; and practical measurements also shows the determination of financial reform from national government. From current situation it can be seen that financial reform mainly shows three core transformations, such as:

The one is marketization of interest rate. In the report of the 18th National Congress of the Communist Party of China, the mission of financial reform has been clarified as “to develop multi-level capital market & to gradually promote marketized reform of interest rate and exchange rate & to gradually accomplish exchange of RMB capital projects”. Interest rate is an important leverage to adjust total amount of national economy, to develop financing for enterprises and to stimulate consumption; and is an important tool for macroeconomic regulation and control in China. For banks, interest margin is main source of earnings; and to control initiative of interest rate is significant for banks to differ with their competitors. The People’s Bank of China has reduced interest rate three times in half of 2015, and adjusted the upper limit of floating range of interest rate from 1.3 times to 1.5 time. These measurements are rare, which is mean of macroeconomic regulation and control with currency in China to face economic downturn and relatively high financing cost of enterprises, and is also the key mean of interest rate marketization. Only release control of interest rate, can banks have bigger space of independent regulation and control and accomplish real competition in market.

The two is to promote insurance finance. Insurance finance represented by deposit insurance system is a kind of financial security system. That means financial institutions with required conditions in each catalogue gather to establish an insurance institution; each deposit institution as policy-holder pay insurance fee with certain ratio of deposit to set up emergency fund of deposit insurance. When member institution has operational risks or faces bankruptcy, deposit insurance institution can provide financial support or directly pay part or whole deposit for them then to protect benefit f depositors, to maintain credit of banks, and to stabilize financial order. “The Ordinances of Deposit Insurance in Chin” (referred to as “The Ordinances”) has been published in 2015 and formally implemented since May 1st that clarifies the highest limit of compensation is 500,000 RMB. The publishing of “The Ordinances” actually further expands floating range of deposit interest rate, and even fully cancels floating range to build micro mechanism & system security. Based on ensuring safety of depositors, financial institution can have wider space of independently pricing, and have more competencies to make great reform, as well as can build a fair market environment of competition for small & medium-size banks and private banks. That can be seen as a great improvement for China to make financial reform.

The three is social capital enters into. “The Guidance on Innovating Financing & Investment Mechanism in Main Fields and Encouraging Social Investment” published by the State of Council in 2014 indicates that “urgently need to further innovate financing & investment mechanism in main fields including public service, resource environment, ecosystem construction, and infrastructure; and fully play active function of social capital especially private capital”. Currently, National Development and Reform Commission is trying to establish cooperation mechanism from governments, financial institutions, enterprises and social capital that will provide more open financing & investment channel via platform construction and mechanism establishment and let more social capital participate in and launch project construction. Social capital represents resources of marketization. Under development trend of economic downturn in China, it is an important content for economic development and reform in China to revolute financing & investment mechanism via introducing social capital and to increase activity of market economy.

It is can be seen from above transformations that the core of financial reform in China is trying to coordinate the functions from governments and market in financial resources distribution. Government gradually exists from the market and market will play bigger function in financial resources’ distribution. In future, financial institution will implement the market exit mechanism and accord with law of the jungle that evolution, the theory goes, guarantees survival to the fittest. The internet finance intensifies living environment for traditional institutions; however under the promotion of internet +, it also provides a new thinking of marketization competition for financial institutions.

The Features and Trend of Financial Development under Promotion of “Internet +”

Actually, “internet +” represents the new round of information technological revolution based on internet. Under the promotion of emerging technologies including internet, cloud computing, big data, internet of things, and artificial intelligence; all industries are producing new productivity via technological innovation and cross-over integration. Internet finance is an orientation and beginning of internet + that will also promote finance to be internet, fully be information, digitalized, intelligent; promote financial products and services to be perfect; promote revolution of operational concept and business modules in finance industry; and promote rapid development of financial marketization. For example of banks, in future banks will be more “enterprization”; therefore, the operational concept will transform from “concentrating on assets” to “concentrating on customers”. Information construction will be more and more “concentrating on data”.

