FINANCE: Alibaba Banks, JD Credit Scores As Old Lenders Watch
Bottom line: China needs to let traditional banks behave more independently and encourage them to take risks, or risk seeing them overtaken by private, entrepreneurial financial companies.
China’s 2 leading e-commerce companies were in the headlines last week with major new moves in the financial services sector, continuing a trend that has seen private firms pose the first serious challenge in decades to China’s banking establishment. One move saw Alibaba (NYSE: BABA) launch its online bank, MYbank, as part of a Beijing pilot program to allow private companies into the sector. The other saw JD.com (Nasdaq: JD) form a credit scoring joint venture, aiming to tap its huge volumes of transaction data to help rate the creditworthiness of individuals.
These 2 new ventures are just the latest in a series of innovative products that China desperately needs to modernize its financial industry, and nearly all are coming from the private sector. Traditional banks have complained loudly in response to the challenge, but have done little else to develop their own rival products.
Part of the problem comes from tighter regulations on traditional banks than on the newer private companies. But the bigger problem is a corporate culture at traditional banks that stresses maintaining the status quo and provides few incentives for risk-taking. Rather than complain, the banks and their major stakeholders should try to change their cultures to reward innovation and smart risk taking.
One place to start would be at the top, by disbanding a system that often sees CEOs and other top bank officials come from bureaucratic backgrounds, and regularly rotate between various entities in a system resembling government appointments. As the controlling stakeholders of these banks, Beijing and local governments should consider more entrepreneurial people with private sector backgrounds to fill these lenders’ top posts, and allow them to act more commercially independent of government policies.
Such shifts could change the corporate culture at big banks like ICBC (HKEx: 1398; Shanghai: 601398) and smaller regional banks in relatively short order, better positioning them to innovate and respond to the challenge posed by private newcomers like Alibaba and JD.com.
Alibaba Leads the Way
Alibaba has been a Chinese leader in the roll-out of innovative new financial services, dating back to the establishment of its Alipay electronic transactions system that has rapidly grown and is now challenging national state-run monopoly UnionPay.
Last week Alibaba took its latest step in financial services with the formal launch of MYbank, which will be an online-only entity under Beijing’s pilot program to liberalize the banking sector. (English article; Chinese article) Reflecting Beijing’s caution with the program, Alibaba’s bank will mostly lend to small and medium-sized private companies, a sector that was typically underserved by traditional banks. MYbank also has yet to receive permission to accept deposits, again reflecting Beijing’s caution not to challenge traditional banks too quickly.
A day after MYbank’s launch, JD.com announced its new joint venture with US company ZestFinance in the credit scoring space. (company announcement; Chinese article) That alliance will see the pair use data from JD.com’s vast banks of transactions to rate customers’ creditworthiness. Alibaba’s affiliated Ant Financial unit recently launched its own similar endeavor with its Sesame Credit product.
Such credit scoring and related products are critical in a market-oriented economy, and are a standard feature in the west. They allow a wide range of third parties like lenders, credit card issuers and landlords to determine the creditworthiness of individuals they do business with, helping them to control their risk.
This slew of initiatives contrasts strongly with China’s state-run banks and other financial institutions, which have largely failed to roll out rival products. The situation is nicely summarized by UnionPay, which was set up in 2002 as a joint venture between most of China’s largest lenders to create a national network for settling transactions between various banks and their largest customers.
And yet despite its massive collection of transactions and big head start on Alibaba and JD.com, UnionPay has yet to announce any similar credit scoring initiatives that could capitalize on its huge troves of transaction data. Instead, China’s major credit scoring initiatives are mostly coming from the government, with the central bank and local governments like Shanghai driving such endeavors.
Financial services has always been a conservative sector globally, and in China the situation is exacerbated by the industry’s historical passiveness due to its role as a government policy tool. To address that issue, Beijing and local governments need to move more aggressively to reduce their ties and influence over traditional banks that they now control. Failure to do so will result in a lost opportunity to innovate, and could also ultimately see these banks overtaken by more innovative private firms like Alibaba and JD.com.
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