Devott Perspectives: The Current Situation and Trend Analysis of Finance BPO Development in China
Source: View: 213 Date: 2015-11-02

A.      China has Good Macro Environment for Development of Financial Service Outsourcing

1.       Preferential Policies Benefit for Service Outsourcing Industry in China

In recent years, the State of Council highly focuses on service outsourcing industrial development. Since the year of 2009, the general office of the State of Council has successively published “The Reply of Questions from the State of Council on Promoting Service Outsourcing Industrial Development” ([2009] No.9, the general office of the State of Council), “The Reply from the State of Council on Encouraging Rapid Development of Service Outsourcing Industry” ([2010] No.9, the general office of the State of Council) and “The Reply from the General Office of the State of Council on Further Promoting Service Outsourcing Industrial Development” ([2010] No.33, the general office of the State of Council); the three documents have clarified a series of policy measurements for service outsourcing industrial features in fiscal, tax, finance, special working hours and other aspects.

Then, Li Keqiang, the prime minister clearly indicated the working mission to develop service outsourcing and made important instructions in “Governmental Working Report” in 2014 that encouraged service outsourcing industrial development. Zhang Gaoli, the deputy minister, Wang Yang, the deputy minister and Yang Jing, the State Councilor also made relative instructions. In order to implement deployment of government working report and instructions spirit of leaders from the State of Council, the Ministry of Commerce and 20 relative departments of the Sate of Council replaced the Sate of Council have drafted “The Opinions” and submitted to the executive meeting of the State of Council to review and discuss.

In November 26th of 2014, Li Keqiang, the prime minister hold the 71st executive meeting of the State of Council to thematically research and discuss “the opinions” of promoting rapid development of service outsourcing industry. In executive meeting, the prime minister specially indicated that service outsourcing industry was an important content for adjustment of domestic economic structure, especially for adjustment of external economic structure; and also an important support for industrial upgrading in China. He also emphasized the relative departments shall have more opening thought, larger step and provide more “gold and silver” policy profits; would not only repeat some “fuzzy” policies in the past, should have new development and new measurements.

In January of 2015, the State of Council published “The Opinions on Promoting Rapid Development of Service Outsourcing Industry” (referred to as “The Opinions”), and indicated that in the year of 2020, service outsourcing industry will have coordinated development no matter in China or in globe, obviously expand scale, obviously optimize structure; the international competitiveness of enterprises will also be obviously improved that become important way to participate in global industrial distribution and to improve industrial value chain. This is first time for the State of Council to make comprehensive deployment for promoting rapid development of service outsourcing industry.

"The Opinions” will lead and promote industrial development from three aspects (scale, structure and competitiveness) that also provides direct profit for service outsourcing; therefore, industrial scale will be obviously expanded. Professional, large-scale and brand outsourcing service enterprises will continuously appear that will make industrial structure more obviously optimized; meanwhile, it also lead innovative and high added-value service outsourcing businesses and entrepreneurship that will promote continue development and innovation of industry and enterprises to build core competitiveness of continuous development, to participate global industrial distribution and to improve industrial value chain.

"Finance Service Outsourcing Business” as an industrial development direction, has been importantly indicated in “The Opinions” to encourage financial institutions to outsource their non-core businesses that will provide substantial preference for finance service outsourcing enterprises.

2.       Service Outsourcing Market in China Has Large Space

China implements “internet+” development strategy to promote innovative & integrate development of internet and service industry & manufacturing industry, to constantly release potentials of onshore service outsourcing market, and to promote rapid development of onshore business with the growth of more than 20%. Onshore service outsourcing market will constantly release potentials; service outsourcing market has large space in China.

Compared with India, although China’s finance service outsourcing still stands in the preliminary stage, it also has huge potentials in future. With deepening opening to the outside world of finance industry in China, financial competition has become gradually serious that also brings finance outsourcing development. The survey report from KPMG show that in next five years, China’s service outsourcing market will keep comprehensive growth with near 26% annually.

3.       The Development of Service Outsourcing Industry in China has Good Trend

It mainly shows in three aspects: one is industrial scale will continually expand. Since 2008 to the year of 2014, the implementation value of China’s service outsourcing industry undertaken from foreign outsourcing has increased from 4.69 billion USD in 2008 to 55.92 billion USD in 2014. The share of international market also increased from 7.7% to near 30%; thus China has become the second large country to undertake outsourcing order. This is only data of expanding industrial development scale. Two is improvement of industrial strength. Until the year of 2014, China has 27000 enterprises to undertake service outsourcing businesses; the annually increasing number of enterprises is more than 3000. There may be more than 30 enterprises that have annual operating income with more than 100 million USD; 5 enterprises with more than 10000 employees; 7145 projects passed by each international qualification certificates such as software, capacity, maturity, and integration and etc. Three is to continually increase gathering degree. The number of enterprises and employees from 21 China’s service outsourcing demonstration cities accounts for 70% of whole industries in China; the business scale reaches near 90% in China.

