I recently found some exceptional insights into how China is leading the world of banking, as we saw the opening of digital banks WeBank and MYBank. If you are unfamiliar with these two bank titans, they both launched this year as offshoots of QQ and WeChat (Tencent) and AliPay and ANT Financial (Alibaba) respectively. This follows a number of notable achievements from both Tencent and Alibaba in recent times, from the trillions of dollars that flowed into Alibaba’s money market fund to the remarkable volume of messages generated by the Red Letter Day promotion. It leads me to wonder why these developments are so far ahead of Europe and America. Why haven’t Google, Amazon and Facebook generated their own banks and payment systems? What will happen when they do?
In this first blog, it’s worth giving some of the background to what si happening in Chinese banking and finance. For me, Alibaba is the Amazon of China whilst Tencent is the Facebook. A third player, Baidu, would be the Google. However, the most intense rivalry exists between Alibaba and Tencent, especially when it comes to money.
For example, the first move to shakeup the financial markets with new private players began in June 2013, when Alibaba launched a money market fund called Yu’ebao. At the time Alibaba’s Chief Executive, Jack Ma, was quoted as saying: “China’s finance industry, especially the banking industry, only serves 20 per cent of clients. I see the 80 per cent of businesses that have not been served. The financial industry needs disruption. It needs outsiders to come in and transform it.” Transform it, it did, as investors flocked to the new service. Within nine months, the total number of investors in the fund topped 81 million people. Compare that with the fact that there were only 77 million active equity trading accounts in the whole country at the time. In other words, within nine months, Alibaba had attracted more people to invest in its fund than all of China’s stock traders.
WeChat followed Alibaba’s lead and launched Licaitong, a fund that also attracted fast take-up, helped somewhat by their promise of high returns. When Alibaba’s fund Yu’ebao launched, it offered 7 percent interest rate returns. As a result, Yu’ebao accumulated $98 billion in assets and 200 million users by the end of July 2015; Licaitong has attracted just over $15 billion.
So these two internet players – Alibaba and Tencent – are setting the benchmark for innovation in China and, from a financial markets viewpoint, the world.
For example, take payments. Both companies offer a payments service that is wrapped into their chatroom offers. Alibaba offer Alipay as part of whilst Tencent offer Tenpay as part of WeChat and QQ, their messaging systems.
To promote the use of such payment systems, these two giants offered incentives to send payment messages to celebrate the Chinese New Year. The idea began in 2014, when Tencent promoted its 400 million WeChat users to send each other virtual red envelopes, which would be deposited into their mobile payment accounts. The gimmick became a big hit with40 million virtual envelopes being exchanged, worth a record 400 million yuan ($64 million). Jack Ma of Alibaba called it a “Pearl Harbor moment” for his company, and ramped up the game in 2015 by announcing it would give away more than 600 million yuan ($96 million) to its 190 million users as “lucky money” gifts if they used its red letter messaging system. Tencent responded within hours by saying it would also gift 800 million yuan ($128 million) to users of its virtual red envelopes service, and blocked Alipay users from their WeChat friends. Tencent’s WeChat won that battle, with over one billion virtual red envelopes send on February 18, compared with 240 million sent through the Alipay Wallet and, as can be seen, the rivalry between the two firms is intense.
Then China’s regulators offered private companies the opportunity to apply for banking licences last year, resulting in these two key internet players both launching banks in 2015. The two banks are rather different however. WeBank launched first from Tencent in January 2015, and focuses upon microlending due to the restrictions placed upon its bank licence by the regulators. For example, they cannot open branches and are unable to take deposits. After all, they don’t want these banks competing head-to-head with the large, state-owned banks and this is why the new private banks are operating differently at this early stage, and focusing upon the underbanked and unbanked in China seems to be their sweet spot.
For example, Tencent’s WeBank has chosen micro-lending as its first major business area, lending 800 million yuan ($130 million) during June and July 2015. Loans have quite a steep interest rate of 0.05 percent per day, or 18.25 percent per annum, and Tencent has so far only offered this lending on its QQ messaging service as it learns the model of banking, but everyone expects this to expand to WeChat soon. Then, the market will really ramp up.
