The recent launch by five foreign banks of internet banking in China may herald the beginning of a new phase for foreign financial institutions on the Mainland. While in the short term the banks are targeting existing corporate customers, their moves can also be seen as a potential maneuver to enable them to expand out of the limited number of Chinese cities where they have so far been permitted to set up branches.
Three of the banks – HSBC, Bank of East Asia and Hang Seng Bank – launched internet banking at the end of last year, having gained licenses from the People's Bank of China (PBOC) in the autumn. Two more licenses were granted to Citigroup and Deutsche Bank in the first two months of 2003. Meanwhile Standard Chartered Bank, which also gained its license in 2002, is planning to trial an internet-based trade platform later this year.
"In the initial stage, foreign banks are likely to use the internet as a value-added service to lure customers, instead of using it as a main sales channel. Customers are likely to conduct routine banking transactions that they would have previously carried out in a branch,? says Ryan Tsang, director of financial services ratings at the Standard and Poor's office in Hong Kong.
Citigroup has developed a simplified Chinese language internet banking system that is customised for China, making it very quick and efficient, says Brett Krause, head of cash management for the US bank in China. This customised version does not contain features such as multiple languages and cross-border banking facilities, which are not yet regarded as being widely needed in China.
Citigroup has been providing electronic banking systems to corporate customers in China for a number of years. "We have installed desktop applications with corporate customers which link into their ERP [enterprise resource planning] and enable them to work offline. Internet banking is just a different channel which makes processes such as installation and software upgrades easier," explains Krause.
The convenience and streamlining of process from the client's perspective are matched by clear benefits to the bank. "The prime drivers are cost efficiencies and permits for products increased accuracy, such as eliminating keying-in errors," says Krause.
In China, Citigroup is focusing on core corporate banking and cash management products relating to payments, collections and information reporting. "We do have other products we could roll out, but customers may not always be driving for that level of sophistication. Unlike in higher-cost markets, the continuation of manual processes is not always a problem in China," he says.
Wei Yen, banking analyst at Moody's Investor Services in Hong Kong, believes that, with the simpler internet banking services such as checking accounts and tracing payments, domestic banks will be able to compete. Foreign banks will want to focus instead on more sophisticated wealth management, trade and insurance products, but he says that these are likely to require specific licenses from the PBOC. "The advantage with the internet banking channel, in particular, is that it would tend to attract the right people for these types of products," he adds.
Permits for products
Dealing with banking regulation remains a major hurdle in introducing new products. Deutsche Bank expects to need to get a permit before launching an electronic invoicing service. Standard Chartered, which already has a basic China internet banking license, plans to introduce a trade facilitation platform to the China market later this year, but again expects to need further special approval from the PBOC for this.
Others doubt whether, in the short term, the internet will prove to be the most effective channel for introducing these new products. "Human interaction is a big factor in selling, in particular selling of abstract or complex new financial products to customers who may have very limited knowledge of these products and concepts," says Standard and Poor's Tsang. He believe that banks will continue to find branches with knowledgeable staff an invaluable asset in building up trust and confidence when launching new products: "Channel is an important tool, but not a sufficient factor by itself."
The introduction of internet banking may be useful as a strategic step towards targeting the broader China market – including retail customers, where there is an estimated US$1,000bn of savings. Remote access banking accounts could help foreign banks overcome the limitation of having a limited number of physical branches in China.
Currently, foreign banks are restricted in the number of cities where they are allowed to open branches. These and other restrictions on foreign banks, such as the ban on providing yuan services to domestic customers, should be phased out in the period up to the end of 2006 in line with the measures agreed by China as part of its entry package to the World Trade Organisation (WTO). But foreign banks would still, at that stage, be faced with high costs should they want to build up an extensive branch network.
Another factor is that branch transactions are more than 100 times more costly than processing customer requests online. According to a 2002 survey conducted by the global market research firm AC Nielsen, it costs just RMB0.01 to process a banking transaction online compared with RMB1.07 to service a customer at a branch or RMB0.45 for a telephone banking deal. "For the bulk of the retail market, which is in local currency, internet banking will not help that much until the end of 2006 when yuan business will be opened to foreign banks," says Raymond Yu, head of the China division for Bank of East Asia.