4.       China’s Service Outsourcing has Strong Growth Recently

Ministry of Commerce in order to better implement document spirit of the State of Council, has comprehensively revised “The System of Service Outsourcing Statistic Table” (revised version in 2014). According to data from Ministry of Commerce, in the year of 2014, implementation value of service outsourcing undertaken by China’s enterprises was 81.34 billion USD, which increasing 27.4% year-on-year; the new employees are 711000 people, which increasing 13.2% year-on-year. The growth of employees is far lower than business growth; thus obviously, production efficiency of service outsourcing in 2014 was rapidly increasing.

B.      Current Situation of China’s BPO in Segmentation Market.

1.       Card Capacity of Credit Card Provided by Banks Keeps Stable Increasing.

In July 28th of 2015, “The Development Blue Book of China’s Credit Card Industry” published by China Banking Association showed that in the year of 2014, China’s credit card industry kept good trend of stable development, continually expanded business scale, and had continuously strong influence for market. In the year of 2014, the number of new credit card in China was 64 million, the accumulated number reached 460 million, which was higher 17.9% than in the beginning of 2014; the number of credit card hold by each person was 0.34; the total transaction amount was 15.2 trillion RMB, which increasing 16% year-on-year. Total transaction amount accounted for 58% of total retail amount of social consumption products in China, which was higher 4.1% than the value in 2013.

2.       Interest Rate Market Brings New Challenge for Banking in China

In the process of interest rate market in China, since the report of the 16th National Congress of the Communist Party of China at first time clearly put forward the concept of “interest rate market” in 2001, according with guidance thought of “foreign currency firstly, then local currency & loan firstly and then saving” to constantly and stably promote, interest rate autonomy of commercial banks also accomplished improvement from small to big, from scratch.

Interest rate market brings opportunities for commercial banks in China to independently operate and to make finance innovative development, at the same time it also brings huge challenge for China’s commercial banks. Firstly, management degree of capital position will be more increased; after interest rate market, it is difficult to predict frequency and depth of interest rate fluctuations affected by many unsure elements such as market, policy and etc.; to increase risk because of not match structures including number of assets and liabilities, and time limit; to increase difficulty for banks to manage capital position. Secondly, the competition among banks will be more serious; the profit space will be smaller. After interest rate market, banks have independent decision right for interest rate of saving and loan, but lock of security from traditional and stable profit. The cancel of floating offline of loan interest rate provides opportunities for small & medium-size banks to compete good customers with large banks. In the loan competition between large commercial banks and local commercial banks, in order to win popularity from customers, the loan interest rate will be lower and lower thus the income of banks also will be reduced. The last one is interest rate market is the result of constantly reducing interest margin of commercial banks and also makes big influences for profits. What’s more, the risk management also becomes more and more difficult. Interest rate market makes saving interest rate of commercial banks rising; high cost of capital also promotes banks to choose loan business with high interest rate to achieve balanced risk compensation; thus banks will face larger adverse selection and moral hazard; if plus not perfect credit card system in China, the credit risk will increase also. Meanwhile, market will bring more fierce competition of financing modes and resource distribution between banks that increase operation risk of banks. Since 2012, quality of bank asset has greatly fluctuated; therefore, bad loan interest rate will also obviously increase.

Finance service outsourcing belongs to traditional and innovative integration. From industrial development process in USA, with process of interest rate market, finance enterprise rebuild process of traditional businesses for banks via industrialization thought then outsource these businesses to reduce operation cost, to achieve better service and to focus on core business. Under current economic environment, traditional finance faces a new challenge—rising of internet finance makes China stand on the same starting line with globe in finance service and finance innovative aspect. In the field of traditional finance, China lagged behind European and America countries; the reform in aspect of interest rate market also has been launched in recent years. Only from the angle of interest rate market, if have not internet finance innovation, promote interest rate market step by step will lead interest margin of China’s banking become more and more narrow. Therefore, banks only have two choices – to increase interest rate or to reduce cost. While, currently, the interest rate in China is generally higher; thus continually increasing interest rate will bring bigger influence for real economy and enterprises can’t afford such high interest rate. Therefore, in process of future interest rate market in China, banks shall reduce their operation cost to achieve profit this is development direction in future. Besides that, it is also closed with finance service outsourcing, and provides best opportunity and development space.