Similar to WeBank, MYBank launched by Alibaba in June and also focused upon the small guys. At tis launch, Eric Jing, MYBank’s executive chairman, said that the bank will be “answering to the needs of those who have limited access to financial services in China is our mission” and “is here to give affordable loans for small and micro enterprises”. It sounds very similar in strategy to WeBank, providing a focus upon microlending through the internet.
In other words, although China has opened up its banking sector to the private markets, it has managed to do so in such a way as to avoid any direct threat to the traditional state-owned banking sector. Will that change in the future and what does all of this mean for users in Europe and America?
Will Alipay and Wechat get Amazon and Google into banking?
No-one can ignore the developments taking place in China’s banking system, as their two largest internet players launched banks this year. In Part One of this two-part series, we looked at the developments in China of simple payment systems through messaging apps like QQ and WeChat along with launch of internet only banks WeBank and MYBank from Tencent and Alibaba. What does this mean for the global banking system, and will we see Google, Amazon and Facebook following similar paths?
The answer is that we will see some emulation of the experiences in China in Europe and America, but it will be very different. Firstly, China’s story is of a newer economy building itself into a powerhouse, but most of China’s large companies are state-owned. Of China’s 12 largest companies, all of them are state-owned including the largest banks ICBI, the Bank of China, the Agricultural Bank of China and China Construction Bank.
This is very different to European and American banking structures, even with the 2008 banking bailouts, and means that China’s regulators are highly restrictive of what internet banks can do. For example, they’ve ensured that the Chinese banks do not compete in the same space as the state-owned banks by banning branch operations and limiting their operations to credit markets only. However, there are some interesting nuances underlying what has happened in China that our internet giants will learn from, particularly Facebook.
For example, although WeChat was only launched four years ago, it already has over 550 million monthly active users (MAUs). That’s almost three times the MAUs of Japan’s Line, and ten times the MAUs of Korea’s Kakao. In fact, it’s only 150 million MAUs short of Facebook Messenger, the largest messaging system out there. This is where the comparison appears as to what is likely to develop over the next year or two, because the cornerstone of WeChat is payments.
Using the WeChat Wallet, WeChat users can order food deliveries, buy film tickets, play casual games, check in for a flight, send money to friends, access fitness tracker data, get banking statements, pay the water bill, ID music and search for a book at the local library, all via a single, integrated app. It’s very similar to a vision I had some time ago that the ideal app would allow me to order taxis, coffee, music and accommodation without having to enter my bank details in Uber, Starbucks, iTunes and Airbnb’s apps as separate services. That’s what WeChat’s Wallet achieves, and enables the user to easily order services in any app that sits on the WeChat platform. It’s more elegant than AliPay, as that service is geared towards Alibaba’s commerce platforms. In fact, Alibaba have failed to compete with WeChat as their messaging service, Laiwang, failed and has been shut down.
Now the beauty of the WeChat Wallet is that it’s the Trojan Horse to quickly get a user’s payment credentials registered, and then use that payments capability to unlock a range of new monetization opportunities for the entire ecosystem. This is noted by Connie Chan when she blogged about WeChat on the Andreessen Horowitz site recently. In the blog, Connie points to how Facebook Messenger could copy the lead of the WeChat Wallet in Europe and America, and notes that it is no coincidence that the man who runs Facebook Messenger is the former CEO of PayPal, David Marcus:
“To get a sense of this in the U.S.: Just imagine how many more transactions would occur on Facebook’s platform if more users linked their credit cards to Messenger, how much faster Pinterest’s buy-it button would take off, how much faster Snapchat users would move from sending cash to buying goods, and how many more Twitter users would pursue options to buy products. In this sense, WeChat gives us a window into the potential evolution of Western social networks and buying behaviors if they, too, succeed in convincing users to embrace payments on their platforms.”
What Ms. Chan has picked up upon is the clearly evolving model of not just Facebook Messenger but also Apple Pay, Twitter and others. The battle is for the Wallet, and the way to win the Wallet war is to create a single, elegantly integrated app that has a payments wallet at its core. If you become the standard core wallet, then you rule the mobile, social world. That’s what China’s WeChat has achieved, and it will be intriguing to see what happens as Facebook, Twitter and other mobile social systems deploy their ‘buy it now’ buttons.
Source: SAP for banking