A Small Bank Makes a Big Difference

By+Zhou+Xiaoyan

As Chinese Premier Li Keqiang pressed the“Enter” button on a computer on January 4， the first loan was issued by WeBank， a new Internet-based private bank located in Shenzhen， south Chinas Guangdong Province， and Xu Jun， a local truck driver， obtained a credit of 35，000 yuan （$5，640） .

Five banks entirely funded by private capital were given the green light by central authorities in 2014， and WeBank is the first of them to start operation. WeBank said it will start its soft opening on January 18 and will be officially operational in April or May this year at the earliest. The banks official website was launched on December 28， 2014.

Tencent Holdings， which operates Chinas most popular online chatting services—QQ and WeChat—is the largest shareholder of WeBank. Other major shareholders include Shenzhen Baiyeyuan Investment and Shenzhen Liye Group.

Gu Min， Chairman of WeBank， said the bank will focus on financial services including deposit and loan services to individual consumers as well as small businesses and micro businesses， rather than courting large companies and people with high assets.

“We aim to cover 30 million small businesses and 300 million individual consumers in the upcoming decade，” Gu said.

WeBank has been in the limelight after the premiers visit， raising high hopes among the top leadership and the general public to catalyze the countrys financial reforms， but questions remain whether it can be an instant success.

High hopes

As distinct from traditional banks， WeBank doesnt plan to have brick-and-mortar banking outlets， and all services will be carried out through the Internet. Procedures for issuing loans will be simplified. WeBank said it will carry out financial innovations based on Internet technologies such as big data.

When applying for a loan in WeBank， the applicant uses the cellphone camera to scan faces， and the software recognizes the person after matching the face with data provided by the Ministry of Public Security. In the meantime， the software gives the applicant a credit rating based on data collected through the applicants online activities—online shopping， activities on social network websites and games—and then decides the amount of credit the applicant can obtain.

Chinas banking assets totaled 167.9 trillion yuan （$27 trillion） as of the end of the third quarter of 2014， according to data from the China Banking Regulatory Commission， but the sector is dominated by state-owned banking behemoths.

Many people believe the tech-savvy Tencent will introduce new ideas and approaches to the banking sector through the newly formed WeBank， thus forcing traditional banks to carry out reforms in larger strides.

During his visit to WeBank， Premier Li pledged to provide a “warm and convenient” environment to boost the growth of private banks.

“The opening of WeBank signals a significant step in Chinas Internet finance and financial reforms at large，” Li said， adding that he has pinned high hopes on private banks to reduce financing costs for small and micro businesses and to “force” state-owned banks to change their outdated business models.

Explicit support from top leadership has provided an adrenaline boost for the fledging private bank.

“Judging from the current situation， Chinas traditional banks havent done enough to serve the countrys real economy. Cash-strapped small and medium-sized enterprises （SMEs） have had trouble getting funded for years. The interest rate has yet to become marketbased and desperate SMEs can only turn to loan sharks，” said Du Xiaoxuan， an analyst with Guoxin Industry Research. “Private banks， with WeBank as a representative， will play a vital role in solving that problem.”

Wang Tingting， a finance professor at the Central University of Finance and Economics， noted that Tencents edge lies in its ocean of existent clients. “As Tencent expands its business in financial services and products， its enormous pool of clients will prop up its bank，” said Wang.

QQ， an online messaging software developed by Tencent， has over 800 million users， whereas WeChat， a chatting app for mobile phones， boasts over 500 million users.

Wu Qing， a financial researcher at the Development Research Center of the State Council， said he has great expectations for the role of private banks.

Wu said that compared with the huge market shares held by traditional banks， private banks will not be big enough to reshape the industry. “But innovation and the Internet ‘genein some of these private banks could bring huge changes to the system in terms of pushing the traditional banks to stay ahead of the competition，” he said.

For instance， yuebao， an online product for money management by Chinas e-commerce giant Alibaba Group， is so popular that it has pushed brick-and-mortar banks to launch more online services， he stated.

“With the competition from Internet finance， traditional banks have been aware that they need to respond and act as fast as they can to stay afloat，” he said.

Obstacles

WeBank is described by Premier Li as “a pioneer private bank.” Guo Tianyong， Director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics in Beijing， said that the pioneer doesnt always have a happy ending.

Du also predicted that WeBank will encounter many obstacles going forward. “The regulations for private banks， which now solicit public opinion， are quite conservative. They have stringent requirements in terms of capital adequacy ratio and bad loan ratio. It can be expected that WeChat will face many restraints in product and service innovations，” Du said.

“Therefore， the government should provide a better environment to support its development， say， loosening certain financial supervision policies for it to encourage more innovations，” Guo said.

“More importantly， the leadership should change its management mindset. People shouldnt discriminate against any foreignfunded and private-funded banks. They should be treated equally to state-owned ones，” Guo said.

“With a flexible system and more advanced management levels， private banks can never lose to traditional state-owned ones if the government has created a level playing field，” Guo said.

Tencent is also facing upcoming competition with Alibaba Group， which is also preparing for a private bank in Wenzhou， east Chinas Zhejiang Province， and Alibaba has a sharp edge because it has obtained massive e-commerce transaction data， which could significantly back up its credit management.

“Whether Tencents WeChat can become a key force in pushing forward the development of WeBank remains to be seen. Most people use WeChat for socializing with others， whereas people dont often use it for consumption or payment. That is a major obstacle for the development of Internet finance in Tencent，” said Zhang Jun， CEO of Ppdai.com， a leading peer-topeer （P2P） lending website.

“Only with enough consumption activities based on WeChat can Tencent have the payment and transaction records of users and then use the information to more accurately access their credit. In this regard， Alibaba has done more and is taking the lead，” said Zhang.

Even so， Zhang said he is still quite optimistic that Tencent can catch up.

“WeChat offers a strong social connection to users. As long as user experience is good and more off-line transaction spots are created， users are very much likely to switch to WeChat online payment.”

“I use WeChat every day， but I dont use Alipay （a third-party payment service by Alibaba and a Chinese equivalent of the Paypal） every day，” Zhang said. “WeChat has a very high user engagement， which makes it much easier to promote products offered by WeBank.”