January 6, 2015
China has witnessed the launch of its first online-only bank, hinting at the government’s faith in privately owned lenders that can expand access to finance, especially for small-scale borrowers. WeBank, a joint venture led by Tencent, is the first private bank to start operations under the pilot program. The banking regulator in China has already granted licenses to six such institutions. An affiliate of Alibaba has also been cleared to launch an online bank in partnership with Focus International.
Small, privately owned companies have struggled a lot in getting loans from state-owned banks. The state-owned banks usually prefer lending to large, state-owned groups. WeBank could mark the next big leap towards financial reform. In China, small and medium sized businesses provide around 60% of China’s GDP and generate around 70% of new jobs. Companies like Tencent and Alibaba are exploiting the big data advantage, using their massive user information database to evaluate credit risk of small borrowers.
However, one challenge for banks like WeBank could be attracting deposits. These online only banks won’t have any physical branches which has always been the primary channel by which traditional banks have attracted funds. But Alibaba and Tencent have already shown their ability to attract money through the deposit-like money-market funds sold online via their websites and mobile applications.
Alibaba and Tencent already offer mobile payment services that enable users to store funds in their accounts. China’s banking regulator has relaxed the norms around the 75% loan-to-deposit ratio. Now placements by non-banking financial institutions will also be considered as deposits. This will further ease the pain for institutions, who have small retail deposit bases, as it relates to compliance issues.
A new insurance scheme has also come up in China which assures insurance for all deposits under $80,500. This would make it easier for new disruptive lenders to compete against the state-owned players in the lending game. Before the launch of this online-only private banking program, Minsheng Bank was the only privately owned commercial bank in China.
Tencent had launched its first financial services product back in January 2014. It was basically a fund dubbed as ‘Licaitong’. Alibaba, Baidu, and electronics seller Suning Commerce Group had also received government licenses to offer mutual funds, loans, and insurance.