Offline – traditional operation with enclosure once was the main development strategy for banks, and the number of branches from banks became the symbolization of scale and competency of banks. However, the past advantages have become current burdens. Since 2013, the amount of deposit from most of national listed banks has begun to decrease; and also because of the strong rising of internet finance, less and less people enter into offline network of banks. Meanwhile, homogenization, bad service, and less innovation of network make them difficultly to produce expanding profit. Simon Dickson, an American author made a bold inference, he believed that the nature of finance was data and information; the function of banks is to make effective distribution of these data and information; while with high transparence of information and data, the world will develop into another space without banks in future. It is believed that in China, in order to protect the stability of financial system, banks also will exist; however, the dependence from people for physical banks will be less and less, but they will pay more attention on consumption experience provided by banks.

Online—with the popularity of internet and intelligent terminals, most of people make payment, transfer, repay credit card, and make wealth management and even do financing and investment. During the half year of establishment of Yu’ebao, the amount of payment exceeded 400 billion RMB. It can be seen that the market space of online finance will be larger than expected. Current internet finance just launches financial activities based on internet/mobile internet platform; it grasps the most direct & convenient & quick demand of users to integrate fragmented resources to form huge amount of data and information then to accomplish transformation from quantity to quality. Currently, most of commercial banks enter into constructing online banks, developing mobile APP; begin to cooperate with businesses to build online malls. Under the “stimulation” of Yu’ebao, they also promote each internet financial wealth management products with name of “Bao”; however, it is difficult for users to remember them and online business developments from them are not successful. For banks, “internet +” should not only be the channel to get more users, but also should be a kind of promotion power to promote banks to fully revolute from inside to outside, to effectively integrate from online to offline, to be more intelligent & elaborate &modernized.

How Banks Transform under the Trend of “Internet +”?

A.      To Build Super Consumers’ Experiences

"Consumer is the god” that always is the golden principle in service industry will be the core slogan in financial industry. With the change of financial operational concept and consumption modes from consumers, consumers not dependent on a certain bank because that which bank can provide timely & intelligent services with situational awareness, they will tend to it. Therefore, concentrating on customers, rapidly integrate resources, timely & actively & intelligently meet financial service demands from customers will be core elements of competition for banks in future.

1.       Build New Brand Image

Brand is image of enterprises and also their core value. Only have high loyalty of brand from customers, can enterprises have higher brand premium and intangible brand assets. For examples of some international first-class brands such as Chanel and LV, the value of their products actually is their brand value. While such as Coco Cola, McDonald’s and other brands also pay much money to keep their brand images. For a long time, development strategies of banks have not indicated brand; however, when face more and more serious market competition, banks must adopt operational means of enterprises, rebuild brand images of banks to increase loyalty from customers and to attract more attention from new users. Banks should focus on some aspects when make brand strategy, they are:

(1)     To build brand image can show core value of banks that not only accords with whole development direction of banks, but also has emotional resonances with customer groups.

(2)     To avoid homogeneity including positioning & products and services of banks. The market demand is motivation for banks; however banks shall make content of brand according to features of customer groups and their own competencies.

(3)     Besides use traditional transmitting channels such as TV advertising, street signs, store advertising and internet, new media means including Weibo, Wechat, We community, and self-media are also good channels to accomplish emotional permeation, to build brand and transmit brand via public power.

(4)     Brand will have value via accumulation and precipitation; therefore, banks need long time to try and to operate brands.

2.       Positioning of Segmented Markets

Currently, commercial banks in China have serious competition with homogeneity. No matter positioning of customer groups, product portfolio or locational positioning, they don’t have differences. For example of the main trend of internet finance, each bank also promotes each internet financial product; however, they ignore the nature that internet finance more fits for minority of common people they may not be potential customers for all banks. Driven by market, each commercial bank pursuit “big and comprehensive” market positioning; but for small & medium-size commercial banks, “the big and comprehensive” means they will have long battle line that need huge amount of capital to support, otherwise they will be failure. Therefore, positioning of segmented markets is significant for majority of small & medium-size commercial banks. The core of segmentation of market is to distinguish differences of demands from customers. Therefore, small & medium-size banks shall make detailed analysis of each feature in some aspects including consumer region (city & county, developed & non-developed and different commercial circles), element of behavior (high-end/medium-end/low-end customers, profit/storage level), psychological factors (life behaviors, characteristic), age, jobs, and salaries; fully focus on customers, products, regional positioning according with their own advantages; and build diversified brand images. Only put limit resources into this segmentation field, can banks build their own “core competitiveness” and have enough space to make innovation and development.