Internet banking rules remain quite restrictive, according to Moody's Investor Services' Yen. "While banks are not allowed to acquire customers, it is quite difficult to tell where customers are," he says. "But in theory, at least, new customers still have to come into a branch office."
Banking liberalisation, which was one of the last issues to be settled in the negotiations leading up to China's entry into the WTO, remains politically sensitive. The decreasing effectiveness of rules tying down foreign banks' operations to their physical locations is an uncomfortable truth for regulators. Foreign banks remain acutely aware of these sensitivities.
"Internet banking is an integral part of our strategy of expanding our channels to meet the demands of clients and is not driven by franchise restrictions," stresses Lim Cheng Teck, head of corporate and institutional banking for Standard Chartered in China.
Provision of yuan services
"We will never have a branch network comparable to Chinese banks," says Citigroup's Krause. "But if you look at Japan, for instance, where we are able to very effectively service customers from branches in Tokyo and Osaka, we don't need to have physical branches everywhere." While Citigroup is in the process of opening up a branch in Tianjin, Krause notes that it has been servicing Tianjin-based customers since December 2001 "using yuan branches in Shanghai and Shenzhen, although it does require us to travel."
Shirley Chan, Deutsche Bank's head of global cash management for Hong Kong and China, believes that the biggest benefits of internet banking will be in improving yuan services to foreign multinational corporate clients, making it easier, for instance, for a customer with a joint venture in Wuhan to access yuan accounts. The bank received a local currency license for its Shanghai branch in January. "It does not impact so much on foreign exchange accounts because customers who import have to provide permits and documentation which cannot currently be done as a straight-through process online," she notes.
"Internet banking may fit some of the foreign banks' business strategies. However, it is unlikely to be a magical solution to solve their lack of distribution channels," says Standard and Poor's Tsang. He points out that banks in some developed countries are expanding their 'bricks-and-mortar' branch network, despite many predictions that the number of branches would decrease as internet banking became more popular. He believes that internet banking is likely to remain "a tool to provide additional services to up-market customers, instead of a replacement of a branch network to serve the mass public."
Partnerships with local banks
"We see ourselves more as a complement to local banks, rather than competing," says Deutsche Bank's Chan. "We are not competing in the retail segment and a customer in Wuhan may still need a local bank to withdraw cash. We are working with the local banks to form alliances."
Citigroup's Krause also believes in the importance of positive relationships with local financial institutions, stressing that "it is not a zero sum game." Citigroup can form partnerships with local banks to service joint ventures in provincial cities in order to deal with tax and payroll accounts, for example, while the joint venture's foreign parent may continue to use Citigroup as its global banking partner.
"A Chinese bank alone might not even be able to gain access to some global corporate customers and, without local partners, Citigroup may not be able to offer a complete solution covering all of China," he says.
Deutsche Bank reports a similar experience in dealing with domestic banks and has had to deal with fears of local partners that their business was being taken away from them. While "most of the distribution fees we charge clients get passed straight back to the Chinese banks… once our partners are confident that we will bring in consistent business from overseas customers, we can start to talk to them about discounted pricing," said the bank's Asia Pacific head of global cash management Jimmy Yapp in a recent interview with FinanceAsia.
The variable quality of China's existing telecoms infrastructure is one potential snag, believes Standard and Poor's Tsang. "Customers may find internet banking a hassle if… the service is frequently unavailable for whatever reason," he says. "Although telecommunications services are not controlled by banks, customers may decide to return to a low-tech branch network if the service cannot deliver what they want."
But others are confident that such problems can be addressed. "Internet technology is generally not a problem as customers can use ADSL [Asymmetric Digital Subscriber Line], which enables broadband over traditional phone lines and is cheap and easy," says Krause. A China Internet Network Information Centre survey of January 2003 found that about 6.6m internet users had access to broadband (including ADSL), or just over 11 percent of the online population.