19 October 2018
Lunar New Year promotions by operators of online finance services highlighted the ease of transferring cash over their platforms. Photo: Tencent
Lunar New Year promotions by operators of online finance services highlighted the ease of transferring cash over their platforms. Photo: Tencent

Will internet finance undermine traditional banks?

The high-profile hongbao promotions over the Lunar New Year holiday, in which online finance firms highlighted the ease of transferring cash over their platforms, helped stoke internet fever on the A-share market.

As stocks linked to internet finance, including several A-share stocks and Tencent Holdings Ltd. (00700.HK), soar, many mainland brokers and funds have announced they will emphasize synergy with the internet in this year.

Several leading peer-to-peer lending platforms, like Lufax, backed by Ping An Insurance (Group) Co. of China Ltd. (02318.HK), are reportedly on track for new rounds of financing, and even initial public offerings.

While the bullish voices predicting that internet finance will rock China’s traditional banking industry are getting louder, it might be better not to get too excited.

The bulls cite skyrocketing growth in third-party and mobile payments, lending (peer-to-peer or crowd funding) and assets under management (for example, by Alibaba’s money market fund Yu’e Bao) as evidence of the industry’s enormous potential.

However, growth rates alone are meaningless if not seen in the perspective of absolute numbers.

Wang Guogang, chief of the Institute of Finance and Banking at the Chinese Academy of Social Sciences, said in a recent article that most of the transactions in the third-party payment business in China are related to online shopping by consumers, and a smaller portion may be related to payment of utility bills.

But the combined amount was less than 1 percent of the 2,935 trillion yuan (US$468 trillion) handled by China’s payment, clearing and settlement system in 2013.

The situation is similar with lending and asset management services on internet platforms.

Figures from, a portal for news on peer-to-peer lending, show outstanding loans climbed to 103.6 billion yuan in 2014 from 5.6 billion yuan in 2012.

However, that is a drop in the ocean when compared with the outstanding loans of banks in China.

Online lending is still far from being a mainstream financing channel, not to mention the higher potential for fraud and default that accompanies it, Wang wrote.

The major internet finance services in China help to fulfill demand from the underserved private sector and individuals, he said. They supplement the country’s immature financial system, but their scale will not be as large as some imagine.

Recent profit projections by BNP Paribas echo Wang’s judgment. It said that while the internet finance industry will enjoy a 44 percent compound annual growth rate from 2014 to 2018, its total profits at the end of the period will only be equivalent to 1.7 percent of total bank profits.

Wang said internet finance’s supplementary role also means that improvements in the traditional banking industry may hinder further development of the new sector.

Certain strengths of traditional banks, such as their capital, physical branch networks, liquidity and risk control, cannot be replaced, the BNP study said.

BNP expects large-cap internet companies to attempt to collaborate with traditional banks, given their inherent limitations.

While traditional banks maintain their focus on high-end customers, it expects internet finance firms to leverage their user reach, technology and data to address markets that have been less served in the past.

Investors may need to consider the impact of internet finance on large banks with high exposure to the retail market, such as Industrial and Commercial Bank of China, the BNP study said.

Meanwhile, banks with weak retail franchises may seize the opportunity to develop direct banking (Minsheng Bank) or cooperate with internet giants (CITIC Bank), it said.

China Merchants Bank is the traditional bank that has the best mobile/internet banking business, the study said.

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EJ Insight reporter

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