3.       Innovate Products/Services

Under the collision of interest rate marketization, less deposit of banks and internet finance, products/services innovation of banks have become the most important mean for each big commercial bank to consolidate deposit amount and net interest margin, to increase income of intermediary businesses, to maintain relationship of customers, and to promote operational transformation. The nature of innovation is to increase income via reducing cost or creating differentiation. For banks, product is service. If banks want to innovate, they must improve users’ experiences via emerging technological means and advanced commercial strategies, get users’ viscidity and loyalty to improve market competitiveness of banks.

First of all, let customers participate into product design. All of economic myths of internet are the essence to grasp C2B to sell participating feels of customers with final goal of improving customers’ experiences. The behaviors of customers for banks also have rapid internet transformation; therefore, banks on one hand will dismantle their businesses into modularization pool and standardization pool in future, and make integration and distribution again according to customers’ requirements to reach maximization of profit between banks and customers. Such as, customers can independently choose different time limit, mean of storage and withdrawing, interest rate of deposit, and limit amount of deposit according to their own holding capital and requirements of deposit, to form deposit products with customers’ requirements. On the other hand, let customers participate into product design process including facades, interface, language and other styles then to touch customers via details.

The second one is to understand “paint point” of customers’ experiences and to enlarge financial service chain. On one hand, grasp different features of requirements from different customer groups to develop different bank products, such as scientific & technological finance, culture finance and real estate finance and etc. On the other hand, enlarge service scope, strengthen cooperation with other fields, and provide one-stop financial services. Such as “house can mortgage loan” of China Citic Bank accomplishes one-time credit, circulation of amount; and flexibly meets demands of consumption purpose for families including buying a house via mortgage, decoration, buying a car, education, tourism and medical; provides one-stop “consumption financial services”. Besides that, grasp the opportunities of long tail market; develop and innovate loan products for small & medium-size enterprises, internet wealth management products for individual spare capital and rural finance; grasp growth point in future.

The third one is to focus on R & D of scene applications. Scene application is main psychological orientation of users’ experiences in future that means to transmit convenient & common & quick investment way of finance to majority of investors and consumers with suitable methods, and enters into daily lives. For example, Weichat payment, Zhifubao also promotes offline payment functions. Only “scan” the Qr code, can consumers timely pay money when shopping that is quite convenient (but should focus on risk problems). Scene application is not patent of internet finance; therefore, banks will concentrate on R & D of scene application in future that lets services of banks including payment, wealth management, deposit & loan and transferring integrate into daily lives, and release people from concept of counter banks. We can suppose a scene that we can receive messages of current discount products timely promoted by supermarket and discount information of consumption with credit card, scan each product can clearly see its whole “life” process from being produced, transportation to retail when we enter into supermarket. With this information, we can easily and happily continue shopping and only scan Qr via APP bound with discount credit card, while some people are hardly lining up and waiting for settlements. When we go back home, these products have been arrived. Of course, if banks want to accomplish these above innovations, they can’t get rid of technological support to greatly develop R & D and application of technologies such as mobile internet, big data, internet of things, artificial intelligence; they need promote innovation via technologies to bring more intelligent and humanized financial consumption experiences. 

B.      Build Elaborate and Professional Management Competency

In the past ten years, although commercial banks in China are making revolution, the elaborate and professional level of internal banks in some aspects including operational efficiency, cost management, channel construction and organizational process still serious lack of their own features. With the marketization of interest rate and gradual promotion of financial marketization as well as “internet +” putting forward, there are higher requirements for elaborate and professional management and operational competency of commercial banks.

