BANKING – Tencent’s WeBank Launches, Faces Rocky Road
Bottom line: WeBank and other newly approved private lenders are likely to struggle to find an audience due to operational limitations and competition from state-run banks and gray-market institutions.
Some have predicted that a new group of private banks could shake up China’s stodgy financial sector, though the first loan from the group doesn’t look all that threatening. That loan came over the weekend, when WeBank, which is backed by Internet giant Tencent (HKEx: 700), made its first loan since receiving its license late last year. (previous post) The loan was for a modest amount and went to a truck driver in the southern boomtown of Shenzhen where WeBank is based. It carried a relatively high interest rate of 7.5 percent, which is probably suitable for that risk level. (English article)
This new group of banks is one of a handful of official programs from Beijing aimed at bringing in more private capital to China’s financial services sector. Tencent’s group was one of five announced winners of new private banking licenses under the new program launched last year. Other license winners included a group backed by e-commerce giant Alibaba (NYSE: BABA) and private equity leader Fosun. The Tencent group, which also includes Baiyeyuan Investment and Liye Group, was the first of the 5 winners to actually receive its license, which is why it’s now the first to make a loan.
Premier Li Keqiang personally attended the weekend launch of WeBank, underscoring the importance Beijing is placing on this new initiative. WeBank looks quite different from most of China’s existing state-owned lenders in almost every way. The bank will only do business over the Internet, and won’t have any real brick-and-mortar branches.
With registered capital of 3 billion yuan ($480 million), WeBank currently has a relatively modest 450 employees, though I do expect that number will grow quickly over the next year. It will specialize in loans to private companies and individuals, with a focus on small and medium sized enterprises. It also hopes to capitalize on Tencent’s highly popular WeChat mobile messaging service to find new business.
It’s still too early to say what the other new private banks will look like, but I suspect that most or all will be similar to WeBank, with no branches and a focus on Internet-based lending. That’s partly because companies like Tencent and Alibaba are strong believers in the Internet, having risen to prominence on the web. But Beijing is also likely to tightly control these new banks to make sure they don’t compete too directly with traditional state-run lenders, which are far more bureaucratic and lack entrepreneurial skills.
That approach by Beijing may be good for avoiding conflict, though it could also become a heavy burden on these new online banks. It’s quite easy to let someone open a savings account online, since all the account holder needs to do is supply some money. But lending is a more people-oriented business, and often requires personal contact to help determine the creditworthiness of a project or individual.
Of course there are automated computer programs that can also help make such determinations; but a system without any personal contact could be easily manipulated, ultimately resulting in higher loan default rates. Tencent, Alibaba and also Beijing, may want us to believe that they can succeed with these Internet-only initiatives, but I’m quite skeptical of their chances for success.
In the meantime, many unofficial financial initiatives now in the market are likely to further undermine these new private banks. Such initiatives include the likes of Alibaba’s Yu’ebao, which acts like traditional savings accounts but with higher interest rates, and a booming industry of peer-to-peer (P2P) private lending services. With so many new products and experimentation taking place, it really does look like these tightly controlled new banks could struggle to find an audience and ultimately won’t do very well.
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