3.       New Labor Law Promotes Popularity of Service Outsourcing Industry

In July 1st of 2013, “The Labor Contract Law of the People’s Republic of China (revised version)” was formally implemented. New contract law regulates “the dispatched workers have right to enjoy same salary with employees in employing company” and requires those companies to strictly control the quantity and proportion of dispatched workers. However, banking with big profits has huge amount of dispatched workers; until the end of 2012, 11 listed banks had 20200 dispatched workers; among them, the proportion of dispatched workers in 6 banks exceeded 20%.

The implementation of new labor contract law makes more than 200000 dispatched workers from banks stand at turning point of fate; thus banking also enters in a dilemma. If all dispatched workers become formal employees, the human cost of banks will increase; however, if fire them all, banks also have not enough workers. New labor law will directly lead popularity of service outsourcing because of its strict regulation and restriction of employment form.

4.       Rapid Growth of Finance Industry in China will Release Huge Amount of Backstage Service

Currently, China has 8.1 trillion finance assets that exceed other emerging economics. In the year of 2011, there were 4293 financial institutions in China; among them, 3800 banks, 150 insurance companies, 341 security companies. During the period of 2006-2008, compound growth rate of operating income of finance industry in China exceeded 30%; the annual compound growth rate of income in China’s banking was 36% which was higher than banking in USA (the annual compound growth rate was -1.5% at the same time). Meanwhile, according to professional data, if finance enterprises choose outsourcing service, they generally can same 30%-65% cost and management cost. Considering the element of cost controlling, in order to reduce cost, many financial institutions are seeking professional service outsourcing.

5.         The Separation Trend between Front Desk and Backstage in Finance Industry Creates Demand for Finance Outsourcing Development

Currently, finance industry in China has appeared separation trend between core businesses and non-core businesses, front desk businesses and backstage businesses, standardized processing business and non-standardized processing business. Original industrial chain with independent operation has gradually developed to professional direction. Domestic financial institutions begin to more focus on development innovation of their own core businesses and improvement of whole operation profit, gradually form finance industrial chain ecosystem in which finance institutions will more concentrate on core capacity, service providers will provide other professional services. Financial backstage service mainly concentrated on data center, clearing center, bank card center and R & D center separates with front-desk operation of financial institutions, and has become development trend of financial industry in future.

C.      The Perspective Analysis of Financial Service BPO Industry in China

According to research from McKinsey & Company, the scale of BPO market in China has exceeded 20 billion RMB, which increasing more than 20%; the domestic financial BPO market also has growth with more than 23%. Currently, finance service outsourcing service providers in China generally stand at period of rapidly expanding; the annual growth of business income is near 100%.

From Table 1 we can see that in 2015, the growth of finance service BPO is higher than 19% in 2014; it is predicted that in the year of 2016, it will reach 1.887 billion USD, which will be 2.35 times of the value in 2011. The details showed as table 1 and picture 1.

Table1: Development and Prediction of Financial Outsourcing in China (2011-2016) (Unit: 100 Million Dollar)

Data Source: IDC

Picture1: Development and Prediction of Financial Outsourcing in China (2011-2016) (Unit: 100 Million Dollar)

D.      The Competition Environment of Finance Service BPO Industry in China

Encouragement and support of policy must lead potential competitors to enter into market; however, service outsourcing industry is not an industry with high gross profit that makes new industrial capital more cautiously enter into market. Meanwhile, they also promote current enterprises to make continually innovation and to keep core competitiveness. The preferential policies of industry also make non-traditional internet enterprises such as entering of relative enterprises especially mutual cross-over to provide outsourcing service via innovative business modes for customers like Google, Amazon, Alibaba, Lenovo and etc.; at the same time, some traditional service outsourcing enterprises also have gradually far away from outsourcing circle in process of integrating industrial chain, and transformation & upgrading, such as Santai Holding to E-commerce circle, Neusoft developing to internet enterprise and so on. Similarly, internal transformation and cross-over in the field of service outsourcing, for examples of software outsourcing extending to operation outsourcing, IT technological call center extending to financial customer service also increase difficulties of competition.

Under this situation, vertical type and professionalization of outsourcing service enterprises have become necessary trend. Enterprises concentrating on a field such as finance, and even being vertical in credit card will consist firewall of segmentation industry, and also will provide professional, high added-value products and services for customers.

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

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