4.       Deploy Strategy between Online and Offline

Increasing and expanding channels are main methods for banks to increase number and attention of users, and to improve efficiency of operation. The advantages of traditional commercial banks are multi-branch, closing customers but the efficiencies have gradually decreased; while the advantages of internet finance are large amount of users’ data, providing online virtue transaction to greatly reduce cost but need to improve safe security and viscidity of customers. O2O is a perfect joint point for bank going to online market and for internet finance going to offline market. In future, banks will dismantle many urban banks and community banks closed with users those can understand customers, efficiently get more users and bring good services for users; therefore, O2O of community bank is a direction. For example, Ping An Bank firstly promotes intelligent platform—pocket community, residents of community can browse service information of neighboring merchants and products, online make appointments and order, choose door-to-door delivery or offline consumption via pocket community; check information of community banks, latest information of wealth management and sales promotion; check each convenient service telephone at any time, online rapidly understand the latest information of community then to build O2O ecosystem of community.

Additionally, banks shall simplify offline branches and transform to be intelligent, new-type, miniaturization, and featured orientation. Beside e-bank, Wechat bank and app of bank, comprehensive internet exploration focusing on direct selling bank (banks will not release entity bank card without branches; customers mainly achieve products and services of banks via remote channels such as computer, email, mobile phone and telephone) from organizational structure to marketing strategy. Or try to cooperate with internet finance and the third service platform to expand threshold of service, to increase service channels and to strengthen internet service competency.

5.       Technology Outsourcing

It is time-consuming for banks to accomplish delicacy management, to reduce cost, to improve efficiency, to control risk; meanwhile, to build intelligent bank, to accomplish O2O & intelligence, to establish professional technology department via employing technological personnel. And banks also are difficult to have more time and energy to make innovation and market competition. Therefore, it is first choice for bank to find a reliable & innovative & powerful outsourcing provider for cooperation. “Stones from other hills may serve to polish the jade of this one”. Arranging from background businesses and strategies of banks (IT system development, application maintenance, testing service, call center, data and disaster preparedness center) to the front desk services (bill processing, HR management, and cloud computing service, big data and digitalization and intelligence) provides professional service providers via sub modules or integration to reduce operational press of banks. In the fact, foreign banks have a growing sense that the importance of putting limited spirit to concentrate on key parts. Such as Infosys, the Indian service outsourcing enterprise outsourced some businesses with millions EUR including development, application maintenance, software implementation, testing service and operational points with digitalization and mobilization from Deutsche Bank. Just like the CFO of Deutsche Bank said “Deutsche Bank devotes to provide efficient services for customers via innovative technologies; while Infosys has responsibility to help us accomplish these goals.”

6.       Cross-over Cooperation

One of principles for internet is to die with seal. In the era of “internet +”, one of core spirit is cooperation. Because no matter how one enterprise strong is, itself also can’t control an ecosystem; while no matter which enterprises want to develop, they must expand ecosystem. If Yu’ebao doesn’t have strong flowing from Zhifubao, it also can’t ignite internet wealth management with such rapid speed. It has become a consensus among banks to make up their disadvantages via others’ advantages. For example, Bank of Beijing has signed stategical cooperation agreement with Xiao Mi to deploy mobile payment to rapidly develop processing of internet. In the era of Pan Internet, Pan Service and consumption revolution, the integrated capacity of resources also determine development space of enterprises; and banks also. Such as new concept—“Finance +” currently indicated, in fact that is concentrating on finance to build an ecosystem. In future, banks need more opening-up to integrate each element with encompassing mind and attitude and to innovate new value, only which can have bigger development.

This post is a personal or group view of Research and Advisory members and don't necessarily represent Devott's positions, strategies or opinions.

Know about ICT information at anywhere and anytime. Please screen the code or search “chnsourcing”, or pay attention on official Weichat of Chnsourcing.com.cn.

Devott Publications
The Selection of the TOP Global Outsourcing Destinations – China TOP 15 (TGOD China TOP 15) Ended and Its Rankings and Research Reports are Now Available Worldwide