14 October 2019
Direct bank clients are are mostly internet-savvy young people such as university students. Photo: Internet
Direct bank clients are are mostly internet-savvy young people such as university students. Photo: Internet

Why direct banks are becoming popular in China

A major development in the Chinese banking sector this year is the mushrooming of direct banks.

By the end of November, 13 such banks had been set up, mostly subsidiaries of traditional banks.

The idea of direct banks — banking operations without any physical branch network — is not new.

These banks appeared in the late 1980s and are popular in United States and Europe. In a sense, China is a latecomer.

The emergence of direct banks marks a leap forward in creating a competitive banking market with the help of the internet.

And such competition, which is good for the overall development of China’s long-monopolized banking industry, is expected to intensify as a group of private banks come on stream early next year.

To understand why direct banks inject competition to the market, just check who are behind them.

The first direct bank was opened by Bank of Beijing in September last year.

It was followed by more than 10 other lenders such as Industrial Bank, Jiangsu Bank, Chongqing Bank and China Resources Bank of Zhuhai, all of which are city or provincial commercial banks.

In contrast, none of the big four national banks — Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China — has a direct banking business.

For years, small banks have been eager to increase their capital and client pool to break up the longstanding monopoly of the big players.

When liquidity in the capital market tightens, small banks often have to rely on interbank borrowing from their larger counterparts to stay afloat.

To attract capital, small banks are willing to raise their deposit rates to the upper end of a government-set band while big players usually keep their rates at a 10 percent discount.

But with much smaller branch networks, small banks can do little to change the landscape until they direct banks offered to a potential game changer.

A direct bank offers its services remotely via online banking and telephone banking and may also provide access via ATMs, mail and mobile phones.

By eliminating costs associated with bank branches, direct banks can make significant savings which could be passed on to clients via higher interest rates or lower service charges.

A direct bank is more than just online banking.

The difference is that online banking only serves existing clients who have already opened accounts with a bank. But direct banking allows operators to reach out to new clients.

The business model allows small banks to bypass the disadvantage of having a small branch network and helps them reach out to more clients.

Hence, direct banks are welcome to small banks.

In addition, clients of direct banks are mostly young people such as university students who are internet and tech-savvy.

Although they are not financially strong, these young people could be future big clients.

Direct banks hence pose competition to national big player and help remove geographic restrictions for small banks.

The appearance of direct banks is a result of market competition.

Last year, internet companies such as Alibaba, Baidu and Tencent launched internet financing.

Among them, the most popular is Alibabao Yu’E Bao. The money market fund product quickly gained popularity by taking advantage of Alibaba’s large online user base.

Internet financial products prompted a capital migration, with depositors moving money from banks to internet financial products. Traditional banks felt the pinch.

Small banks were particularly hard hit as those products took a chunk from their already limited money pool.

Competition brings changes.That is why small banks were quick to launch direct banking, combining online finance and traditional banking.

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The writer is an economic commentator. He writes mostly on business issues in Greater China.