The opening up of China’s financial sector this December in accordance with WTO accession requirements will see domestic banks exposed to the brutalities of truly commercial competition for the first time. With foreign banks able to offer RMB accounts to Chinese customers, local players will have to pitch their marketing skills against the best in the business.
But the battle doesn’t end there. The higher standard of service required to attract the most affluent customers can only be delivered if these banks improve the technology that forms the backbone of their systems. Investments are being made and Western specialists in financial technology are among the beneficiaries.
"Our view of the China financial services market is very positive," said Christopher Formant, EVP for Global Financial Services at BearingPoint, a global technology outsourcing company with a strong presence in China. "The pace of change and the growth is extraordinary."
The Chinese banks’ hopes of joining the ranks of the world’s leading financial services companies are tied to a significant amount of tech-heavy housekeeping. Areas like risk management, fraud control, improved financial reporting and new product development all involve a degree of digitization. "It’s either the number one or the number two focus of every client we’ve spoken to so far," Formant said.
For many banks, this means serious work on the fundamental software platforms that make the bank run – risk management software isn’t very effective if the financial information isn’t available in electronic form. Similarly, electronic banking and ATMs require real-time transaction processing systems.
Two years ago Bank of Shanghai hired HP to build a standards-based service center that reduced the costs and processing time of online transactions. HP worked together with Temenos Group AG, a Switzerland-based provider of core banking systems which has since done business with Shanghai Pudong Development Bank. Now Bank of Shanghai is back in talks with Temenos, according to Chen Chen, an IT manager with the bank.
Chen added that foreign vendors need to make efforts to localize their systems for Chinese needs – and not just add Chinese character support. "Business requirements are different from abroad," he said.
When it comes to investing in new systems, it doesn’t hurt that some big banks are flush with cash from recent public offerings. China Construction Bank raised US$8 billion in its Hong Kong IPO last October so reports that it plans to spend US$1.24 billion on technology this year are not surprising. Asian Banker magazine reported that US$375-500 million will be spent on core banking systems alone.
Another of last year’s IPO successes, Bank of Communications, is also upgrading its technology infrastructure. Earlier this year, the bank announced that it was centralizing data for its retail operations. "We are very concerned about data centralization," said bank Chief Information Officer Hou Weidong. "With centralized data management, the headquarters will be able to monitor branch level performance timely and accurately."
Move to centralize
The project, due for completion in August, is being done with the help of US-based Sterling Commerce, an e-business specialist owned by AT&T that has much experience in data centralization and electronic security. The company has identified several holes in the banks’ current methods, such as using file transfer software downloaded from the internet rather than secure, state-of-the-art technology.
"Freeware FTP [file transfer protocol] has a lot of security loopholes," said Albert Visscher, marketing director for Asia Pacific at Sterling Commerce. "And at times, it is unreliable and inefficient."
The move to more reliable tech solutions may be slow but it is happening, with core business systems, disaster recovery and payments the key growth areas. Last year, Chinese banks spent US$3 billion on IT, according to Beijing-based China Computerworld Research, and this is expected to rise to US$3.3 billion in 2006. In March, Agricultural Bank of China announced that it had gone live with software produced by UK-based Mysis to handle the trading and risk management of treasury market derivatives and structured products.
"In China, international treasury and structured products are something quite new," said Murray Sargant, managing director at the treasury and capital department for the Asian region at Misys Banking Systems. "So far, we have about twenty Chinese banks in the mainland, ranging from top-tier big four, to city commercial banks, to joint-stock banks."
China Merchants Bank was an early adopter of Misys treasury and capital markets software. The package it uses is a straight-through processing system that covers transactions all the way from the front to the back office. The move was driven in part by the China Banking Regulatory Commission (CBRC), which requires banks implement technology before engaging in certain types of business.
"We finished the implementation last year," a member of the bank’s IT management team said. "We did it in order to meet the CBRC’s regulatory requirement; if we want to trade derivatives as well as bonds, we must have this kind of system."
A desire to tap the international capital markets is also driving China’s banks down the path toward technological reform. "There is greater push for Chinese banks towards global standard of capital adequacy, qualitative and quantitative risk management measures," he said. "In the past few years, many of Chinese banks have upgraded their infrastructure and many are looking at the treasury area."
This view is echoed by John Barnes, director of systems and process assurance for PricewaterhouseCoopers in Beijing. But he points out that the key obstacles to the banks achieving this, and the unification of their vast branch networks under common systems and software architectures, is not substandard software or hardware.
Indeed, in many cases, the technology in China is as new – or even newer – than that used by foreign banks. What Chinese banks lack the most is the skills and experience to use this technology. "It is now time for the big banks to focus on the people and process side," Barnes said.